The theory of market capitalization management law

Chuang Tzu Yue: "I have a cliff, and know no cliff, to have a cliff for no cliff, is just a." A superficial understanding of the original means that life is short, don't endlessly pursue unlimited knowledge (there are many important or interesting things to do), right? As the Chinese famous phrase "Now is the time to make a choice", Dr.2 's choice is to end the series with a few articles in the last quarter, because the more we write, the more we learn to discover our insignificance and ignorance, and the more limited it is to finance and cash flow. This season we will discuss some very in-depth questions, there is no standard answer, just hope that the small partners can think together, because this is really meaningful things.

Let's try to introduce the theory of market capitalization. The three terms of corporate value, market capitalisation, and valuations are often talked about by investors, so let's explain the specific concepts:

1. Enterprise value is the enterprise to follow the law of value, through the core of the management, so that all stakeholders with the enterprise (including shareholders, creditors, managers, ordinary employees, the government, etc.) can obtain satisfactory return of the ability. Obviously, the higher the value of an enterprise, the higher the enterprise's ability to give its stakeholders a return. This value can be measured by its economic definition.

2. The market value of an enterprise is the total value of the shares of a listed company, calculated by market price, multiplied by the total number of shares issued per share.

3. Enterprise valuation refers to the enterprise itself, the enterprise's comprehensive value assessment. Enterprise valuation is the precondition of investment, financing and transaction. An investment organization injects a sum of money into an enterprise, and the right to occupy it depends first on the intrinsic value of the enterprise.

The relationship between them is:

Company Market value = Corporate values-Debt-priority shareholder Equity + cash and equivalent + various uncertainties

Valuation is a forward-looking forecast, more to consider the future changes, can be long-term or sustainable business enterprises have the basis of valuation and discounting.

The value management method is based on the values management, and its connotation is how managers apply the principle of creating value to the actual management decision. It includes, but is not limited to, business portfolio design strategies, how to do performance management, how to create value from mergers, acquisitions and even business stripping, how to build a reasonable capital structure and how enterprises should enhance and market communication ability, and so on a series of value creation and maintenance behavior.

With the continuous development of enterprises, you may find that in the enterprise life cycle, business managers as the business environment changes are also constantly changing. Usually, the founder of the Enterprise is the first best manager of the enterprise. The founder's entrepreneurial spirit, passion for the cause, hands-on style and action are of great value to a start-up.

However, with the continuous development of enterprises, will sell a certain proportion of equity to the VC or industrial capital. At this point, the enterprise becomes bigger, the risk becomes higher, needs the management skill and the experience to be more, therefore in order to create the biggest enterprise value to rearrange one manager to replace the founder's example to be numerous. When a business is listed as a public company, the executive power is handed over to the board. With the development of the industry and the fierce competition, the company may find itself not the best manager of the enterprise, in order to solve this bottleneck, the company may sell itself to a bigger and better company and become an individual in their business portfolio.

Conversely, the managers of the larger business may change direction in the future based on various considerations. At this point, they may be able to separate or reorganize the business individual, giving it a streamlined cost structure. The future will be sold to new managers who need it to create new value.

Therefore, the business portfolio design as the core of the market capitalization management method has three important meanings to the enterprise:

First, business divestiture restructuring is not shameful, it and mergers and acquisitions can create value for the enterprise.
Second, the increase and decrease of business portfolio is an uninterrupted process, and it will experience different best managers in the enterprise lifecycle. Every manager will take different actions to create value for the enterprise.
Third, the diversification of business portfolio is not simply good and bad, but dynamic change, to keep pace with the times.

When it comes to market capitalisation, we have to mention performance management. All the value created by an enterprise is made up of various, large and small decisions. Enterprises need a system to ensure that these decisions related to the creation of value are consistent with the short-term and long-term goals of the enterprise. The scope of performance management is definitely not a short-term behavior, it covers the long-term strategy of the enterprise, the short-term budget, technology reserves, talent training, performance reporting, as well as the compensation and benefits framework, and so on various factors. A successful value creation process requires the enterprise to collaborate on the various parts of performance management and the long-term strategy of the enterprise. This will encourage managers to make decisions that maximize the value of the enterprise.

