Vernimmen | corporate finance | Comment, question or quotation of the day

21-12-2024 : “The forthcoming IPO of AsmodÃ©e, European leader in board games ”

Benefiting from a low-concentration sector and its passage through the hands of several successive LBO funds (Montefiore, Eurazeo and PAI), Asmodée has been able, through internal and external growth, to increase its sales from €110 million in 2013 to €1,288 million this year, with operating income of €188 million. In 2022, Asmodée was sold to the listed Swedish video game group Embracer. But since this acquisition, Embracer's market value has fallen by a factor of 4 to €3.4 billion. In an attempt to remedy this fall in value, Embracer will split into 3 entities, including Asmodée, at the beginning of 2025.

As Asmodée's net bank and financial debt to EBITDA ratio is more than 4 times, Embracer will, prior to the IPO, inject an additional €400 million of equity into Asmodée to reduce its net debt to EBITDA ratio to a more normal level for listed groups of 2.2 times, and give it the financial resources to resume an external growth strategy. Indeed, the risk aversion of stock market investors is quite different from that of LBO funds, which are comfortable with 4 to 7 times debt on most of their portfolio companies.It's true that companies with net debt/EBITDA multiples of this magnitude can be found on the stock market, but this is usually the result of an accident where EBITDA has plummeted, propelling the ratio to heights worthy of companies under LBO.

As long as its indebtedness does not fall below 2 times EBITDA, Asmodée has no intention of paying dividends, which can only delight its future shareholders, since the company has demonstrated real know-how in acquiring competitors and bringing them up to its profitability standards, thereby making investments that yield far more than their cost of capital and creating value. In fact, shareholders are only thirsty for dividends when the company is no longer able to find and carry out investments that yield a return in excess of its cost of capital, in order to utilize all the free cash flow it generates. In this case, dividends enable the reallocation of equity from mature companies to others with better development prospects and the equity needs to finance them.

In conclusion, as Embracer is listed in Sweden, Asmodée will naturally be listed on the same market, in the midst of 1,140 other listed companies, and only 820 in Paris, whereas GDPs are in a ratio of 1 to 3, illustrating a true share culture in Sweden.

23-11-2024 : “Robertet or the value of a voting right ”

There are times when we need to consider the value of a non-voting share, and the subject is not a simple one. Last week's exit of Firmenich from the capital of Robertet, world leader in natural raw materials for perfumes and aromas, is illuminating. Robertet is the only one of the 818 companies currently listed in Paris to have both listed voting and non-voting shares. In 1987, because the family's control over Robertet was fragile, the company had stripped ordinary shares into investment certificates (IC) and voting rights certificates (VRC): an IC is a share deprived of its voting rights. CIs were created in 1983 by the French government to finance nationalized companies. BNP, Saint-Gobain and others issued CIs to the public, without diluting the State's stake in their capital, as the State kept the associated VRCs. Private firms such as Bouygues and L'Oréal followed suit. But the innovation, at least for listed companies, didn't catch on, and soon all these CIs disappeared through redemption or conversion into ordinary shares with voting rights. All, that is, except those of Robertet, which now has 3 stock market quotation lines: ordinary shares, CIs and VRCs. The latter are very rarely traded, as they are mainly held by the family. The CIs are much more widely traded, but their liquidity is reduced by the fact that FirmeniSo the value of a voting right depends very much on the configuration of the shareholder base. Other factors come into play, such as the ability of a third-party purchaser of control to improve margins, or possible competition between several third-party purchasers. It's easy to see why it's hard to see a discount on Hermès shares, where the limited partnership structure leads to solid family control and it's hard to see how the current management can do better. Or why, in agricultural cooperatives, the principle of one vote per cooperative member, irrespective of the shares held, means that voting rights lose all value. As a result, all shares in a cooperative have the same value, whether or not they carry voting rights, since a voting right is worthless. In this case, the absence of voting rights does not justify any discount.

09-11-2024 : “The future governance of Havas ”

Vivendi's governance was already characterized by the oddity that the Chairman of the Supervisory Board, Yannick Bolloré, was also the Chief Operating Officer of one of Vivendi's main subsidiaries, Havas. Certainly nothing illegal, but the spirit of balanced governance between management and control powers was undermined, as the chairman of the supervisory board could hardly supervise and control himself. And who could imagine the Chairman of Vivendi's Management Board, irrespective of his qualities, taking a swipe at Havas' Chief Operating Officer for, say, under-performance or faulty implementation of the defined strategy, when he is also his supervisor in his capacity as Chairman of Vivendi's Supervisory Board??..? Especially when you consider that he is part of the family group that de facto controls Vivendi with just under 30% of the capital. In Havas, whose parent company has become Dutch and will be listed on the Amsterdam stock exchange to enable the Bolloré group to benefit from quadruple voting rights (see my post of October 12), the oddity takes on a new, well-intended dimension, since we were starting from scratch. The governance of post-split Vivendi remains the same: Yannick Bolloré supervises and controls Arnaud de Puyfontaine, Chairman of Vivendi's Management Board. With Havas, the situation is reversed, and Arnaud de Puyfontaine becomes Chairman of the Havas Supervisory Board, in charge of supervising and controlling his shareholder Yannick Bolloré, who becomes Chairman of the Management Board ... . Children would call this holding on to each other's goatees. Anyone who believes that governance has an impact on corporate performance and value will not be surprised to note the following: since Bolloré took control of Havas in 2012, without a takeover bid to disinterest minority shareholders thanks to a clever use of the French watchdog market authority's general regulations, the value of Havas has multiplied by just under 2 in 12 years, from €1,700m to around €3,000m. For its competitor Publicis, and over the same period, it's by a factor of 3.2 (from 7,600 M€ to 25,000 M€). Publicis has thus become the world leader in its sector by market capitalization. It's true that the founding family of Publicis never thought that genius was hereditary, nor did they cling to a percentage shareholding, accepting instead to be diluted by successful external growth operations, led by brilliant managers they had detected and promoted, Maurice Lévy and Arthur Sadoun.

02-11-2024 : “Boeing: largest-ever capital increase in the United States ”

$16.1bn, not including, as is often the case in such cases, $5bn in convertible bonds, and a possible extension (greenshoe) of $3.2bn, i.e. a total of $24.3bn. But there was peril in the air. If in 2018 Boeing made $101bn in sales, delivering 806 aircraft and generating $14bn in free cash flow; in the first 9 months of 2024, its sales fell to $51bn, with 291 aircraft delivered and negative free cash flow of $10bn. Since 2019, the start of its industrial woes, Boeing has lost $24bn, including $8bn in the first 9 months of this year. Since the same date, Boeing has had negative book equity (sic), -$24bn at September 30, because, while it has a lot of net debt ($55bn or 9.3 times its expected 2025 EBITDA (EBITDA 2024 is negative)), it has few fixed assets ($29bn) after years of outsourcing, and very low working capital thanks to customer advances ($2bn). But this source of financing could shrink, as with 5,400 aircraft still to be delivered, orders taken today may not be delivered until the next decade. And since 2025 is also expected to be a loss-making year, debt could only continue to rise. To increase the number of its shares by 18%, Boeing had to concede a discount of only 5% to the syndicate of underwriting banks, compared with Monday evening's price. This shows the depth of the American financial market, in stark contrast to the European markets. Remember our post a month ago on the capital increase of ID Logistics, a star in its segment, which had to concede a 10% discount on the closing price to place a miserable 6% of new shares. A double discount to place 3 times fewer shares relative to the size of the company... As we explain in the foreword to Vernimmen 2025, entitled Make equity great again, this is due to the funded pension system in the USA, which has created pension funds that buy equities over the long term; and in France to our preference for liquid, inflation-protected low risk investments, which are largely tax-exempt and tax-advantaged. It's high time, in these times of budget shortages, that the tax advantages of life insurance were reserved for risky equity investments, and not bonds (euro contracts), which account for 74% of assets under management of those contracts. This is exactly what the Swedes have done since 1980, with a financial market 2.6 times deeper than those of other European countries, 16% of Swedish companies with more than 250 employees listed (3% in France), and a number of IPOs since 2013 (501) that exceeds the combined IPO volumes of Paris, Frankfurt, Amsterdam and Madrid.

29-10-2024 : “Tribute to John McQuown, passive investing pioneer ”

In 1971, John McQuown created the first investment fund to replicate the performance of an index, thus creating index investing (also known as passive investing), whose assets under management today exceed $20,000 billion. He passed away a few days ago at the age of 90. An engineer by training, he had been hired by the innovation center of Wells Fargo, then just a regional Californian bank. In 1970, an heir to the family that owned Samsonite was looking for a team that could manage $6 million, or around $47 million today, according to the principles he had learned in Chicago studying the work of Harry Markowitz, William Sharpe, Eugene Fama, Merton Miller, Myron Scholes and Fisher Black, all young finance professors who had just created the CAPM or Capital Asset Pricing Model, in other words, modern finance. They had also demonstrated that, over time, active managers underperformed the market. As The Vernimmen.com Newsletter reminds us in its October issue, only 17% of active equity managers have beaten their benchmark over the past 10 years. It is therefore more efficient to hold the market portfolio represented by an index fund (ETF), and then adjust your level of risk by adding risk-free assets to run less risk than the market; or by taking on debt to invest in the market portfolio if you want to increase your risk relative to the market. More efficient, because management and transaction costs are lower, and because no random bets are made on this or that stock. In July 1971, John McQuown launched the first index fund on behalf of the Samsonite pension fund, and a new stage in collective asset management was launched. Like all trailblazers, John McQuown had to battle against prevailing skepticism and, above all, the criticism of asset managers who saw passive management as a far inferior source of income to active management. But he had on his side the research of the aforementioned scientists, all of whom went on to win Nobel Prizes in economics a few decades later. 53 years on, I've just sat on the selection committee for a new employee savings fund manager at an institution of higher education. Although the specifications explicitly called for at least one equity-index fund, only one of the six candidates proposed one in its response to the invitation to tender, and it won the contract. While employee savings schemes have been pioneers in ESG investment, thanks to employees and their representatives, there is still much to be done in terms of investing efficiency, with passive equity investing virtually non-existent in this field, where the few players do not play up to the innovation that is so embarrassing for their margins, unless you insist on it.

21-09-2024 : “Vivendi, or the lenders who applaud a demerger with both hands ”

As a general rule, a demerger that reduces the diversity of a group's businesses is not well received by lenders, since their level of risk increases with the concentration of activities that results from a demerger. Indeed, the cash flows generated by each division of a group are naturally pooled within the group that combines them to service the latter's debt. Once split into independent entities, cash flows are naturally no longer mutualized, and the lenders of each of these now independent divisions can only rely on the cash flows generated by each division to service the debt allocated to it in the demerger. As a result, lenders have long reserved the right to obtain early repayment of their loans/bonds at face value, or even slightly more, in the event of a demerger (or even in the event of a simple announcement). When a phase of sharply rising interest rates pushes the value of bonds well below par, the subsequent announcement of a demerger is a godsend for lenders, who suddenly see the value of their bonds approaching par, despite a below-market rate of return on these loans. This is exactly what has been happening for several months with Vivendi bonds. A year ago, before any announcement of the demerger project, the 2016 bond maturing in 2026, yielding 1.875%, was quoted at 94.3% of par, due to a market rate of 4.10%. The bond is currently trading at over 99%, in anticipation of redemption at par by the end of the year, when the demerger is scheduled to take place. For a bond investor, a price increase of 7% in one year, including coupon, is considerable for a BBB-rated bond. The demerger candidate must refinance its debts, i.e. negotiate with banks to take out loans that will be used to prepay the bonds. These bank loans are then allocated between the various entities to be demerged. Only when the demerger is complete can the demerged entities issue bonds to repay the bank loans set up as bridging loans. For Vivendi, this involves €2,750 million.

20-08-2024 : “Do share buybacks boost share prices? ”

For those who might be tempted to answer yes to this question, despite the countless academic research papers that answer not significantly, here is a graph of the 10-year performance of the S&P 500 (in red) and the 100 components of this index that have bought back the most shares (S&P buyback, in blue), taken from La Lettre Vernimmen.net of July-August: While the S&P 500 buyback returned, dividends reinvested, a return of 9% over 10 years, the S&P 500 returned 13%, and with less risk (standard deviation of daily returns 12% lower than that of the S&P 500 buyback). Why did this happen? Because the aim of share buybacks is not to boost share prices, but simply to return to the financial markets, which financed the company making the buyback, equity that has become surplus, at least transitively, to its needs. Admittedly, this graph is not intended to be scientific, but if share buy-backs were to push share prices upwards after 10 years, this should be visible in share prices! The only source of value creation from buybacks is when the company is able to do so at a time when its share price is temporarily depressed and moving away from its intrinsic value. Do share buybacks boost share prices? For those who might be tempted to answer yes to this question, despite the countless academic research papers that answer not significantly, here is a graph of the 10-year performance of the S&P 500 (in red) and the 100 components of this index that have bought back the most shares (S&P buyback, in blue), taken from La Lettre Vernimmen.net of July-August: While the S&P 500 buyback returned, dividends reinvested, a return of 9% over 10 years, the S&P 500 returned 13%, and with less risk (standard deviation of daily returns 12% lower than that of the S&P 500 buyback). Why did this happen? Because the aim of share buybacks is not to boost share prices, but simply to return to the financial markets, which financed the company making the buyback, equity that has become surplus, at least transitively, to its needs. Admittedly, this graph is not intended to be scientific, but if share buy-backs were to push share prices upwards after 10 years, this should be visible in share prices! The only source of value creation from buybacks is when the company is able to do so at a time when its share price is temporarily depressed and moving away from its intrinsic value.

