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Strategic Management & the Investment Banker

Investment Bankers & Strategic Alternatives

Investment  bankers  identify  the  business  opportunities  that  can  generate  the  most  attractive  equity  valuations  and implement strategic  plans  to  capitalize  on  those  prospects. Determine strategic alternatives with management after discussing market (m&a, financing, value chain of industry, where ROA is coming from, what the equity markets are rewarding with higher multiple)


Then model the strategic alternatives in excel


involving  an  investment  bank  in  an  organization’s  strategic  planning  process


When  the  time  is  right  to  execute  on  a  strategic  or  financial  transaction,  an  investment  bank  serves  as  a  strong  advocate  for  the  client during  the  transaction  marketing  process.


An  investment  bank  can  help  shape  a  company’s  strategic  plan

Using  feedback  from  strategic  and  financial  investors,  a  firm  can  direct  its  efforts  to  exploring  business  opportunities  that are  viewed  favorably  by  the  investment  community  and  strategic  investors.  This  approach  to  long  range  strategic  planning  can  yield significant valuation gains over time.


allow  a  firm  to  sell  opportunistically  when  the  market  is  robust  and, conversely,  buy  when  the  market  experiences  softness. Without  an  investment  bank’s  input  into  a  firm’s  strategic  plans,  the  likelihood  of mis-timing  the  market  and  underperforming  increases  greatly.


Senior  executives  should  make  contact  with  their  chosen  senior  investment  banker  at  least  once  a  quarter.  Discussion  topics  during this  update  session  may  include  operational  developments  and  strategic  initiatives,  financial  results,  and  market  intelligence  on  the strategic  wish  list  as  well  as  broader  investment  objectives.  Ideally,  conducting  this  discussion  in  advance  of  any  board  meetings  will ensure  that  a  company  is  fully  apprised  of  any  new  developments  in  the  marketplace  and  can  develop  strategies  that  incorporate them.

Conducting  an  annual  review  of  the  firm’s  strategic  alternatives  with  an  investment  bank  can  yield  new  insights.  By  reviewing  a  firm’s strategic  alternatives  with  respect  to  capital  raising,  partnership  opportunities,  and  shareholder  liquidity  options,  the  company  can chart  a  course  for  the  long  term.  With  the  feedback  from  this  review  as  a  backdrop,  a  firm  can  kick-off  its  internal  strategic  planning process and create a framework for optimizing the company’s resources and opportunities for the coming year.


Strategic alternatives pitch.  Student teams develop a bank-quality  strategic alternatives pitch and deliver their recommendations to the CFO or head of  strategy  of  a firm.


The breakdown of your index into separate indices for subsector allows you to build your value chain for the industry and highlight what the equity markets are rewarding, where ROA is coming from.


Evaluating Strategic Alternatives

Most companies, particularly well-managed businesses, have multiple strategic options available for both liquidity and growth. Evaluating Strategic Alternatives (ESA) is a formal review, analysis, and decision-making process that guides owners in assessing their financial and strategic options. The ESA process helps owners clarify and prioritize their personal and business objectives based on their company’s strategic direction, financial characteristics, and shareholder liquidity preferences.


Whether an owner’s goal is to expand the business, or to pursue a value-optimizing exit strategy, our investment banking team’s ESA assessment provides an objective, market-based valuation, as well as the options to achieve the value, and the implications of each option for the owner. The output from an ESA assessment includes a framework for strategic and operational decision-making; alignment between the owner’s long-term business objectives and the needs of the management team and shareholders; optimization of wealth transfer between shareholders; and coordinated tax structuring and exit planning strategies.


Essentially, investment bankers determine the valuation of the company under a number of strategic alternatives using comp companies, precedent transactions, DCF, LBO analysis and Merger analysis. The investment bank is usually asked by a company or pitches the prospect of reviewing strategic alternatives for the company.


The first step is to determine valuation (football field) under different scenarios including as is, change in capital structure, and sale to a strategic or financial buyer.  The max valuation is then communicated as a recommendation to the Board of Directors of the company. The investment banker then recommends a process to be run by the investment bank in order to execute on the strategic alternative.