For example, if the development of a business is critical to the long-term strategy of the enterprise. Then we should make enough budget to ensure the smooth development of the business. The focus of performance appraisal should be on the development of core or key business, not short-term profits. But dr.2 that short-term performance management and the long-term strategy of the enterprise will produce systemic friction, so performance management is not so easy to operate.

If the enterprise has established the concept of market value management, distinguish the short-term and long-term value-driven enterprises, set reasonable long-term objectives, the exercise of performance-based performance appraisal is likely to be one of the solutions. For example, now listed companies popular management incentive, you can give these core stock options at a certain price, but there is a lock-up period, can be long term (such as a few years later), usually the price will be significantly higher than the current stock price, so in order to gain the right to the long-term income, Management has a considerable interest drive to improve the performance of the entire company, because only the company's business growth, cost reduction, market position to improve, in a relatively long time will be a large probability of performance for the stock price rise, the total market value increased.

Merger and acquisition is an important way for enterprises to create value, which is the integration of social resources. Dr.2 has been partially elaborated in the third quarter on how acquisitions create value and its potential pitfalls. Like mergers, stripping creates value. Large sample statistics tell us that if an enterprise uses mergers and acquisitions and spin-off strategies to maintain a reasonable business portfolio, it will perform better than a company without a stripping strategy. And business stripping does not just peel off the business individuals who are performing poorly. It also includes stripping out the business that will perform well but more suited to others.

When the business is better managed by others than under your management, the action itself creates greater value (see the control premium described in this quarter). On the other hand, from the point of view of the acquirer, when others are willing to pay more than your valuation of the business, such as the Net Dragon Split 91 assistants and then be Baidu acquisition, stripping has created value. But for many business executives, stripping, especially the spin-off of good business individuals, seems a disgrace. This is mainly because from the performance point of view, stripping makes the enterprise scale smaller, this seems to be outsiders questioned the entrepreneurial management ability, and some people from the heart will have a certain sense of frustration. Learning to put down is a required course for entrepreneurs to grow.

Generally, managers have to answer this series of questions: how the corporate debt and equity portfolio are the most reasonable, and also need to be able to solve the enterprise's financing, business flexibility and stability issues, how much money enterprises need to support their key business, on the one hand, when the opportunity to invest in the interim, On the other hand, it will resist the possibility of business decline due to the industry cycle or economic downturn, and how companies need to adjust their capital structure to meet their long-term goals, establish an anti-fragile system and have sufficient business elasticity and safety margin. Usually a poorly managed capital structure may lead to financial distress, but the capital structure is not at the heart of the market capitalization approach. For a firm with a reasonable level of leverage, instead of icing on the existing capital structure, it might as well spend its energy on securing enough financial flexibility to support the core business while reducing risk.

Finally, we have to talk about the importance of market communication. Many managers believe that communicating or propagating with investors is to boost share prices. But the real goal of market communication is to make its stock price and market value reasonably reflect the intrinsic value of the enterprise. If an enterprise's market capitalisation is much larger than its intrinsic value, then in the long run, the market will eventually understand the real value of the enterprise, and the share price will fall. When the stock falls sharply, the goodwill will be affected, the morale of the employees will be hurt, the core backbone will be unable to do the right to suffer losses, management will be questioned by the board, and the biggest loss will be all shareholders, especially the high price of the two-tier market small shareholders.

And a high share price will allow managers to continue to take some short-term action to maintain high stock prices, for example, managers will delay investment, even if a good opportunity is at hand, they will reduce technology investment to increase profits, short-term catering to the market, which will eventually damage the long-term value of the enterprise creation. Similarly, the stock price is too low is also problematic, for example, there will be the risk of malicious takeover, the use of swap or additional shares to buy other companies, if the stock price is too low will seriously damage the interests of former shareholders, you say? In the next chapter we will discuss the actual practice of market capitalization.