17-08-2024 : “3 lessons from the recent squeeze out of Adevinta ”

While the delisting of Adevinta (le Bon Coin in France, or L’Argus brands in Belgium with 2dehands/ 2ememain, in the Netherlands with Marktplaats, or in Germany with Mobile.de) completed a few weeks ago, is the 4th largest European LBO of all time (€14 billion in entreprise value), this transaction has 3 lessons which are the subject of the news article of the July-August Vernimmen.com newsletter issue. One of them is that Adevinta's minority shareholders, unconvinced by the delisting price (like the independent directors), were given the opportunity to reinvest under the same conditions alongside the initiating LBO funds. This puts an end to the price debate, at least for those shareholders who are able to hold unlisted and highly leveraged shares, which not everyone can do. The initiators increase their chances of crossing the delisting threshold (usually 90%). This technique, used in this particular case on the Oslo Stock Exchange, had already been tried out a few years ago in Paris, but on a much smaller deal (Nextstage); it has subsequently been used by L'Occitane en Provence for its own delisting from the Hong Kong Stock Exchange; and is currently being used on the London Stock Exchange by the consortium of LBO funds seeking to delist the Hargreaves Lansdown financial group for £5.4 billion. It's true that when certain large minority shareholders are offered this possibility before the launch of the offer, not offering it to all shareholders who wish to do so as part of the offer may come as a problem.

14-08-2024 : “Riddle for your week-end ”

BlackRock is the world's largest asset manager, with around $10,500bn in assets under management. Its share price has risen by 9,097% since its IPO in 1999. Blackstone is the world's largest alternative asset manager, with $1,100bn in assets under management. Since its IPO in June 2007, its share price has risen by 317%. Which has the highest market capitalization? The answer is given in the Vernimmen.com newsletter in its July issue.

16-06-2024 : “Privatizing France TÃ©lÃ©visions? ”

In 2023, the France Télévisions group generated sales of €3 bn, including €2.4 bn in public subsidies (the licence fee was abolished in 2022), and €432 m in advertising revenue, taken from a TV advertising market declining by 1.4% a year and totaling €3.5 bn. France Télévisions has €429 m in equity, and negative free cash flow of €67 m in 2023, the same as in 2022. Net income in 2023 was €14 m, compared with a loss of €48 m in 2022. As the Rassemblement National plans to return to the French citizens the €2.4 bn in annual subsidies paid out, an additional €2.4 bn in advertising revenue is needed to break even, representing 69% of the market volume, giving France Télévisions an 80% share of the TV advertising market, with only 29% of the audience. Even if this feat were achieved, which would mean depriving TF1 and M6 of 90% of their advertising revenues, France Télévisions would still only break even. To justify the €3 bn figure given by Sébastien Chenu as the proceeds from the privatization of France Télévisions, and taking into account the M6 and TF1 P/E of around 8, France Télévisions would have to generate net income of €375 m, which is about the same as the combined net income of TF1 and M6 (€429 m). This is quite coherent, given that €3 bn, the proceeds from the privatization of France Télévisions according to Sébastien Chenu, is roughly the sum of the market capitalization of M6 and TF1. To reach these €375 m, it would be sufficient to generate €500 m in additional advertising revenue, leading to a 96% share of the TV advertising market, with 29% of the audience. Alternatively, lay off half of France Télévisions' 8,950 employees (salaries of € 1030 m in 2023). As for a takeover of France Télévisions by M6 or TF1 mentioned by Philippe Ballard, spokesman for the Rassemblement National, apart from the fact that it could only be partial and would involve dismantling the company to comply with anti-trust rules (no more than 7 national TV programs for any one person), it does nothing to solve the problem of finding €2.4 bn a year to compensate for the loss of current public subsidies - equivalent to TF1's sales, or 185% of M6's sales. If you find it hard to believe in the feasibility of these business plans, perhaps you're wondering how, in 1987, TF1 was able to be privatized, and survive the absence of licence fees? Well, the TV advertising market was booming at the time, with annual growth rates of 10-15%, compared with the current 1.4%. This changes everything.

29-05-2024 : “Believe, an expert who outclasses the advisory banks ”

Here's the second thing that left us wondering when we read the offer notes, after the concept of a fair price, but not fair enough to allow expropriation as seen this Saturday. While the consortium has made an offer of €15 to buy back the free float, the valuation of the 2 advisory banks is significantly lower, whereas there is usually little difference between this valuation and the offer price. Here, the opposite is true. The bank advisors arrive at a DCF of €10, where the independent expert is at €17; with the multiples it's a range of €5 to €10, where the independent expert is between €10 and €20... . With advisors valuing the target at €10 using a DCF and between €5 and €10 using multiples, one wonders how the consortium, which is not made up of financial choirboys, could put €15 on the table, and Warner Music articulate a price of €17 ... . When we look at the details of the banks' valuation, we are struck by the errors made: 1/ The required rate of return estimated from the CAPM model is: risk-free rate + beta x (expected market rate of return - risk-free rate). The figure in brackets is the risk premium. But if we take one in bulk, we make sure that it has been calculated using the same risk-free rate that is also used in the formula, so that we don't have 2 different risk-free rates. In this case, the risk premium taken has no chance of having been calculated with the risk-free rate used (OAT 20 years), as required. 2/ Use the 20-year OAT rate as the risk-free rate, whereas the usual practice is to use the 10-year OAT rate, in the absence of a short-term rate that is truly risk-free. This inflates the discount rate and reduces the value. 3/ Adding consultancy costs not foreseen in the business plan prepared by management, which reduces the value. 4/ Simply taking the multiples of two comparable companies, Warner Music and Universal Music (UMG), and lazily applying them to Believe, pretending to forget that the level of a multiple depends above all on the growth rate, and that by this yardstick, Believe is leaving these two groups behind: + 22% per year from 2019 compared with + 12% by UMG and 6% for Warner. Just by comparing the multiple calculated by the banks for Warner (14) and UMG (22), the substantial difference between which is explained by the no less substantial difference between the growth rates of these two groups (6% and 12%), we can instantly see that these multiples cannot be applied to Believe, which is growing 2 or 4 times faster. This is exactly what the independent appraiser understood, having done some real thinking and managed to integrate, as she should, the impact of the growth rate into the multiple used to value Believe. Strange.

25-05-2024 : “So, is the offer on Believe fair or not? ”

A reading of the draft takeover bid prospectus and reply prospectus leaves us wondering about two points. Believe had been floated on the stock exchange in June 2021 at the bottom end of the announced price range, at €19.5. On the first day, the share price fell to €16.1 and continued to slide thereafter. In February 2024, the management, together with one of the funds currently holding shares and a new investment fund, formed a consortium and proposed to delist Believe at €15 by buying back the 28% free float, even though the company was 2 years ahead of its business plan and the stock market index used by Believe (as part of its stock-based compensation policy, the Eurostoxx 600) had risen by 14% since the IPO. Of course, an index hides dispersion, and the rise in interest rates has hit harder those companies whose free cash flow is far in the future, like Believe whose free cash flow is still negative. The independent appraiser's task was going to be an arduous one, since it was not easy to attest to the fairness of an offer under these conditions, which could lead to the expropriation of shareholders, and which was causing quite a stir. But then a deus ex machina, in the form of Warner Music, appeared and announced for a while that it was considering making an offer at a price of at least €17; then, on reflection, it withdrew. The independent expert had then no problem telling the consortium: "Raise your price to €17 if you want me to certify the fairness of an offer that could lead to expropriation. Response from the consortium: We have already raised it from €14 to €15 at the request of the independent directors, and our price is final. Expert's reply: I cannot attest to its fairness, unless you drop the possibility of a delisting by squeezing out of the remaining minority shareholders if you win over 90% of the shares. Reply from the consortium: We modify our offer and abandon the delisting option. Expert's response: I can then attest to the fairness of an offer that will under no circumstances result in expropriation at €15. It's not the first time we've seen this ballet (cf. SMTPC), and we've ended up with the concept of a price that's fair (€15), but not fair enough to allow expropriation (at €17 or €18?). It's up to each and every one of us to make up our own minds, because being an investor is an activity that, like any profession, requires hard work, and there's little room for dilettantism. The independent expert's report provides a lot of information and arguments for those who want to sell at €15, or who want to continue the adventure. That said, we're not going to complain about an independent expert who didn't let her feet be trodden, and who achieved the essential, avoiding compulsory expropriation at €15, even if she can say, like the minority shareholders: Thank you Warner Music. See you next Saturday for the second element of this operation that leaves us wondering.

08-05-2024 : “Peugeot Invest or value-destroying reinvestment ”

Peugeot Invest, which is 80% controlled by the eponymous family and listed on the stock exchange, has a 5.4% interest in Stellantis, which accounts for 54% of its net asset value. The balance of its assets is made up of minority stakes in listed (SPIE, LISI, etc) and unlisted companies, and in investment funds. For decades, Peugeot Invest has suffered from a discount to the value of its assets of around 50% (currently 55%). This is the price investors pay for agreeing to be shareholders in a structure that is useful for the Peugeot family, but whose relevance for investors and usefulness for the market are not obvious. In the Netherlands, it is possible for a pure holding company to be listed on the stock exchange. Heineken Holding, for example, owns 54% of the Heineken group and no other assets. Its discount on net asset value (NAV) is only 17%, Heineken Holding is not forced to diversify. In France, it is unacceptable for a listed holding company, which over time has become a minority shareholder in a major group, to have this shareholding as its only asset. To maintain this structure, the Peugeot family has had to invest in other assets. Sometimes brilliantly, like the investments in SEB and Zodiac-Safran; sometimes disastrously (Orpéa, Signa in the German property market). Not everyone can become Warren Buffett. Over the last 5 years, while Stellantis' share price has doubled, the value of its other assets net of debt has fallen by 17%, while the Paris indices have risen by around 30%. Long-term minority shareholders have tabled resolutions at the forthcoming AGM calling for an increase in the dividend. This is not because they are as thirsty for cash as leeches, but quite simply because one euro paid in dividends is worth one euro in cash for all shareholders; whereas one euro of earnings not paid in dividends at Peugeot Invest only increases the value by 50 centimes, given the discount on the NAV. That's a quick calculation! As long as the structure and governance remain the same, the discount is unlikely to be reduced. To do this, Peugeot Invest would have to be given a real business by selling its financial assets, including its stake in Stellantis, like Eurazeo which is becoming an asset manager (a small Amundi). It is understandable that the Peugeots remain attached to their stake in Stellantis. But in this case, the new generation should consider that having its name synonymous with a 50% structural discount on the stock market is not the best way to honour the name of the founding entrepreneurs, and draw the necessary conclusion by delisting this vehicle that no longer has any place there.

27-04-2024 : “Will New York become TotalEnergies' main stock exchange? ”

At this stage, it's just a thought, announced yesterday, as managers must have them, without them necessarily materialising. In this particular case, the difference in multiples between the American and European oil majors is impressive and may tempt managers to think that a main listing in New York could bring TotalEnergie's multiple into line with that of its American peers: Exxon is valued at 6.4x EBITDA 2024, Chevron 6.1x, compared with 4.3x for Total (Shell is at 4.1 and BP 3.2). This gap is all the more striking given that TotalEnergies is one of the best managed majors, if not the best managed. It is therefore understandable that American shareholders, who hold more than 40% of the company's capital, should be pushing the wheel, especially as their percentage is increasing due to the withdrawal of European shareholders who are more sensitive to the challenges of the energy transition. This is not the least of the paradoxes, given that TotalEnergies is the most advanced of the majors in this field, and that it has not reduced its ambitions, unlike Shell and BP. But the level of multiples does not just depend on the listing market, it also depends on risk and growth characteristics. By this measure, a company listed in the United States, but with a smaller US share of its assets than its competitors, could be at a discount to them. The transfer of the main listing cannot be decreed; it is observed on the basis of trading volumes. In order for New York to become its main listing, TotalEnergies would probably have to make a major share placement in the United States, where it is currently only listed in the form of ADRs. A full listing would probably be required. If such a move were to occur, and if TotalEnergies were thus better valued, its cost of capital would fall, since at constant free cash flows, the discount rate required to make these flows equal the value would be lower; and employees would see their profit-sharing and incentive schemes invested in their employer's shares increase in value. The usual critics of TotalEnergie will no doubt talk of betrayal, while others will regret this development if it comes to fruition. But you can't : - Refuse to set up pension funds, the creation of which had been voted on at first reading in 1997 before the dissolution of the French parliament sent the text to oblivion, where it never came back despite the political changeover; - Granting unlimited tax advantages to life insurance euro funds, i.e. debt securities; and limiting them for PEAs invested in equities; - And lamenting the shallowness of our equity market, resulting in lower valuations in a number of cases.