Strategic Management:

Strategic plan (industry value chain optimized financial statement model with scenarios + valuation), strategic goals, corporate projects, executing corporate projects (business case development, project proposal, selection), tracking project benefits individually and in aggregate in relation to strategic plan


A strategic plan links the vision and the mission to the economic reality of the business expressed in a financial statement model. The schedule for revenues is broken down by segments which is broken down further by corporate projects (that have been accepted).


Strategy is how you plan to add monetary value from a valuation perspective

Strategic plan is where you are (historicals and current valuation), where you want to be (from a multiples perspective and EBITDA), and then building backwards from then until now.


Business level strategy is how do we compete in a distinct business

Corporate strategy is how do we bring the businesses together in a way that adds value?


Business strategy is where projects/programs emanate.


Industries change in attractiveness in terms of profitability at any given time

What is the average ROI/ROA in the industry? Is your perpetuity above or below this?


In order to beat the average, must have a competitive advantage

Part of performance has to do with the industry. Part of the performance has to do with are you better or worse than the competition (positioning)

5 forces acting on the corporate arbitrage to weaken it


Industry analysis to understand ROA of the industry given an index of public comps that you are maintaining


Second is positioning, higher price with positioning or lower cost to improve ROA


Are you a premium priced differentiator or a cost leader with an acceptable product


Positioning will relate to an analysis of the value chain. Where are ROAs at each step of the value chain?

Every business has a value chain and the early company must build out its value chain


All competitive advantage comes from the value chain

Where does competitive advantage come from in the value chain?

Projects/programs connected to some part of the value chain

Operate at best practice through each step of the value chain

Managers must identify best practice, validate them, then do them

Operationally effective means assimilating best practices

How to configure the value chain to deliver on the value proposition (differentiation) that your competitors cannot


Strategy is configuration of the value chain in a differentiated way past best practice. Pioneering new best practices


Best practices are founded by projects and programs


financial  plan is budgeted  financial statements


Investments must at least earn the cost of capital. If investments earn above cost of capital, market value will increase. If investments earn lower, market value will decrease


Capital markets can be broken down into primary markets and secondary markets. Primary markets are those markets where new issues of securities are sold. Secondary markets are where outstanding securities are traded (such as the New York Stock Exchange).


strategic  planning  is a way  of  preparing  for  the future  by  attempting  to  simulate  the  future via financial statement models


Strategic planning: Analyze current capabilities in the industry value chain and ROIs on each step in value chain. Analyze industry value chain average ROIs and compare. What capabilities in industry value chain to build next to increase ROI?


This marks strategic goals; will they be accomplished organically or inorganically?


These strategic goals should be included in the FSM&V to show the impact on value.


Vision and mission statement before strategic goals


  1. Determine position (industry value chain & ROIs)
  2. Develop strategy (grow current capabilities, acquire/build new in order to organize firm value chain in a differentiated way)
  3. Develop plan to acquire/build capability along with FSM
  4. Implement the plan
  5. Measure against the plan actual results


Strategic Alternatives & Strategic Management Process:


Strategic Analysis & Choice

Strategy choice involves the evaluation of alternative strategies and selecting the best one. It involves the following steps:


  1. Focusing on strategic alternatives
    1. Involves the identification of alternatives. The strategist examines what the organization wants to achieve (desired performance) and what it has really achieved (actual performance). The gap between the two is the background for various alternatives (gap analysis). The gap can be filled via the industry value chain and either deepening activities in an existing part of the industry value chain or entering a new part of the industry value chain.
  2. Evaluating strategic alternatives
    1. Involves the modeling of the strategic alternative in a financial statement model in excel. Corporate scenario analysis means creating pro forma balance sheets and income statement to forecast the strategic alternative’s impact.
  3. Strategic choice


Gap Analysis

When doing a strategic analysis via financial planning & analysis within a corporation, we are going to model pro forma financial statements based upon historical assumptions carried forward into the future. This is going to give us an understanding of where we will be if we do nothing differently. We can then identify where we would like to be from a valuation perspective and then go about identifying strategic alternatives that can fill the gap between where we are now and where we want to be.



