In a reflection of my own aging, and the pluses (there are some) and minuses (the list is longer), I have spent the last decade thinking about and writing on how businesses go through a life cycle, from start-up (baby) to early life (toddler) to decline and death. While the corporate life cycle diverges from the human life cycle in some aspects, the desire to be young again is just as strong in businesses, as it is in humans, and an ecosystem (with bankers and consultants playing the same role as plastic surgeons and physical trainers) takes advantage of this desire. In this book, I start with a description of the corpoate life cycle and how to diagnose where your business falls, and then look at the implications of businesses aging on corporate finance, valuation, investing and management. This short video should give you a sense of what this book is about:
You can read the preface to the book by clicking here.The material is organized by chapter and includes links to data, my own writings on the topic, other readings and any analyses that is part of the chapter.
There is a YouTube playlist, composed of an introductory video and a video for each chapter at the playlist below:
YouTube Playlist for the book: https://www.youtube.com/playlist?list=PLUkh9m2BorqkjTKRzLN9Cx0vIlPvo4Ivw
If you are interested in buying the book, you can try any of the reetailers listed at this link. No pressure, though! I am perfectly okay with your browsing.
Unlike the pope, I am extremely fallible, and with a book that is as full of numbers as this one, there are errors that creep in. If you do find errors in the book, please let me know and I will not only create a corrections page but also make sure that those corrections make their way into future prints. Enjoy!
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Exercises | a. Pick five companies that span the life cycle spectrum, from young growth to declining. This may take a little experimentation, and you may have to revisit your choices as you move through the sessions. If you want, pick a company based upon corporate age:
b. Look at each of these companies and assess where they were in the life cycle ten years ago. |
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Exercises | a. For
each of the five companies on your list, estimate the operating metrics
(revenue growth, operating margins) in the most recent years. b. For each of the five companies on your list, evaluate whether there has been, and if yes, how much capital raised (from debt or equity) in the most recent years. c. For each of the five companies on your list, look at the shareholder ownership breakdown (founder, insiders, individuals, institutions) in the most recent year. |
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Exercises | a. For each of the five companies on your list, estimate the corporate age (from founding year to today). b. For each of the five companies on your list, examine the revenue growth rates and operating margins of the industry groups they belong to. |
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Exercises | a. If any of your companies are private, find out whether
it has accessed venture capital and if so, on what terms. b. If any of your five companies are public, examine when the company went public and what its operating metrics (revenue growth, operating margins) looked like at the time of its IPO. c. Have any of your companies, since going public, have raised more capital from external providers? If yes, did they raise additional equity or borrow more money? d. Have any of your firms been targeted by private equity investors or activists? If yes, when and why? |
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Exercises | a. Given your assessments of the five companies, which
corporate finance decision (investment, financing, dividend) would you
expect to have primacy? b. Are there any corporate finance mismatches (companies not behaving the way they should, given their life cycle position) in your firms? |
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Exercises | a. Estimate the costs of equity, debt and capital for each of the companies in your group. Discuss the
differences. b. Estimate the accounting returns (to equity and invested capital) for each of the companies in your group. How would you read the excess returns that you get from comparing accounting returns to costs of equity/capital? c. What does a typical project (if any) look like for your company? What challenges would you face in assessing whether it is a good or bad investment? d. Is there optionality in investments in any of your companies? How would you make that judgment? |
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Exercises | a. Evaluate the mix of debt and equity used by
each of your companies to fund their businesses. b. If your company has debt, what type of debt does it have? (Debt maturity, currency, straight or convertible etc.) c. What tax benefits to each of your companies get from debt? (Look at marginal and effective tax rates, whether the company is making money, net operating losses carried forward) d. What is the expected bankruptcy cost from debt to each firm? (Look at volatility in earnings, current bond ratings if any, interest coverage ratios)? |
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Exercises | a. How much cash (FCFE) could each of your firms have returned in the most
recent year(s)? b. How much cash did your firms return in the most recent years? c. In what form (dividends or buybacks) was the cash returned, if at all? |
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Exercises | a. Estimate
the historical values for revenue growth, margins and reinvestment (sales to capital) for each of your firms. b. Estimate at least three pricing multiples for each of your firms, with a mix of equity and enterprise value ratios. c. Find peer group companies for each of your firms, with median (and average) values for the pricing multiples of your choice. |
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Exercises | For the youngest company in your peer group: a. Given what you have learned about your company, what is your valuation story? b. Does your valuation story pass the 3P test? c. How does your valuation story play out in your valuation inputs (revenue growth, margins, reinvestment, and risk)? d. Given these valuation inputs, what is your valuation for the company? e. How uncertain are you about this valuation? How do you deal with this uncertainty? f. Is there any optionality in this company? If yes, why and what drives that option’s value? |
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Exercises | For the high growth company in your peer group: a. Given what you have learned about your company, what is your valuation story? b. Does your valuation story pass the 3P test? c. How does your valuation story play out in your valuation inputs (revenue growth, margins, reinvestment, and risk)? d. Given these valuation inputs, what is your valuation for the company? e. How uncertain are you about this valuation? How do you deal with this uncertainty? f. What is the value that growth is adding (or destroying) in your company? |
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Exercises | For the mature company in your peer group: a. Given what you have learned about your company, what is your valuation story? b. Does your valuation story pass the 3P test? c. How does your valuation story play out in your valuation inputs (revenue growth, margins, reinvestment, and risk)? d. Given these valuation inputs, what is your valuation for the company? e. How uncertain are you about this valuation? How do you deal with this uncertainty? |
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Exercises | For the declining company in your peer group: a. Given what you have learned about your company, what is your valuation story? b. Does your valuation story pass the 3P test? c. How does your valuation story play out in your valuation inputs (revenue growth, margins, reinvestment, and risk)? d. Given these valuation inputs, what is your valuation for the company? e. How uncertain are you about this valuation? How do you deal with this uncertainty? |
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Exercises | a. Are
you an active investor? b. If yes, what types of mistakes do you think markets make, and why? If no, why not? c. What investment strategies do you use (or plan to use) to take advantage of those mistakes? d. What are the weakest links in your investment philosophy/strategies? e. Do you have an investment track record? Have you earned more than you would have as a passive investor (buying index funds)? |
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Exercises | a. If you had the capital and the capacity, do you think
you would be a successful venture capitalist? If yes, why? If no, why
not? b. As a public market investor, what approach to investing in growth companies offers the best odds for you? Why? |
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Exercises | a. If you had the capital and the capacity, do you think
you would be an activist value investor? If yes, why? If no, why not? b. As a public market investor, what approach to investing in mature companies offers the best odds for you? Why? |
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Exercises | a. If you had the capital and the capacity, do you think
you would be a private equity investor? If yes, why? If no, why not? b. As a public market investor, what approach to investing in declining companies offers the best odds for you? Why? |
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Exercises | a. Who
is the CEO of each of your companies? How long has he/she been CEO and how
did he/she get the position (founder, hired from outside, hired from inside)? b. Is your CEO matched to your company? c. If there is a mismatch, is there a response building to that mismatch (activist investors, proxy challenges)? |
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Exercises | For the declining company in your group a. What would denial look like (in terms of investing, financing and cash return policies? b. What would acceptance look like (in terms of investing, financing and cash return policies)? c. What would a revamp/rebirth look like (in terms of investing, financing and cash return policies)? d. Which of the above paths is the management currently running the company most likely to pick? |
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Exercises | Given what you have learned about each of your five companies across the dimensions, has your view about where each of them falls in the life cycle changed? If yes, in what way and why? |
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