13-04-2024 : “The strange accounting for capital gains on partial disposals of fully consolidated subsidiaries. ”

Last week, Wendel sold 9% of Bureau Veritas on the stock market for €1.1 billion, reducing its controlling stake from 51% to 42% of the voting rights. The capital gain was €800m, but did not appear in the profit and loss account, which goes against common sense. In doing so, Wendel is simply following the IFRS accounting principles that apply to it, which stipulate that as long as the controlling shareholder remains the controlling shareholder, the capital gains generated by block sales do not appear in the income statement. Indeed, in this logic of continuing full consolidation, all the assets and liabilities of Bureau Veritas remain consolidated within the Wendel group, and only the share of minority interests and that of the Wendel group in the result and in shareholders' equity are affected. The only change in Wendel's consolidated balance sheet is the appearance of €1,100 million in cash, the counterpart of which, in order to respect the balance sheet equilibrium, is an adjustment (increase) of €1,100 million in shareholders' equity, without the €800 million capital gain being taken to income or other comprehensive income (OCI). If the accounting rules considered that the €800m capital gain should appear, it would be sufficient to include it as such in the income statement and to adjust equity (excluding profit) by only €300m. When Wendel, by selling a new block, falls below a threshold of voting rights that no longer gives it control of Bureau Veritas, the capital gain on this block will then appear in the income statement, together with the entire unrealised capital gain on its residual stake. The latter will be recorded in Wendel's accounts on the basis of its market value at the time of the change from full consolidation to the equity method. Fluctuations in the value of this holding could then appear each year in the income statement (this is an option). We therefore have the unusual situation of a capital gain realised last week that does not appear in the profit and loss account, and another one to come that will appear in the profit and loss account because of the change in consolidation method, even though the holding will only have been partially sold. It is true that IFRS and US GAAP have freed themselves from the straitjacket of law and taxation to take a more economic view of situations, but in this particular case, it does not seem to us that this corresponds to real economic or financial life. Understand who can! Fortunately, this situation is rare, because when industrial or financial groups sell a subsidiary, they usually sell 100% of their stake. Moreover, in the case of Wendel, an investment company, the profit and loss account is less important than an extra-accounting valuation of its net assets in assessing its performance.

06-04-2024 : “Kering and the Milanese real estate prices ”

Should Kering have refrained from acquiring a magnificent building in Milan for €1.3 billion, on Via Montenapoleone, the Milanese Avenue Montaigne or New Bond Street? Admittedly, the price of these 11,800 m2 is €110,000 per m2 (sic), but the return apparently corresponds to a market yield of 3.85% in the second most expensive city in the world, at least for luxury retail properties. This is the view of the Financial Times, which estimates that the return on this investment will be nowhere near the Group’s ROCE of 11.7% in 2023 (including goodwill).
Despite all our sympathy for the British daily, its reasoning does not hold water from a financial point of view. Indeed, to consider that an investment is bad whenever it yields less than the ROCE generated by the company is a fallacy. It is not appropriate to relate the prospective return of an investment to the accounting return currently generated by the company, but to the cost of capital of this investment. If you have a ROCE of 20% and a cost of capital of 8%, any investment yielding 12% will reduce the ROCE, which will then settle between 12% and 20%; but it will nevertheless create value if the forecasts made prove to be correct, because it will yield more (12%) than its cost of capital (8%).
The second pitfall to avoid would be to compare the return on this property investment (just under 4%) with Kering's cost of capital (around 8.5%). This would only be relevant if the risk of this building were identical to that of the rest of Kering's activities. However, we all know that the cost of capital for a property company is much lower than 8.5% because the risk is much lower than for an industrial activity, even one in the luxury sector. With a yield in line with the market for this Milan acquisition, it is not obvious that this building was overpaid.
Secondly, it's true that property prices in Milan are particularly high, which explains why for years my Italian students at HEC Paris have been telling me that they don't want to go and work in the economic capital of their country, because salaries for young graduates are much lower there than in Paris. And as this has been going on for a long time, this is one of the reasons why Italy's top 20 market capitalisations today total just €431 billion, compared with 5 times as much for the top 20 French market capitalisations (€2,148 billion) for a roughly similar population. When a country loses its best-trained and most agile young people, the economy can only suffer. Let's congratulate ourselves on the fact that prices on the Champs-Élysées do not exceed €50,000 per square meter!

04-03-2024 : “Could you join the IASB and become an accounting regulator? ”

You'd stand a good chance if you can answer these 3 questions TRUE or FALSE, all relating to IAS 32, on which the IASB has published an exposure draft: 1/ A perpetual or hybrid debt must be recognised as equity even if, in the vast majority of cases, the issuer redeems it early after a few years to avoid having to bear a sharp rise in the interest rate, which is contractually provided for to prompt the issuer to redeem the perpetual bond early (which is bound to make you smile). 2/ Under IFRS, a bond redeemable in shares (mandatory convertible bond, MCB) is recognised under shareholders' equity, with the exception of the present value of the interest paid before being redeemed in shares, which is recognised under financial debt. However, if the redemption parity of the MCB (3 shares against one MCB, for example) is variable (against 3 shares, or 4 or 2 depending on a given criterion), then the MCB must be recognised as a debt. 3/ More difficult now. You have granted minority shareholders in a subsidiary that you control a put option allowing them to sell you their shares. The amount you may have to pay out if the minority shareholders exercise their put option is a financial liability, the creation of which is offset (so that the balance sheet remains balanced) by a deduction from shareholders' equity (group share) of the same amount, and not bya deduction from shareholders' equity (minority share). Well, if you answered TRUE 3 times, you have every chance of succeeding at the IASB, which holds these positions in the exposure draft mentioned above. But you are unlikely to be a good financier. Equity capital is so important to a company - it is the cornerstone of its existence and development - that in this area you have to call a spade a spade and be particularly rigorous. A debt that is repaid, even if it is wrongly called perpetual, is a debt, not equity. An MCB, with a fixed or variable parity, and which by definition does not involve any cash outlay, since it is redeemed in the issuer's shares, is an equity security, precisely because it is not redeemable in cash or debt securities. As for the put on minority interests, the IASB is proposing a double penalty. Why not create a liability on the balance sheet in respect of minority interests. But where is the consistency in deducting the put amount from shareholders' equity, group share, and not from that of minority interests, who have just been assumed to be exercising their put by recording the put amount as a liability? When will the IASB finally realise that, by proposing provisions so far removed from common sense, it is discrediting the accounting standards of which it should be the intelligent and scrupulous guardian?

27-02-2024 : “Warren Buffett's 2024 annual letter to shareholders ”

In this letter, Warren Buffett points out that what creates value is a company's ability to reinvest its profits at a rate of return higher than its cost of capital. Conversely, a company that reinvests its profits at a rate of return lower than its cost of capital destroys value. This explains why the share price of these companies jumps when their managers promise significantly higher returns. Barclays, for example, has just promised to return £10bn to its shareholders over the next 3 years (on a market capitalisation of £23bn). The share price has jumped by 10%. Not that shareholders are dividend-hungry leeches. It's just that they know how to count. To understand this, you need to remember that Barclays' equity of £71bn is only worth £23bn on the stock market, the result of Barclays' return on equity (7.3% in 2023) being lower than its cost of capital for years. This represents a 68% discount and a £48bn loss in value. 10bn of dividends paid means £10bn of cash reaching shareholders' accounts and being worth £10bn. It also means a £10bn reduction in book equity, which at a constant 62% discount means a reduction in equity value of only £3.8bn. In net terms, +10 - 3.2 = +6.8. On the other hand, £10bn of reinvested earnings means a £10bn increase in the book value of shareholders' equity and a £3.2bn increase in its value at a constant 32% discount. + 6.8bn if Barclays returns £10bn to shareholders, versus +£3.2bn if Barclays reinvests the £10bn in its business, whose marginal profitability is lower than the cost of capital, leading to a loss of value. No wonder shareholders are applauding with both hands. Especially as there could be a second-round effect, as at least 60% of the returns will take the form of share buy-backs, leading ipso facto to an increase in shareholders' equity per share, and at a constant discount, a corresponding increase in the share price. On the other side of the Atlantic, once again this year, Berkshire Hathaway shareholders will overwhelmingly vote for no dividend, preferring reinvestment, confident in their leader's ability to generate returns in excess of the cost of capital. Having said that, Warren Buffett warns that Berkshire Hathaway's size ($900bn) means that its future performance will no longer be as exceptional as in the past. The day when Berkshire Hathaway will pay dividends is not far off; probably after the death of its founder, just as Apple waited until the death of Steve Jobs to do so, such is the power of these exceptional men.

17-02-2024 : “Uber and share buybacks ”

ï»¿ On the occasion of the publication of its 2023 results, the first to show positive net income ($1.9 billion), Uber announced the launch of a $7 billion share buyback plan. Why initiate share buybacks when the group still has a net debt of $5.8 bn, i.e. 3 times EBITDA (or 1.5 times if we consider share-based compensation expensed as a non-cash expense)? Admittedly, Uber is announcing growth rates for the next 3 years of between 15/20% and cash flow growth twice as strong, which makes doubts about its ability to meet its debts irrelevant. So, it's not a case of idle, surplus capital, as with Apple or Google. Nor is it that the stock is grossly undervalued - that's not immediately obvious at 50 times operating cash flow minus tangible investments. These are the two most common reasons for share buybacks. The issue is rather the growth in the number of shares. Indeed, like virtually all technology groups, Uber compensates its employees through the granting of free shares, averaging $58k in 2022, but probably much, much more for employees in the key R&D and Technology department, which accounts for $1,215m of the $1,935m in share-based compensation booked in 2023. Since the share-based compensation of these employees accounts for 38% of the department's costs, their share of compensation is likely to exceed half of their total compensation, and therefore exceed the amount of their salaries paid in cash. A share price that has doubled since the 2019 IPO is a blessing for everyone (sorry, short sellers), but the day a bearish phase sets in, some in the R&D and technology department will look sadly for greener pastures, as soon as the downward price movement is not general, but specific to Uber. Since the IPO, the number of Uber shares has grown by an average of 5% a year, due to this effect and to the payment of external growth operations in shares. Buying back shares limits the growth in the number of shares, which would otherwise reduce the growth rates of operating parameters and threaten a good valuation. This shows a discipline that appeals to investors, and is the strength of this convention to which Uber has just adhered (in its own best interests). PS: for those who believe that share buybacks boost share prices. The $7 billion announced by Uber, assuming it is fully realized in 2024, would represent only 2.4% of the average daily volume of transactions on the share. Not enough, in itself, to boost the share price mechanically and significantly. And academic research shows that the idea that share buybacks will boost share prices is false.

16-02-2024 : “Believe's delisting - look for the mistake ”

Believe, a major independent music company (Jul, Naps, etc.), listed on the stock market since June 2021, yesterday announced its plan to delist. It is true that Believe's stock market life had got off to a poor start, with an IPO price at the bottom of the announced range (€19.5 - €22.5), and a share price down 15% on the evening of the IPO. However, Believe was able to raise €300 million in a purely primary transaction to finance its expansion, and had a market capitalisation of €1.5 billion on that basis. The share price gradually fell to €8, then stabilised at around €10. Yesterday the management, Believe's main private equity fund (TCV) and another private equity fund (EQT) announced an offer of €15 and a delisting if the offer seduces more than 90% of the capital (it already has 75%). Believe's founder and CEO commented: "Since its IPO, Believe has maintained excellent growth momentum, enabling it to achieve the targets set at the time of listing two years ahead of schedule." And here, we can't help thinking that there is either a problem with the IPO price in 2021, the proposed exit price in 2024, or the Chairman's statement. Let's rule out the last option, because a press release like this is proofread by lawyers who know how to make comparisons. Then there are the prices. If Believe is 2 years ahead of its business plan less than 3 years after its IPO, logic would dictate that the 2024 price (€15) should be higher than the 2021 price (€19.5), especially as the stock market has performed well in the meantime: +20% for the SBF 120 (dividends reinvested). Moreover, an investor who invested in the SBF120 in June 2021 has a Believe share equivalent of €23.4, compared with a share price of €12 on Friday evening and an offer price of €15. So either the IPO price was good, in which case the exit price is undervalued, and we will read the independent expert's report with interest. Or it was not good, and the exit price is correct. This should come as no surprise, given that at the end of 2022, of the 139 companies that have floated on the Paris Bourse since 2014 and are still in existence, 77% were valued below their IPO price. When we talk about the attractiveness of the stock market - and the subject is far from being confined to Paris - we might wonder whether introducing bankers should not ask themselves questions about their practices in advising on the IPO price, where the battle to obtain the mandate can lead them to overbid on valuations and overpromise. And it is very difficult for a company to recover from a very negative initial effect when, on the evening of the flotation, the investors who subscribed realise that they have lost 15% of their investment in one day.

31-01-2024 : “Magic thinking in China: ban short selling ”

Since its high point in February 2021, China's flagship CSI 300 index has fallen by 44%, compared with rises of 51% for the DAX, 53% for the CAC40 and 82% for the S&P 500. This weekend, the Chinese stock market authorities resorted to old, hackneyed recipes: banning short selling in the magic hope of bolstering share prices. Academic research has consistently shown that a ban on short selling has no discernible impact on prices, increases the bid-ask spread and reduces market liquidity. In other words, it does not achieve its objective and reduces market efficiency. As illustrated by our previous post dedicated to the 15th anniversary of the death of Adolf Merckle, short selling is highly risky and those who engage in it are either incompetents who quickly disappear because the risk is so high, or swindlers who try to manipulate prices and who will quickly come up against the market regulators, or investors who have done their homework and passed on information to the market that others did not perceive (cf. Muddy Waters, who presciently sold Casino short at the end of 2015). Wanting to deprive ourselves of this type of information is like banning the bearers of bad news, and it is not the way to develop confidence in your financial market, quite the contrary, as shown by the 2.8% decline yesterday and the day before yesterday in the CSI 300 index. If China's financial markets are doing so badly compared with ours, it's because priority is no longer being given to economic development, but to strengthening the Communist Party's leadership role and to imperialist dreams, which are likely to convince investors to look elsewhere for greener pastures. Even for a dictator, you can't have your cake and eat it too.