Plans, Programs & Projects

The strategic plan devised by the organization proposes the manner in which the strategies will be put into action. Strategies are accompanied by the implementation of tools including plans, programs, and projects. The strategy itself will be broken down into different plans to chunk the work. Within the plans, there are various programs to chunk the work further into smaller components. Programs then lead to the formulation of projects. A project possesses a time schedule and costs (budget) and requires the allocation of funds based upon capital budgeting by organizations. Projects require resources inputs and systems.


Perpetuity Management:


The Purpose of the Company

Companies exist to create value


How Companies Create Value

Companies create value by investing capital at rates of return that exceed their cost of capital. This is the principle of value creation.


The only thing that differs across companies is the implementation (i.e. different asset and capitalization mix)


Strategy & Finance


Valuation Drivers



The Role of the CEO



Perpetuity Management






Perpetuity Management with Discounted Cash Flows



Growth or Restructuring



Perpetuity Management Process




Measuring Value Added: ROIC vs. Market Return


Measure return on invested capital (after-tax operating profits divided by capital invested in working capital, PP&E) and compare it with stock market returns


Measuring Value Added: Economic Profit & NPV


Economic profit = ROIC spread % over cost of capital x invested capital


The objective is to maximize economic profit. When the company is larger, one should use Net Present Value (NPV) which calculates economic profit in a more robust and flexible fashion.


Valuation in the Public Markets


Valuation in the public markets has investors paying for the performance they expect the company to achieve in the future; investors ultimately end up paying more since their valuations are not based upon the past or cost of the assets.


The CEO should endeavor to have his company in the public markets since the largest multiples are applied in valuation


Real Markets & Financial Markets


When a public company, the CEO has to both maximize the intrinsic (DCF) value of the company and manage the expectations of the financial market


Differences between actual performance and market expectations and changes in these expectations drive share prices. The delivery of surprises produces higher or lower total shareholder returns


Perpetuity Planning & Control (i.e. Management)


Planning & control system should be put in place to monitor the NPV of every business unit and summed to get the NPV of the corporation. Economic profit (i.e. NPV) targets set annually for next three years, progress monitored monthly and managers’ compensation tied to economic profit against these targets


Value Metrics


Metrics are to drive decisions and guide all employees toward value creation.


Perpetuity Planning & Control (i.e. Management) in Practice


Corporate management sets long-term value creation targets in terms of market value of a company or total returns to shareholders (TRS)

Strategic alternatives valued in DCF (i.e. NPV)

Intrinsic value of chosen strategic alternative translated into short and medium term financial targets and then targets for operating and strategic value drivers


Performance assessed by comparing results with targets on both financial indicators and key value drivers. Managerial rewards linked to performance on financial measures and key value drivers


Value Metrics: Market Value Added & Total Return to Shareholders


Market Value Added is the difference between the market value of a company’s debt and equity and the amount of capital invested. Measures financial market’s view of future performance relative to capital invested in business.


Total Return to Shareholders measure performance against the expectations of financial markets and changes in these expectations. TRS measures how well a company betas the target set by market expectations


Value Metrics: DCF vs. Earnings Multiple


DCF is intrinsic value. Earnings multiples are market values.


Earnings alone is inadequate without understanding the investment required to generate the earnings. Should know ROIC


Cash Flow


Cash flow equals the operating profits of the company less the net investment in working capital and fixed assets to support the company’s growth.


Perpetuity Management Capability


  1. Analyze where perpetuity is currently at (which phase)
  2. Determine which phase is the goal
  3. Determine steps to get to next phase of the perpetuity
  4. Build Work Breakdown Structure (WBS) to get to next phase working backward from the next phase
  5. Execute the plan


Perpetuity Lifecycle:

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