10-01-2024 : “15th anniversary of Adolf Merckle's death ”

Except to some of our German-speaking readers, this name won't say much. It was that of a 74-year-old German industrialist (HeidelbergCement, Ratiopharm, Phœnix Pharmahandel, etc.) who had become his country's 5th richest man and who, in the early hours of 5 January 2009, left his family home in Blaubeuren to lie down on a nearby railway track. How could anyone go to such extremes? By short-selling Volkswagen shares that economic and financial analysis showed to be grossly overvalued, but ignoring the fact that a secret battle going on within the founding family was leading some of its members to buy Volkswagen shares whatever the price, causing it to jump from €211 to more than €900 in two days. ... While there were many theoretical opportunities for short-selling in 2023 (Orpéa, Casino, Atos, etc.), this sad example should serve as a reminder that short-selling is a particularly risky investment technique, with the potential to lose far more than the amount invested. There is a reason why short-selling specialists rarely use it over long periods, even if they are convinced that a stock is overvalued. In this regard, we are reminded of the aphorism of the economist J.M. Keynes, whose fortune owed at least as much to the fruits of his skillful speculation as to his royalties and courses: "Markets can stay irrational longer than you can stay solvent."

03-01-2024 : “British American Tobacco is writing down the value of its brands. ”

Impairment of goodwill does not usually have a significant impact on share prices, because goodwill is simply written down to reflect a loss of profitability that has already been taken into account by the market, since accounting naturally lags behind economic and financial reality. When BAT announced that it was writing down £25bn of its cigarette brands (Pall Mall, Newport, Camel, etc.) on 6 December, for 31% of their book value, its stock market value fell by 8% in one session, a fall that has not since been offset, even partially, which is why we waited to tell you about it. The reason is that this announcement was accompanied by the decision to write off these brands over 30 years, on the assumption that, given the changing consumer habits of its customers, these brands would no longer have any value in 30 years' time and that this business, in this form, would have disappeared. This loss of value in 30 years' time had not been anticipated by investors, who consequently reduced their free cash flow expectations, causing BAT's share price to fall. In fact, the new tobacco consumption brands are new to BAT (Vuse, Velo, Glo) and not the historical brands. Coincidentally or not, the £25bn write-down reduced the amount of book equity to more or less the same level as market capitalisation, leading the CEO to say that this was a case of accounting catching up with reality, overestimating investors' ability to grasp reality as accurately as possible. This suggests that there may be further downturns of this type in sectors where significant changes may be difficult to quantify correctly, and we are naturally thinking of the effects of the energy transition.

28-12-2023 : “Three emblematic property transactions ”

In recent weeks, Meta announced that it was terminating an 18-year lease, signed in 2021, on an office building near Regent's Park in London that it had never occupied. It agreed to pay the owner £149m in compensation, equivalent to around 7 years' rent. Taking into account other similar transactions, a total of $3.350 billion was spent in this way. Flexibility is priceless for those who remember, for example, that Saatchi and Saatchi sank into heavy losses in 1991 because of a lease on a building it could not get rid of in the midst of a property and economic crisis. LVMH, for its part, bought the buildings at 144-150 avenue des Champs-Elysées, just a few dozen metres from the Étoile, opposite the Publicis Drugstore, for just under a billion euros to house Dior boutiques and offices; this showcases the continuing move upmarket on the Champs-Elysées with Louis Vuitton due to open in the former HSBC building, owned by Qatar. Control of strategic locations is priceless, with prices in the region of €50,000/m2. As for Barclays, it is extending the lease on its Canary Wharf headquarters from 2034 to 2039, probably on good financial terms given the departure of the business district's first occupier, HSBC. For those for whom location is not strategic, real estate is a matter of opportunity.

02-12-2023 : “The passing away of Charlie Munger ”

Charlie Munger, vice-chairman of Berkshire Hathaway, died on Tuesday evening a month and 4 days shy of his hundredth birthday, having still not retired, or even semi-retired. We can't help thinking that hard intellectual work is good health, and that finance keeps those who practice it regularly! Charlie Munger, a lawyer by training, is the man whose letter to the shareholders of Berkshire Hathaway inspired our October news article, which questioned the impact of Berkshire Hathaway's management style as the source of its exceptional performance. In retrospect, we are glad to have been able to write that article while he was still with us. Charlie Munger is the man who convinced Warren Buffett to change his investment strategy, as the latter admitted in 2005 in his letter to shareholders: "The blueprint he gave me was simple: forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices". In fact, in his early days, Warren Buffett invested in companies in great difficulty, and therefore cheap, such as Berkshire Hathaway, which was active in the textile sector at the time. Then came the time for minority stakes in growing companies such as Amex, Coca-Cola, The Washington Post, and more recently Apple, taking advantage of moments of undervaluation, either in times of economic or financial crisis, or because market efficiency sometimes slumbers, like reason, or the takeovers of Geico in insurance, or Burlington Northern and Santa Fe Railway. Charles Munger and his 93-year-old younger partner, Warren Buffett, were probably the best allocators of capital in the history of mankind, since in 57 years an investment of €1,000 in the S&P 500 index became €24,428, giving an actuarial return of 10% a year; while the same sum invested in Berkshire Hathaway shares became €3,777,937, giving an actuarial return of 20%. Correctly allocating capital, which is a resource that exists in limited quantities, to avoid wasting it and to make the best possible use of it, is at the heart of corporate finance. Hats off to Mr Munger.

16-11-2023 : “Orpea and South Korea ”

No, Orpéa has not discovered that it owns retirement homes in South Korea! (although it does operate some in Brazil, Uruguay and China). The link between the two is through short-selling.

In response to our previous post, some people wondered why short sales weren't taking place to bring Orpéa's share price down to a level more in line with economic and financial rationality.

Well, to be able to sell short, you need to be able to borrow shares, which you don't have because you want to sell short, from investors who do. In a normal situation, this is possible because there are institutional shareholders in the capital who agree to lend their shares for a while and receive interest in return. But in the case of Orpéa, with a share price that has long exceeded all rationality, the institutional investors, who know how to count, have sold their shares and the bulk of the shareholders are individuals. These individuals do not have access to securities lending services and often hold a number of shares that are too small for this. Furthermore, banks are prohibited from lending the securities of their individual clients, which considerably reduces the number of securities that can be lent. So, de facto, it is very difficult to sell Orpéa shares short, as there is no possibility of securities lending. This also explains why its share price has been so irrational for so long. Even if they are often unloved, short sellers have an economic role to play in contributing to market efficiency in the case of overvalued securities, as Orpéa's situation demonstrates a contrario. But like everyone else, they can also make mistakes, and usually at great cost to them. In South Korea, the stock market regulator has banned short selling from 6 November to the end of June 2024, officially to strike a balance between retail investors, who cannot sell short, and institutional investors, who can. On the day this measure came into force, the Korean index gained 4.5% during the day, with Korean investors thinking that without these short-sellers getting in the way, stock prices were more likely to rise, and this was immediately anticipated in stock prices. It is also said that with the general elections taking place in April, and with 14m of the 52m Koreans investing in the stock market, the measure was primarily electorally motivated. For those politicians wishing to follow the Korean example, it should be noted that a week later, the Korean index had risen by just 1.5%. And in the United States, where the measure was taken during the 2008 financial crisis on bank stocks for 15 days, the measure did nothing to stabilise prices, leading to the abandonment of the ban on short selling.

14-11-2023 : “Is Orpea worth as much as TotalEnergies? ”

Of course not! But that's what we're seeing on the Paris stock exchange, where investors regularly buy shares at around €1 a share, for around €4 million a day, or around 6% of the capital that turns over every day.

There are currently around 65 million Orpéa shares. In a press release dated 11 October, Orpéa announced, in accordance with the safeguard plan approved by the commercial court and against which appeals have failed, three capital increases to transform unsecured debt into equity for €3.9bn and to provide liquidity of €1.55bn, all of which will enable the company to adapt its financial structure to its ability to generate cash flow enabling it to get back on a sound footing. In doing so, Orpéa will issue around 159 billion (sic) shares, resulting in a dilution of 99.96% of current shareholders, since the new shares will be issued at prices ranging from €0.0133 to €0.06. The reason for this is that the entreprise value of Orpéa’s is less than the amount of debt to be repaid, so the value of shareholders' equity is zero.

To value Orpéa's shares at one euro today is to believe that the company could reasonably be worth €159 billion, or as much as TotalEnergies ... . It is sad to see, when Orpéa has clearly indicated for months that its shares were massively overvalued, and again on 11 October ("These capital increases will result in massive dilution of existing shareholders and could lead to a significant fall in the share price, with the value of the share after operations possibly being less than €0.02"), that some investors are still completely deluding themselves. Those who have held on to their Orpéa shares since 2022, and who have already lost 90% of their assets invested in Orpéa, will lose a further 98%. And it's sad for us educationalists to see that reason, which is shining through here, has been unable to assert itself for months on this topic where only passion and illusion reign.

21-10-2023 : “Naming and shaming in Japan ”

Japan never ceases to amaze us. Eight months ago we commented on the relationship between Kiocera and KDDI, which is far from being marked by good governance. This week, we learned that the Tokyo Stock Exchange will shortly officially publish the list of listed companies whose equity value is greater than their book value, i.e. whose PBR is greater than 1. Less than half of listed Japanese groups have a PBR greater than 1, compared with 60% in Paris. However, if a serious plan to remedy this situation has been announced, a Japanese group worth less than its book value could join the roll of honour. Phew! Shame, of course, for those who remain outside this list! This will point out that they are indulging in a situation where the 100 invested by shareholders in the form of a capital increase or reinvested profits not paid out as dividends are worth less than 100. This is the hallmark of poor capital allocation, which penalises the economy as a whole because this capital, which does not exist in unlimited quantities, could have been devoted to more efficient management teams to carry out other projects. A PBR that is persistently below 1 may be the result of a return on assets that is persistently below the cost of capital, a particularly opaque group structure, a poor corporate governance, a financial structure with far too much debt, and so on. In the United States and Europe, without the need to publish a list, it is the role of shareholder activists to try to change things. In Japan, where activist shareholders are not welcome, it is the Tokyo Stock Exchange that wants to encourage its listed company clients to improve, for the greater good of the users of its platform, the investors, and of society in general, by publishing a list of the next targets of activists.

14-10-2023 : “Euronext, mission : impossible? ”

The withdrawal of Planisware's listing, for price reasons, on the eve of its IPO (12 October), is a major blow for Euronext, which lists fewer and fewer companies (1,212 in 2008, 857 in 2023 in Paris). Planisware, which specialises in SaaS software for businesses, had everything going for it: strong growth (+20% a year), 25% net margin, no debt and net cash flow thanks to a subscription model, and dividends of 40% of net income. Its valuation at the bottom of its IPO range gave a multiple of 30 times 2022 operating profit. That's not cheap, but with a growth rate of 20% a year, it's only 21 times for 2024. The IPO was intended to enable the private equity fund Ardian to sell its 20% stake, with the management keeping its 80% stake in a company whose market capitalisation was expected to be €1,100m. And that's probably where the problem lies. Why would a private equity group that is selling 100 % of its stake agree not to maximise its selling price to enable the new stock market recruit to get off to a good start on the stock market? An entrepreneur looking to the long term can reason in this way (like Jacques Veyrat and Neoen, for example). But not a private equity fund that is able to sell its stake to another private equity fund or a family office, without reducing the carried interest of its partners. On the other hand, stock market investors often think that if a private equity fund floats one of its holdings on the stock market, it is because it has not found a better deal among its peers and industrialists. And it's true that when we look at the IPOs of companies that have raised at least €200m since 2018, all the former private equity fund holdings have done less well than the market, which has risen by 40%: Verallia +30%; OVH, Antin Infrastructure and Believe have seen their share prices divided by 2 or 3.... This is enough to dampen investors' appetite for private equity funds, as Planisware had paid the price in a terrible geopolitical climate, but with a stock market that was OK (down less than 1% over the week). Since 2018, at this size, private equity funds have accounted for half of all IPOs. Euronext must succeed in convincing private equity funds to leave money on the table for the benefit of the first stock market investors if it is not to kill off the market for IPOs worth a few billion. Otherwise, this segment will continue to languish, even though it could attract long-term candidates for top indexes. Our sympathy goes out to Planisware's financial management team, who have been working very hard for months to ensure that everything was fine and was told to cancel everything at the last minute.

01-10-2023 : “Vedanta, a spin-off in an emerging country ”

This Indian conglomerate, mainly active in oil and gas, aluminium, mining (zinc, silver, copper, iron and lead) and the steel industry, with a stock market capitalization of $10 billion, has just announced a demerger that will give rise in a few quarters to 6 new groups, each focusing on its own business. In countries where financial markets are underdeveloped and access to finance is difficult, listed conglomerates (Argos in Colombia, Reliance in India, etc.) are a more efficient form of organisation because they form their own internal financial market, with cash cow divisions supplying cash to divisions needing funds. Because of their large size and the lower risk induced by their sectorial diversification, they find it easier to attract local or international savings to supplement their own ressources. As the financial markets develop, their competitive financial advantage fades, and their shortcomings become more apparent: they are complex to analyse, even opaque, diversification is imposed on the investor, and there is a fear of internal misallocation of funds, as star divisions may be held back in their development if the conglomerate's funds provide too much support for divisions in difficulty that would otherwise have to be closed. In Europe, over the last forty years or so, Philips, Siemens, Schneider, Fiat, Générale des Eaux, CGE, General Electric plc, etc. have refocused on one of their core businesses, some with success (Schneider, Veolia) and others less so (Philips, Alcatel). In the United States, which accounts for 69% of spin-offs, the same trend has also taken place: ITT, General Electric, Gulf & Western, etc. which may not mean much to our younger readers. The same is true in Japan.

One of the justifications put forward by Vedanta for its demerger is easier access to credit for its various divisions, whose individual performances are difficult for lenders to analyse within this conglomerate. This argument may come as a surprise, since it is generally believed that the diversification of a conglomerate's businesses reduces lenders' risk. But it is true that when debt levels become high, as is the case with Vedanta, lenders prefer to clearly identify cash flows in a logic that is almost akin to project financing, which the break-up of the conglomerate will make possible.

Even if one swallow doesn't make a spring, we can't help thinking that if India is starting to do demergers, it's because it's changing!

17-09-2023 : “Reverse auction ”

Exor, the listed holding company that groups together the investments of the Agnelli family, has announced a share buyback of 5% of its share capital using the reverse auction technique for €750m, and ordinary purchases on the market over time for €250m. It is true that family investment holding companies are not very popular on the stock market at the moment, with discounts to net asset value (NAV) of between 38% (GBL) and 57% (Peugeot Invest). Exor, which has registered the best performance in recent years, has a discount of 43%. For an investor, these vehicles, which allow families to play a more important role in their investments than they would be entitled to if they were limited to their own funds, are unattractive, hence the discount. Who would think that Exor would keep its stakes in Ferrari, Juventus or Stellantis, solely on financial criteria, without the historical attachment to the companies playing an essential role? The announcement of this reverse tender offer was combined with a 23% rise in NAV over the first half, compared with half that for the benchmark stock market index. It is therefore difficult to attribute the 5% rise in the share price that day to either of these announcements with any certainty. For a company with a market capitalisation of €20bn, we believe that the performance effect had the greatest impact. This transaction, which will reduce NAV by around 3% but the number of shares in issue by 5%, will result in a 2% increase in NAV per share, which may explain part of the 5% rise in the share price. The reverse auction technique, more rarely used in Europe than the simple fixed-price offer, simply means that shareholders interested in selling some of their shares in this way will indicate the price at which they are prepared to sell what quantity of shares, within a range of between - 3% and + 10% of the market price. Exor will set the price at that which will enable it to buy back €750m, starting with the lowest prices, hence the term "reverse auction".

16-08-2023 : “Novo Nordisk illustrates one of the laws of breakeven ”

The publication of the half-yearly results of the Danish pharmaceutical group Novo Nordisk illustrates one of the laws of breakeven, which states that the further a company is from its breakeven point, the more its results vary in close line with sales. With an operating margin in the first half of 2023 of 45.4%, Novo Nordisk is indeed a long way from its breakeven point, probably around 270% above it. In short, sales would have to fall by 73% (sic) for operating profit to cancel out, assuming that fixed costs remain fixed, which is a particularly conservative assumption when sales fall by three quarters! In the first half, sales rose by 29%, boosted by excellent results from its anti-obesity and anti-diabetes drugs. Operating profit grew by 30%, almost as much. For the year as a whole, Novo Nordisk has announced sales growth of between 27% and 33% and operating profit growth of between 31% and 37%. When you're excellent, it's hard to be super excellent! Novo Nordisk is Europe's second-largest market capitalisation, 10% behind LVMH (€377bn market value, compared with €403 bn for the luxury goods leader).

08-07-2023 : “Casino: Death of a zombie ”

What is most striking about Casino's restructuring, the main points of which were announced this week, is that the fall has come so late. Casino's ROCE has been below its cost of capital since ... . 2011, its sales and negative working capital have been falling since 2013, its free cash flow has been negative since 2017, and its net bank and financial debt exceeded 4 times EBITDA in 2015 and 6 times since 2019. Casino is one of the few zombie companies we know, having been virtually bankrupt for years. Which makes its share price performance all the more surprising. The two restructuring plans made public stipulate that former shareholders will be diluted to 0.2% or 0.03% of the share capital, i.e. a minimum dilution of 99.8%. Even if we take Casino's highest share price this century (€96 in mid-2014), we should be at 20 cents at best, compared with a current price of €3. Like human beings who know they are mortal but don't believe it, Casino's current shareholders seem to have forgotten that a share price that has already fallen by 97% can fall by another 97%.

25-06-2023 : “Capex and dividends ”

With €88bn of investments, the CAC40 groups have beaten their all-time record according to EY's annual study (if we set aside 2012 when EDF, France's biggest investor in 2022 with €18.3bn, was still a member of the stock market index). This high did not prevent the 2022 dividends of the CAC 40 from also reaching an all-time high in 2022 at €57bn (see our annual study of January 2023). Anyone who thinks that, at macroeconomic level, dividends constrain or even reduce investment can only be surprised by this finding, which can be explained by 2 facts. Margins are currently at their highest (13.5% current operating margin), which greatly simplifies matters. Furthermore, while at company level, an entrepreneur with a stable level of debt is more likely to slash his dividend in order to increase investment than vice versa, this is not true at global level, given the heterogeneity of groups in terms of maturity and capital intensity. Within the CAC40, Air Liquide, ArcelorMittal, Stellantis and STMicroelectronics account for 22% of investments, but only 9% of dividends paid. In fact, at a macroeconomic level, dividend growth enables investment growth, once we understand that it is not the same groups that are the dividend champions and the investment champions. The dividends of the former help to finance part of the investments of the latter, via the capital increases carried out in recent years by Air Liquide, ArcelorMittal and Stellantis, for example.

19-06-2023 : “Do less stupid things than your neighbours. ”

This was the wise advice of Wilfrid Baumgartner, Governor of the Banque de France in the 1950s, then Minister of Finance and finally CEO of Rhône-Poulenc, France's largest market capitalisation in the 1960s. Our British neighbours did not follow this advice, and alongside the Brexit, popularised by liars and incompetents, they made another major mistake, squandering one of their greatest advantages, the London Stock Exchange, which is now being shunned by a number of British companies that find higher valuations in the United States (CRH, ARM, Ferguson, etc.). While the market capitalisation of companies listed on the London Stock Exchange was twice that of Paris in 2000 (around €3,000bn compared with €1,600bn), they are now equivalent (at €3,600bn, including secondary listings). While London's market capitalisation was 159% of British GDP in 2000, it is now only 95%. The reason for this lies in the proportion of UK pension funds' portfolios invested in equities, which has fallen from 50% in 2000 to 4% in 2022, while the proportion invested in fixed income products has risen from 15% to 60% in the same period. As a result, the UK government has been able to finance its budget deficit cheaply. British listed companies, meanwhile, have seen their relative value plummet. The UK's top 20 market capitalisations have risen from a cumulative €1,529bn in 2000 to €1,657bn in 2023, an increase of 8% in 23 years, with an average P/E of 15; compared with 20 for their Paris-listed counterparts, which have risen from €1,031bn in 2000 to €2,148bn in 2023, an increase of 108%. This trend is all the more incomprehensible given that if there is one investor who can aim for the long term, it is pension funds, which systematically outperform fixed-income products by capitalising over the long term. In conclusion, we should not underestimate the role of stupidity in history. Here is an example that is less well known than Brexit, but just as harmful.

17-06-2023 : “HSBC's long and costly exit from the French retail banking market. ”

A small player in the French market with 244 branches (less than 0.7% of the national total) and 0.8 million customers, HSBC has lost $500 million over the last two years. HSBC signed an agreement in 2021 with the investment fund Cerberus to sell its assets to Cerberus for €1, in return for a bailout of around €1.9 billion, giving the banking group a negative value of this amount. At almost 4 times its losses, HSBC's exit from the French retail market was not particularly cheap, since most loss-making assets are sold for between 1 and 3 times their annual losses. Rising interest rates (and the collapse of Silicon Valley Bank) have increased the size of the cheque to be paid, which the parties have just agreed. Cerberus, which knows how to count, renegotiated the agreement and obtained that HSBC keeps for itself approximately one third of the loan portfolio of HSBC France retail banking, probably in capital losses due to the rise in interest rates, which would have had to be carried at an interest rate higher than that of the interest received on this loan portfolio. In addition, HSBC will invest €407m in the holding company that will take over these assets, on which its potential capital gain is capped, while Cerberus will only reinvest an additional €225m. In total, HSBC is losing $2.7 billion on this transaction, or more than 5 times its annual loss, which to our knowledge is a new record for disposals of loss-making assets. And as HSBC's 2023 P/E is 6 times, the deal is marginally value-creating for the UK banking group. But as HSBC bought the UK subsidiary of Silicon Valley Bank for £1 in one weekend to prevent it from going bankrupt (lost a third of its deposits in one Friday) in the same way as its Californian parent company, and made a pre-tax profit of £1.5bn in the process, HSBC could afford to be generous. We can trust Cerberus to have understood this, since after HSBC's purchase, it was rumored that it would pull out of the French deal in which it was the only buyer, just as HSBC was the only buyer of SVB UK.

16-04-2023 : “Getlink's decarbonisation margin ”

Getlink, the parent company of Eurotunnel, has published a new financial indicator that allows extra-financial elements to be integrated into the financial elements, by subtracting from EBITDA a fictitious charge corresponding to the valuation of all its greenhouse gas emissions (scope 1, 2 and 3) at a price more than double that of the current cost of a tonne of carbon (€197 compared to €94). For Getlink, which has low greenhouse gas emissions, the impact on its profit and loss account is small, with a 3.3% reduction in EBITDA. But for its ferry competitors, that emit 73 times more for the same journey, you can imagine... This also shows the forced transformation that some companies must carry out between 2024 and 2030, in a context where the European Union is going to extend the carbon quota market to new sectors such as maritime transport (well, well...), construction and road transport, or to reduce the volume of quotas that are currently free of charge, in accordance with the polluter-pays principle. Who will ultimately pay? The customer via price increases, the shareholder via lower profits, the community to relieve sectors that cannot adapt quickly enough? It remains to be seen. In any case, as we explained in the last edition of the Vernimmen, it is easier for investors to take into account the externalities that companies impose on the planet if their costs appear in the profit and loss account, rather than in an appendix, another document and quantified in tonnes, litres or kWh, and not in euros. This is why we welcomed Danone's decarbonated EPS as a first step in this direction, even if Danone's approach was focused on the growth rate of its decarbonised EPS 2019, which was higher than for the classic EPS since the food group had reached its peak of greenhouse gas emissions. As far as we know, no other group has followed suit and Danone has stopped publishing it for three reasons: Covid, which caused its decarbonised EPS to decline faster than conventional EPS, the sharp rise in the price of carbon credits from €35 to €94 in Europe, which would have put decarbonised EPS at a loss, and probably the change in CEO. Does the decarbonisation margin have a better future? Probably, since its proponent does not risk being caught out like Danone, being a low emitter of greenhouse gases; and because the time when this theoretical cost could well become a real cost is much closer. Have a good day.

19-03-2023 : “Greed and short-sightedness. ”

In a recent article entitled How start-ups should manage their finances, we read the testimony of two confident entrepreneurs: "When you have at least 1 or 2 million in cash, you can invest it in US Treasury Bonds. At the moment they are paying 5%! This will give you a free runaway. "We bought US Treasuries a while ago. There is little chance that the US Treasury will default. If not, the world will be in big trouble." We don't dispute that the world would be in big trouble if the US Treasury defaulted, and that this is very unlikely. We find, in our dual role as educators and investors, including in start-ups, that it is a very bad idea for a European start-up to invest its cash in dollars. The only case where this might make sense is if the start-up has debt in dollars or makes significant purchases denominated in dollars, so as to constitute a natural hedge against currency risk, which should not concern many European start-ups since they rarely have debt, and even less in dollars! Why is this a bad idea? Because in order to get 5% on US Treasury bonds, you have to buy a two-year paper, which only yields 4.4%, whereas French Treasury bonds currently yield 2.7%. So for a rate differential of 1.7%, the company takes a currency risk on the dollar. If the dollar falls by 1.7% against the euro in one year, the gain in the return on the dollar Treasury bill against the same maturity in euro is wiped out. A fall of 1.7% means that the euro falls from its current rate of $1.06 to $1.08. When you consider that the dollar has fluctuated between 0.96 and 1.4 over the last 10 years, you can see that a variation of at least 1.7% in one year is a possibility ... if not a certainty. But there is not only currency risk, there is also interest rate risk. If in a year's time US one-year interest rates have risen to 6.2%, because inflation is finally higher than expected and our start-up needs the funds, it will sell its treasury bills at a loss, at a constant exchange rate, erasing the difference in yield. We wish good luck and a lot of courage to these apprentice treasurers to go and announce their brilliant idea to their governance committee, or even, when the time comes, the possible disaster of an investment that would have lost 10% of its value with a dollar at 1.17, especially in the context of a rising tug-of-war between the Democrats and the Republicans on raising the ceiling of the US government debt. ... In any case, we have advised start-ups that have put their trust in us by welcoming us to their capital and their governance committee to invest wisely in euros and to focus on operations. Have a nice day.

12-03-2023 : “Are large groups pushing up inflation? ”

We don't think so in Europe, but we wouldn't say the same thing in the US. If the large groups, which in France are summarised as the CAC 40, were to feed inflation by increasing their selling prices more strongly than is justified by the rise in their production costs and the maintenance of their margins, we should see their results rise faster than their turnover, thus showing an increase in margins. However, when we look at the 2022 results of the 38 CAC40 companies (which close on 31 December), two thirds of them have a growth in results that is lower than the growth in turnover, implying a fall in their margins: Thus, by way of illustration for products that contribute to the daily life of consumers who may have this suspicion: Carrefour: + 16% for turnover and + 8% for results, Danone + 14% and + 1%, Crédit Agricole: + 3% and -7%, Michelin: + 20% and + 9%. Among the 13 groups whose results grew faster than sales, we find, for example, Hermès: +29% and +38%, Safran +25% and +55%, Dassault Systèmes: +17% and +20%, whose activities are not remotely or closely related to the household basket and are therefore not likely to inflate inflation significantly. In the United States, where competitive pressure has diminished since the 2000s, and where, for example, a telephone package costs around €60 per month compared with €20 in France, with 3 national operators compared with 4 in France, the situation is likely to be different. Have a nice day

01-03-2023 : “Should Berkshire-Hathaway pay dividends? ”

Berkshire Hathaway is the investment company of Warren Buffett (92 years old) and Charlie Munger (99 years old), whose share price has risen since 1964 (when Warren Buffet took control) by 3,787,484% (sic) compared with 'only' 24,708% for the S&P 500 index, dividends reinvested, i.e. an average rise of 19.8% per year for 58 years, i.e. exactly twice the return of the S&P 500 (9.9% per year) over the same period. Berkshire Hathaway has never paid a dividend, and has therefore always reinvested its earnings, with the success mentioned above, again in 2022, when its share price rose by +4% compared to -18% for the S&P 500 index with reinvested dividends. At 31 December 2022, cash net of debt was $30bn, and $153bn gross of debt. A shareholder tabled the following resolution for a shareholder vote: "Whereas the corporation has more money than it needs and since the owners unlike Warren are not multi billionaires, the board shall consider paying a meaningful annual dividend on the shares." This resolution failed to pass with 98% voting against, and only 2% for, among the B shares held by hundreds of thousands of small holders, the score being 99% against for the A shares. A lesson to ponder for all those, many among politicians, trade unionists and journalists, who think that shareholders are like dividend-hungry leeches and ignore or forget that a policy of return to shareholders is judged by the marginal rate of return that managers are able to find and achieve. As soon as profitable investment opportunities (earning more than the cost of capital) exist, and management has demonstrated its ability to carry them out, shareholders are prepared to do without dividends altogether. It is a very rational decision, without any passion behind it, as illustrated by the shareholders of Berkshire Hathaway who have no regrets about not having received any dividend since 1964. Have a nice day.

23-02-2023 : “Japan is another world. ”

Kyocera is a diversified Japanese industrial group (industrial ceramics, semiconductor components, automotive parts, printers, solar panels) that holds a 15% stake in the telecom group KDDI, without probably many synergies between the two. But this stake represents 55% of Kyocera's market capitalisation, which is of course penalised on the stock market by this baroque structure. The group is only valued at 4.7 times its operating profit, as long as its industrial activities are valued without taking a discount on the sum of the parts. This shows a contrario that there is one, since an industrial group of this size is not valued at 4.7 times its operating profit.
Kyocera has a particularly healthy debt situation since it lends to banks, to the tune of €2.8 billion. Its board of directors is composed of 13 members, all born before 1963, with one exception, with 8 managers and 5 independent directors, whereas Kyocera's shareholding is made up of institutional investors; not one foreign director and only one woman. At the level of KDDI, not one independent director to take into account the 85% of the capital held by third parties, not one foreigner on the board and only one woman. 14 members, all born before 1966, including 9 managers and 5 representatives of Kyocera.
To the shareholders who asked for an improvement of the governance of Kyocera and the sale of the stake in KDDI, the president answers that it is not possible to sell the participation in KDDI because it will be used as a guarantee for a loan at a reduced rate because of the collateral provided by the KDDI shares, a loan of €3.5bn euros to finance investments. Moreover, as the dividends paid are higher than the interest on the loan, this is good for the shareholders, especially as selling the stake in KDDI would require paying taxes on the capital gain.
This is the accounting illusion of leverage, and it forgets the most important thing, which is the value of KDDI, whose variations can be much more important than the difference between the dividend yield and the interest rate on the debt. As long as management thinks like this, it is unlikely that the discount to assets will disappear.

Have a nice day

09-02-2023 : “Societe Generale's strange communication on its distribution to shareholders. ”

On the occasion of the publication of its 2022 results, SG announced a distribution policy to shareholders with a dividend of €1.7 per share and a share buyback programme of €440m, "equivalent to around €0.55 per share". It is curious to say the least, and in our opinion not intellectually honest, to put on the same footing, in € per share under a "distribution to shareholder", a dividend of €1.7 received by all shareholders and €0.55 per share of share buybacks that shareholders will not receive. Indeed, even the shareholders who will sell their shares and be acquired by SG, unknowingly and by chance (given the daily trading volumes of this share), will not receive €0.55, which is a figure that has no financial significance because it is dividing apples by pears! Of course, it is nicer to announce €1.7 + €0.55 = €2.25, a calculation that SG does not give and that it is content to implicitly push the reader of its press release to do so, than simply €1.7. But there are limits to the power of communicators, at the risk of undermining their credibility. The only figure that counts in this area is the total sum in M€ of dividends and share buybacks, i.e. 1.8 M€. And here, investors were caught off guard because SG was expecting a rate of return to shareholders of at least 50% as in the previous year. And as the 2022 results were better than in 2021. . . Compared to a 2022 recurring net income (group share) of €5.6bn, a billion is missing.
Not that shareholders are thirsty for dividends or share buybacks, like leeches, but they know that the marginal return on reinvested equity, above the levels required by prudential standards, is currently 2%, i.e. the money market rate, and well below SG's cost of capital. SG has a CET 1 ratio of 13.5%, above these minimums, while BNP Paribas is at 12.3%. As SG is quoted at one third of its book value (€22bn against €66bn), the €1bn not distributed by SG will not result in an increase in value of €1bn, but only of €333m, i.e. a loss of value of €666m. It is therefore easier to understand why, despite good results, SG's share price fell by 5% yesterday, the biggest drop in the CAC 40, in a stable market.
A good lesson for those who have forgotten that a policy of return to shareholders is naturally judged by the returns on marginal investments that the company can make.
Have a nice day.

24-01-2023 : “Very interesting quarterly results from Procter and Gamble ”

P&G has just published its results for the quarter ending 31 December, which show a 1% decline in quarterly sales. However, it would be wrong to stop at this figure as its breakdown is very illustrative of the current economic situation. The - 1% is the result of 3 main effects: 1/ A price effect of +10% because P&G has increased its prices by about the inflation given the strength of its brands. 2/ A volume effect of - 6% as consumers reduced their consumption of P&G products, probably to buy cheaper products such as private labels. Moreover, the decline in volume was strongest in the Fabric & Home Care (Ariel, Cash, Lenor) and Grooming (Braun and Gillette) divisions, -7 and -8%, where price increases were the strongest: 13 and 11% respectively. 3/ A currency effect of -6%, given the strength of the dollar over the past year. The effective corporate tax rate of 18% (coming from 19 % the previous year) is a sobering figure given that the main countries where P&G operates all have higher corporate tax rates, and that its main competitor, L'Oréal, was at 22.5% in the first half of 2022. By this measure and over a year, that's about $1bn that is lost for the world's tax authorities, for P&G alone. Have a good day.

19-01-2023 : “Renault Nissan: divorce at the back of the class. ”

Presented as a new beginning for the Renault-Nissan alliance, the terms of the new partnership are, in our opinion, similar to a divorce between two players who, from a financial point of view, have become marginalized over time, with respective market capitalizations of €11 and €13 billion, compared to 4 times more for Stellantis (Peugeot, Fiat, Chrysler), €46 billion, and 14 times more for Toyota (€180 billion). In the 2021 ranking of car sales, the Renault-Nissan-Mitsubishi Alliance is ranked third worldwide with 7.7 million vehicles sold, compared with 10.5 million for the leader (Toyota) and 8.9 million for Volkswagen. On this basis, Renault alone will be in 10th place, and Nissan in 8th, more in line with their market capitalization. Sure, by gradually selling 28% of Nissan, Renault can recover at the current price a little less than €4bn, but that's only one-sixth of Stellantis' operating cash flow in 2022..., and of course, a non-recurring amount. The sad moral of this story is twofold. Convoluted schemes and shaky governance rarely lead to industrial, let alone financial, success. They are too complicated, synergies are not found, national sensitivities are protected and maintained by the coexistence of two entities. Moreover, it is rarely good to be a shareholder alongside the State when the latter is directly involved, as the Agnelli family had the intelligence to understand when they broke off advanced merger negotiations with Renault to marry Peugeot and create Stellantis, in the face of the procrastination of the State, Renault's largest shareholder. As for those who are worried about how Renault will replace the fraction of Nissan's dividends that will disappear from its results, let them be reassured. That is not the issue. The issue is industrial first and foremost. The proceeds from the sale of the 28% will be reinvested in Renault's activities and will generate results higher than the share of dividends lost, if the investments undertaken return their cost of capital. Have a good day.

26-12-2022 : “De-risking your retirement savings or getting poorer? ”

There is a principle generally observed and applied to pension funds and employee savings for retirement, sometimes even automatically, which is to mechanically reduce the share of shares and to increase just as regularly the share of bonds and money market investments as the beneficiary of the fund approaches retirement age in order to de-risk his/her savings. While this principle may seem relevant and prudent, it should be noted that its application over the last 15 years has been catastrophic, leading to a relative, if not absolute, impoverishment of those who were persuaded to enter into such an automatic pilot. Indeed, continuously reducing the share of equities in the portfolio from 2007 onwards has led to a failure of the price recovery since 2009: at the end of 2007, the Eurostoxx50 was at 4400, fell in February 2009 to 2000, before regaining nowadays nearly its 2007 level Increasing the share of bonds over the past decade has meant investing more and more in products that yield less and less or none at all, or even seeking yield by choosing the longest securities. That is to say, those that have fallen the most since the rise in interest rates, because a low coupon rate and a long duration give a very high sensitivity. For example, the Michelin 2040 bond issued at the end of 2020 with a coupon of 0.625% is currently only quoted at 61% of its nominal value, i.e. a loss of 39% in 2 years because, with a modified duration of 18, the slightest rise in rates is reflected in the price multiplied by a factor of ... - 18. It is true that those who had a mainly bond portfolio in 2009 were able to benefit from the fall in rates until 2021, but with shorter securities and less sensitivity due to higher coupon rates. Thus a fall in rates from 4% to 0.625% only leads to a 26% increase in the value of a bond with an initial duration of 7 years, and 20% if this fall is not instantaneous but observed over 2 years. Not enough, however, to avoid relative impoverishment, nor absolute impoverishment due to rising interest rates as the portion of maturing bonds not used to pay pensions was reinvested in long term bonds with reduced coupon rates. So what should we do? Define an incompressible amount invested in risk-free monetary assets, which could correspond for example to 10 years of expected retirement or to half of the funds, and invest the balance in shares, a pocket that is gradually liquidated to pay the first years of retirement. The last pensions being paid by the least risky pocket, because at the end of one's life the appetite for risk naturally tends to reduce. And above all, regularly question the relevance of the rule adopted to avoid any automatic pilot which seems to us to protect the asset manager more than its customer. Good thinking.

07-11-2022 : “Answer to the weekend brainstorm. ”

First, let's recall the problem:Company A owns one third of the share capital of company B, which in turn owns one third of the share capital of A. A and B each have 50 of cash net of bank and financial debt and each has operating assets worth 100. What is 100% of the group consisting of A and B worth in equity value? What is the value of 100% of the equity of A? What is the value of 100% of the equity of B? Good thinking and see you on Monday when we publish the answers to this weekend's brainstorm. A and B as a group have operating assets each worth 100 and each worth 50 in net cash. So the equity of A and B together is worth 300. The value of A's equity is 150 (value of its operating assets + net cash) + value of one third of B's equity The value of B's equity is 150 (value of its operating assets + net cash) + value of one third of A's equity We thus have a system of two equations with two unknowns, the solution of which gives for the value of 100% of A's equity 225, and the same for B. We check that 2/3 of the equity of A that is held by shareholders other than B and 2/3 of the equity of B that is held by shareholders other than A is the original 300, which is the case. Have a good start to the week.

05-11-2022 : “This weekend's brainstorm ”

Company A owns one third of the share capital of company B, which in turn owns one third of the share capital of A. A and B each have 50 of cash net of bank and financial debt and each has operating assets worth 100. What is 100% of the group consisting of A and B worth in equity value? What is the value of 100% of the equity of A? What is the value of 100% of the equity of B? Good thinking and see you on Monday when we publish the answers to this weekend's brainstorm.

13-10-2022 : “Taking losses to bounce back ”

In M&A transactions, the banks that arrange the financing commit themselves very early in the process. They can only syndicate to institutional investors or refinance on the bond markets once the deal is certain, on average 6 months for the largest deals, a little less for the smallest, but sometimes more than a year after the deal is announced. This is because the green light must be obtained from the anti-trust authorities, and there may be counter-bids or challenges. During this period, the financial markets may deteriorate. This has been the case since the beginning of 2022. The conditions (and in particular the price) of the financing no longer correspond to those of the market; syndicating the financing then proves complicated. Major deals were announced at the beginning of 2022 (Citrix: $8.5bn in financing, Brightspeed: $3.9bn, Nielsen: $8.3bn, etc.). The syndication of these financings can only be contemplated with a discount to the nominal amount of the loan to reflect the new market conditions, since the rate of the loan corresponds to that of the bank's initial commitment, even if a small part of it can be borne by the purchaser when the debt contract provided for it (flex clause). The discounts on the sale price of the loan, i.e. the potential losses for the banks, can be up to 10% of the nominal value of the loan (OID - original issue discount). What should arranging banks do? Wait for better days and "keep the paper", or syndicate at a discount? In 2022, in the United States, almost all banks chose to syndicate even if it was at a deep discount; they therefore accepted to make a loss on these operations. There are several reasons for this choice: - The crisis of 2008-2009 demonstrated that keeping non-performing operations on the balance sheet made the exit from the crisis longer and more painful; - Banks need to make room for new, more profitable transactions; - The arranging banks benefited from significant fees for setting up the financing. The arranging banks have benefited from large fees for arranging the financing. These fees reduce their losses significantly; - Difficult for second-tier arranging banks to make a different choice. Who would take the responsibility of holding on to the risk of mounting losses, when making losses at the same time as the arranging banks is easily justifiable? In the US market, the arranging banks are not unhappy that the second-tier banks are incurring significant losses (the fees earned by the second-tier banks being lower because they are not structuring the financing and are not advising on the acquisition). This strengthens their position and discourages potentially threatening players. Have a nice day

11-10-2022 : “Could you be the CFO of Softbank? ”

The interview with Softbank's CFO, Yoshimitsu Goto, made a few days ago by the Financial Times, is a good illustration, we think, of the qualities of a CFO of a large group. It is true that managing the finances of the financial conglomerate founded by the charismatic, dynamic but chaotic Masayoshi Son since 2000 is not for the faint of heart. For alongside brilliant insights such as the investments in Alibaba and Yahoo! before we had even heard of these firms, there are far less brilliant investments such as in WeWork and Greensill Capital. In any case, here are some highlights: Creative, he doesn't say no to a deal he doesn't spontaneously like, but first thinks about what conditions the deal could still be made by Softbank. That said, he sometimes says No, knowing full well that in a group like his, his No is equivalent to the end of a project for the operational staff. He has the absolute confidence of his boss; without it, the previous point would not hold for long. He also and above all has the confidence of the group's main banker, Mizuho, from which he came more than 20 years ago, which helps, but which he cultivates assiduously because he knows that the day the confidence of his first banker is in doubt, the situation of Softbank, whose financial structure is not the clearest despite its efforts to simplify, changes completely. Finally, he always tells his boss that if he finds someone better than him, then he must replace him. Which may offer you some prospects! Have a nice day!

07-09-2022 : “150% above break-even in the automotive industry! ”

This was the performance of Stellantis on the occasion of the publication of its half-yearly results. Given the cyclicality of results in the automotive sector, as this picture from page 806 of the French edition of the Vernimmen shows, such a situation makes it possible to withstand a drop in sales of up to 60% while remaining profitable. This is all the more remarkable as Stellantis is mainly present in the mass market segment (Peugeot, Citroën, Fiat, Chrysler) and little in the luxury segment (Maserati, DS). It is true that the all-time high of 14.1% for the operating margin is also amazing. Hats off to Mr Tavares and his teams

05-09-2022 : “A staggering inefficiency ”

It happened while you were at the beach or at the mountain, in the US market where a Hong Kong fintech, with 50 employees, 3 years of existence and $25m in turnover, went public on the Nasdaq on 15 July at $7.8 a share. Its share price rose on 2 August to $1,679, giving it a market capitalisation of $310bn, i.e. more than that of the world's leading bank, JP Morgan, and we won't even mention the price reached in the middle of the session at $2,550, i.e. 327 times the IPO price! It is true that the description of its activities fully justifies it: “...to act as a fusion reactor for the best entrepreneurs and innovative ideas, fusing synergistically all elements within the AMTD SpiderNet ecosystem using digital means, harnessing and magnifying the power from each partner to create a force with meaningful and influential social, technological, and economic impact.” The share price has since fallen to $100, which is still 13 times the IPO price, giving a market capitalisation of $18bn, equivalent to that of Société Générale, or twice that of Amundi. The only rational explanation for this aberration on the supposedly most efficient financial market in the world, apart from a few exceptions, is a listing symbol, AMTD, which is very close to that of the semiconductor manufacturer AMD, whose share price rose 33% in July. This shows that absent-mindedness and incompetence can produce a detonating cocktail in staggering proportions. Have a nice day.

10-08-2022 : “The pre-emption right: the right to pay more? ”

When a business is sold, a third party may have a statutory or contractual right of pre-emption which allows it, if it so wishes, to pre-empt the sale at the same price as that offered by a third party. This right naturally complicates a sale process since buyers can never be sure that at the price they offer the beneficiary of the pre-emptive right will not use it to acquire the company put up for sale, and that they will then have lost their time. In our experience with mergers and acquisitions, we have often observed that this actually leads to higher prices because the buyer, who knows that a pre-emptive right can be exercised at the price he/she is offering, has every interest in going to the limit of his/her financial possibilities if he/she really wants to acquire the asset. This is probably what we are seeing with the sale of Suez's waste assets in the UK by Veolia, who announced a price of €2.4bn offered by Macquarie, opening a 30 working day period for the new Suez to (re-)acquire them at the same price. The latter is well above what was expected with a multiple of 16.9 times 2021 EBITDA, pushing Veolia's share price up by 2% compared to 0.8% for the CAC 40. This multiple is above the multiple paid by Veolia to acquire Suez (9.5 times), although the comparison of the two multiples cannot be direct, as Veolia has acquired many different assets with different multiples within Suez. This transaction also shows that private equity funds, rightly or wrongly, continue in a number of cases to pay higher prices than trade buyers. Have a nice day.

29-07-2022 : “SEB and the inflation ”

At 30 June 2022, SEB's working capital jumped by €700 million (to €1.8 billion) compared with 30 June of the previous year, with a roughly stable level of activity. The working capital thus rose from 14.8% of sales to 22.3%, its highest level for 10 years. And the debt has increased accordingly. Inflation explains most of this phenomenon, which is concentrated almost exclusively in stocks, with different effects. Firstly, the rise in the price of raw materials, components and freight, which increases the amount of stocks for equal volumes, since these incorporate more expensive materials, components and transport costs. Secondly, a change in the behaviour of consumers in the face of inflation, who either buy less as a precaution or because of reduced real resources, or who buy cheaper products with lower margin. Hence, stocks of finished products are higher than expected, taking into account these changes in buyer behaviour. In addition, bottlenecks in the supply chain lengthen the transport time of finished products, thus delaying the time when they can be sold. Higher material and freight costs and a change in the product mix to lower margin products lead to a drop in the operating margin by a good third from 8.9% to 5.4% of sales. It should be noted, and this is impressive for a group which is not one of the world's largest, that SEB was able to publish its consolidated half-year results as early as 21st July, which is an indication of very good management. Well done to SEB's financiers, who certainly don't take their holidays at the beginning of July! Have a nice day.

15-07-2022 : “Turbulence in the credit market ”

The stronger than expected rise in interest rates coupled with fears of a sharp economic slowdown, which could turn into a recession in the coming quarters, has brought the high yield market to a standstill and is blocking the crossover market (ratings between BBB and BB). This is reflected in the cost of protection against the risk of default on these bonds, which has reached 600 bp on the iTraxx crossover index, i.e. almost as much as in April 2020, but far from the record high of winter 2009 (1123 bp). As a result, the market for large LBOs is at a standstill, and some borrowers for whom the bond market is de facto closed are turning to the banks, provided that the latter are willing to lend and have room on their balance sheets. In this case, the margins are not small. Bad times for the most indebted borrowers. Banks are making their first big losses on LBOs committed in February that are only now coming out as the M&A process is getting longer and longer. Banks prefer to take their losses now so as not to be saddled with a tainted balance sheet in the future. This is quite healthy. Have a good day.

12-07-2022 : “EDF, a logical evolution ”

The State will therefore buy out the minority shareholders in EDF's capital to take the energy company off the stock exchange if it succeeds in reaching the threshold of 90% in voting rights and shares, up from 83.8% today. This evolution seems inescapable and desirable as the great gap between the State, majority shareholder of EDF, and the State which wants to protect the citizens against a too strong rise of the energy prices has become unbearable. Thus, last January the State ordered EDF to sell 20 TWh more from its nuclear power plants to its competitors at a price of 46.2 €/MWh, well below the market price, in order to allow the final consumer to bear only a 4% increase of his/her electricity bill. This resulted in a drop of about €8 billion in its EBITDA (to be compared with €18 billion in 2021). And EDF's share price felt by 20%. It seems to us that logic would dictate that the buyout offer from the minority shareholders should be calculated with a business plan that neutralises this fait du prince against which EDF's management has lodged an appeal. This will probably be the case since the government has chosen the path of the takeover bid followed by a squeeze out, and not that of a nationalisation, which is more protective of the interests of the minority shareholders since its success is conditional on the agreement of 38% of them (6.2/16.2, to reach 90%). The fairness opinion that will be delivered will be watched closely. The more financial-minded among you will have noted that for the State, the stock market listing will not have been a bad financial deal, with an IPO at €32, then a sale at €82 and a buyback probably at around €10. In the meantime, being a shareholder alongside a state is rarely an enviable situation because of its dual role as political power and shareholder, which logically leads to choices that are not always in the company's interest. Hence the value discounts for listed companies with state ownership, as Renault or Eramet can testify, and which do not seem to be compensated for by the elimination of the risk of bankruptcy induced by state ownership. Have a nice day

24-05-2022 : “Walmart and the inflation. ”

We know that inflation inflates working capital, thus increasing variations in working capital, which in turn reduce the free cash flow generated by companies and has a negative effect on the cash position of companies with positive working capital.
Conversely, one might have thought that the rise in inflation in the United States, which reached 8.3% in April, would be favourable to the finances of groups with negative working capital. The quarterly results published by Walmart show that this is not the case.
In the first quarter of 2022, the major US retailer recorded an operating cash flow of -$3.8bn, compared with +$2.9bn in the equivalent quarter of 2021. The main reason for this is the 8.4% jump in inventories to $4.7bn, while sales were down from the previous quarter (which includes Christmas) by 7.4%. This jump in inventories is explained by changes in consumption by Americans faced with inflation, who are buying cheaper products at the expense of more expensive ones (television sets, furniture, etc.) that are remaining on the shelves longer than expected.
And this unexpected news caused Walmart's share price to fall by 20% in one week.
In an inflationary context, "all things being equal" is rarely good reasoning.

18-03-2022 : “One of the biggest value destruction in recent history ”

"The acquisition of Monsanto was and remains a good idea," said Bayer CEO Werner Baumann three years ago when the June 2018 acquisition of Monsanto for $63bn was already being criticised. If Bayer had duplicated the performance of the DAX index, its market capitalisation and the €13bn of equity raised to acquire Monsanto would be worth €120bn today, compared to a market capitalisation of less than half that at €55bn. This has not prevented his remuneration from rising each year since his appointment in 2016 to €5.7m in 2021 (excluding pension entitlements of €2.1m) compared to €3m in 2017. Do Bayer shareholders have eyes and votes? Have a nice day

15-03-2022 : “Question from a reader. ”

"Does it seem to you that the inverse of the P/E ratio has a meaning to indicate the financial profitability observed by the market?" The inverse of the P/E ratio is rarely used because it corresponds to almost nothing, and especially not to the rate of return required by shareholders, except in the very special case of companies with no growth for which the value = net profit / required rate of return. It is only the accounting rate of return that a shareholder obtains on his investment in the year of its acquisition. Indeed, if he acquired the company on the basis of a P/E ratio of 20, i.e. 1000 for example, for a net profit of 50; he would then get a profit of 50 on an investment of 1000, i.e. 5%, i.e. the opposite of the PER of 20. But apart from this, it is of no interest. Have a nice day

03-03-2022 : “How do you dispose of a 20% stake in a Russian listed company? ”

This is a question that BP's financial teams are having to work hard on at the moment, for their group that owns 19.75% of Rosneft, Russia's second largest market capitalisation, as their leaders announced this move. It is likely that no Western group will want to buy, that no Russian group will want to or be able to buy, that no non-Western group will want to take the risk of buying, and at what price? No structured placement in the Russian market can take place (especially as the Moscow Stock Exchange is closed). As for a share buyback of Rosneft shares held by BP by Rosneft itself, which could be interesting from a financial point of view for its shareholders in the long term, the current situation does not allow them to see further than the very short term in all likelihood. What remains might be the distribution of the Rosneft shares held by BP to its shareholders in the form of a special dividend, with the onus on them to make the best use of it. In 2014, LVMH sold its 23.2% stake in Hermès following the acquisition of the acquisition of this stake in its competitor that was considered anything but friendly by the majority shareholders of Hermès, which led to the agreement with LVMH. It had been an excellent deal for the shareholder of LVMH (price multiplied by 4 in 7 years), thanks to Hermès' performance. It could be different this time for other reasons. Have a nice day

02-03-2022 : “Question from a young professional. ”

“In assessing the solvency of a listed company, is it better to reason in terms of the ratio of net bank and financial debts to shareholders' equity, with shareholders' equity taken as book value or market value?” Let's just say that in the overused sense of solvency, i.e. the ability to repay debts in the ordinary course of business, the ratio of net debt to EBITDA has become the norm. In the classic sense of solvency, the ability to repay debts in the event of liquidation, market value seems much more relevant than the book equity, because it reflects the current market view of the value of assets and debts (the difference between which makes up the value of shareholders' equity) whereas the book equity, which is established according to formal rules (no account is taken of unrealised capital gains, recognition of unrealised capital losses with delay) reflects a past that may be distant rather than a present that concerns us. The fact that market value introduces volatility is not in itself a problem because a company whose solvency is in doubt will have a value of its equity that will fluctuate structurally a lot, since it is the result of a small difference between two large masses, one of which is more or less fixed (the value of the debt). Have a nice day.

28-02-2022 : “Warren Buffett's 2022 annual letter to his shareholders ”

3 elements to remember, it seems to us: 1/ A suggestion to publish important news about a listed company on the Friday evening after the close of the stock market in order to allow investors to analyse it quietly during the weekend before reacting in full knowledge of the facts and to avoid a price surge followed by a fall, or the opposite, when after having acted to follow the movement following news published at 7.30 am, investors then start to think. This is obviously not always possible, as regulations require issuers to publish news that may impact on their share price without delay. And the analysts who had managed to save their Friday night/Saturday morning are not going to like it much. 2/ Berkshire Hathaway, well known for its financial holdings (5.6% of Apple, 9.2% of Coca-Cola, 19% of Amex, etc.), is less well known for its industrial activities (rail freight, renewable energy, etc.), even though it has become the largest American group in terms of fixed assets: $158bn. 3/ And finally, as every year, because pedagogy is the art of repetition, the power of compound interest, which means that with an IRR double that of the S&P 500 over 56 years (20.1% compared with 10.5%), a sum invested in Berkshire Hathaway shares since 1964 is worth 120 times more today than if it had been invested in the S&P 500, knowing that the latter is already worth 303 times the initial investment in 1964. Have a good start to the week.

25-02-2022 : “ Porsche's IPO project, or the schizophrenia of investors ”

When a group feels permanently undervalued, it is a classic practice to think about listing its most successful subsidiary, which is not necessarily the most important one in terms of business volume. Examples include FiatChrysler Automobiles and Ferrari, or Vivendi and UMG. On February 22, the Volkswagen group confirmed that it was thinking of listing 25% of the capital of Porsche AG, which it currently owns 100% and which represents 3% of its vehicles sold (0.3 million), 10 to 12% of its turnover (€32bn), 33% of its operating profit (€5.5bn) and around 45% (€102 bn according to BNP Paribas Exane) of the value of its assets. On this announcement, Volkswagen's share price rose by 4.1%. That of its main shareholder (31% of shares and 53% of voting rights), which is Porsche SE by 11.3%. And the next day, Porsche SE's share price rose by 4.6%, probably because the scheme calls for it to acquire a direct 5% stake in the carmaker during the IPO of Porsche AG, even if it means selling Volkswagen shares to finance this investment. The fact that investors, like modern Saint Thomas, need to see the listing of Porsche AG to confirm its value is already a surprise for the second largest German stock market capitalization (€110 bn), which is not a priori a company under the radar of analysts and major investors. Moreover, how will value be created for Volkswagen's shareholders when shares in the group's nugget are sold to third parties, unless they are sold at a significantly overvalued price, which is unlikely in what will be one of the largest IPO processes in Europe? Can you imagine LVMH taking Louis Vuitton or Christian Dior public? And the LVMH share price jumping by 4% on this announcement? Finally, once Porsche AG listed, the discount of Volkswagen's share price to the sum of its assets minus its net debts will be even more obvious, calling for either an outright demerger (like AXA and Equitable, Atos and Worldline), or a buy-out of Porsche AG's minority shareholders (like Orange and Wanadoo for example). The pressure will be all the stronger as there will be three levels of listing for assets that are not very dissimilar: Porsche SE, Volkswagen, Porsche AG. It is therefore not surprising that academic research has shown that the creation of value in a demerger is real when one goes to the end of the process without stopping, as in this project, at a partial IPO. If the spin-off of Ferrari was such a success, it is precisely because the spin-off was complete and that Ferrari succeeded in positioning itself as an ultra luxury value (average sales price of €0.4m compared to €0.1m for Porsche, production volume 30 times lower) with a luxury P/E (currently 40 times). In this particular case, the unsatisfactory governance of the Volkswagen group - the founding family holds 15% of the shares, but 53% of the voting rights, the supervisory board is de facto controlled by an alliance with the employees, either of the family or of the State of Lower Saxony - makes this development unlikely. In short, too much or too little. Have a nice day.

23-02-2022 : “Quote of the day. ”

« When you have a lot of money, you are less frugal. I like to say that lack of money makes you smart.» An anonymous investor in a start-up

21-02-2022 : “Solution to the Weekend brainstorming ”

Let’s remind you of the problem. You had a pleasant dream in which the Oracle of Omaha told you that your stock market performance in each year of the next 5 years would be, by ascending order, -20%, -10%, +15%, +25% and +45%.
As you intend to give this portfolio to philanthropic organisations in 5 years time, whose leaders you meet next Monday, you ask yourself what value they can expect to receive in 5 years time. But unfortunately you have forgotten the exact chronological order of your annual performance as given by the Ohama oracle, the one given above being their simple ascending order. Now you have in mind that 20% of 100 is not the same as 20% of 145. If your portfolio is worth €100,000, how much should you be able to give to philanthropic organisations in 5 years' time? Why? And now the solution. If we understand that the value of the final portfolio results from the value of the initial portfolio increased by the product of the 5 annual performances, each increased by 1, i.e. final portfolio = initial portfolio x (1 + p1) x (1 + p2) x (1 + p3) x (1 + p4) x (1 + p5), we can see that the order of the annual performances has no influence on the final performance, because of the commutativity of multiplication, which means that 3 x 2 = 2 x 3. In total, this means a final portfolio of 150 k€. Have a nice day

21-01-2022 : “Question from a reader ”

Is the net present value of an investment project the same if you discount its pre-tax free cashflows at a pre-tax rate or if you discount its post-tax free cashflows at a post-tax rate? Generally speaking, one should not confuse the concept and the method of calculation. All too often, we retain the latter, and then the method of calculation makes us forget the concept, which sometimes results in increasingly complicated calculations that are arithmetically correct but disconnected from a simple financial reality that has been lost sight of. So let's get back to the basics. The net present value measures the value creation that an investment should allow. The net present value naturally exists before its measurement. In the same way that a patient's temperature pre-exists when measured by a thermometer that is inserted in his or her mouth. There are two ways to calculate this value creation. One can take a rate after corporate income tax and apply it to free cashflows after corporate tax to be consistent. But we can also take a pre-tax rate and apply it to pre-tax free cashflows. But whatever the calculation, this value creation cannot be rationally different, unless you think that the measurement modifies the object to be measured, which can happen in the field of physics, but it is difficult to see why in terms of value creation. Thus, when you weigh yourself on a scale calibrated with kilos, your weight is the same as when you weigh yourself on a scale calibrated with pounds, the figure is simply different with a different unit. Simply the pre-tax rate will be a higher rate than the post-tax rate, see last week's brainstorming where we saw on an illustrative example that a pre-tax rate of 8% corresponded to a post-tax rate of 3.32% for an investment limited to 10 years. In fact, a pre-tax rate is necessarily higher because it will have to remunerate the taxman in part, which was set aside when deciding to reason on pre-tax cashflows. This is why the discounting of pre-tax cashflows with a pre-tax rate is relatively rare, even if it is not stupid. And we could see that there was a correspondence between these two rates which we established thanks to the uniqueness of the net present value, whatever the approach, before or after tax, that we took to compute it. Have a nice day.

17-01-2022 : “Answer to the weekend brainstorm. ”

First, let's recall the problem: A company that regularly reviews 10-year investment projects has been using a pre-tax discount rate of 8%, which it applies to free cash flow before corporate tax. It decides that, like the vast majority of companies, it will now use a post-tax discount rate (at 25%) and apply it to free cash flows that now include taxation at 25% on EBIT. So what discount rate should it use? Well, contrary to the misleading appearance, not 6% (8% x (1 - 25%)), because the discount function is not linear (it is a curve and not a straight line which depreciates distant sums more than close sums), because investment projects have a finite duration and not an infinite one, and finally, free cash flow after tax is not free cash flow before x (1 - tax rate), because tax only applies to one of the components of free cash flow (the EBIT) and not to all of them. In an example we have built to illustrate this often misunderstood point, and which we have made available to you in the form of a simple excel file (simply ask for it), the post-tax rate for discounting post-tax flows is 3.32%. It is indeed with this rate that we obtain the same value (748 in this particular case) depending on whether we discount pre-tax flows at 8% or the same flows but taking into account a 25% tax rate on their EBIT component which reduces them in part and with this time a discount rate of 3.32%. We know of a large group that continues to use pre-tax rates to test the impairment of its goodwill (for a time, IFRS required that a pre-tax rate be applied to flows calculated before tax for this task). Thus, in its sector, where the duration of investments can be short, it appears to have a rate that seems demanding, 8%, whereas the reality is very different from this initial impression, 3.32 %. Have a good start of the week.

14-01-2022 : “Weekend brainstorming ”

A company that regularly reviews 10-year investment projects has been using a pre-tax discount rate of 8%, which it applies to free cash flow before corporate tax. It decides that, like the vast majority of companies, it will now use a post-tax discount rate (at 25%) and apply it to free cash flows that now include taxation at 25% on EBIT. So what discount rate should it use? Good pondering and good weekend.

12-01-2022 : “Quote of the day ”

"It's the people that are important. Not the capital. » Paul Ricard, entrepreneur and founder of the Pernod Ricard Group

10-01-2022 : “Interest rates and high-tech shares ”

For those of our readers who are surprised by the size of the drop in the stock market last week for US tech companies, - 5% for the Nasdaq, we would remind you that these companies are characterised more than others by cash flows that are distant in time, and therefore more sensitive to a change in interest rates. Indeed, their duration is longer due to free cashflows arriving later. The rate of return on 10-year US bonds has jumped in recent weeks from 1.4% to almost 1.8%. It should also be noted that while the Nasdaq fell by 5%, the price of technology companies that are not yet profitable fell by an average of 10% over the week, because compared to the average Nasdaq share, their duration is even higher. Good start to the week.

20-12-2021 : “Shell, SSE and the financial challenges of the energy transition ”

Shell, which aims to have 30% of its business in decarbonised electricity generation by 2030, and SSE, another FT100 member, which is active in electricity distribution networks and is currently building the world's largest offshore wind farm, have both been targeted by shareholders who have suggested in recent weeks that they should split into two. We believe that this type of criticism, and even campaigns, will intensify in the coming years because, if the energy transition is not simple to achieve from an industrial and human point of view, it is not simple from a financial point of view either. Based on the principle that the goal of all living organisms, including companies, is survival, it is understandable that oil companies have decided that there is no longer much of a long-term future in oil extraction, and that it would be better to invest in new energies to ensure their long-term survival. At the same time, investors are valuing new energy companies much higher on the stock market. Orsted is worth 15.3 times its EBITDA, Neoen 18.4 times, while Shell, TotalEnergies and Exxon are at 3.5, 4 and 4.9 times respectively. If in a pure and perfect world, investors should be able to value an oil group more highly the further along it is in its transition, it is clear that this is not the case at present; Shell is valued less highly than Exxon, which is much less advanced than the British group as we know! Consequently, the temptation is strong for shareholders to demand a demerger that would allow assets valued at less than 5 times their contribution to their parent company's EBITDA to be valued at 15 times. In short, when the sum of the whole is worth less than the sum of the parts, the pressure for a demerger increases. Alternatively, with majors whose value falls below €100bn (BP is at €80bn), private equity funds that see the value that others do not may be tempted to take them private. To try to avoid these outcomes, CFOs have every interest in communicating very regularly and very clearly about their new energy divisions. But we are not sure that this is enough. And as a number of investors are getting rid of their oil stocks, such as ABP, the pension fund for Dutch civil servants (€528bn in assets under management), which has announced that it will sell the remaining 3% of its portfolio allocated to fossil fuels by the beginning of 2023, this trend is not going to disappear. Have a nice day

11-12-2021 : “L'Oreal: two lessons in corporate finance ”

For those who harp on two corporate finance fallacies, fortunately rare among our readers, L'Oréal's purchase of 4% of its capital from its shareholder Nestlé for €8.9bn offers a full-scale demonstration of their falsity. No, share buybacks do not support share prices when their objective is not to return hoarded cash that the company would no longer find a proper use for. Otherwise, L'Oréal's share price would have risen on the announcement of this operation on Wednesday morning. The share price was quoted at €424.8 on Tuesday evening and at the close of trading on Friday at €421.05, the same variation as the CAC 40 index over the same period. No, the optimisation of the financial structure, a common place for investment bankers in need of inspiration, does not create value by replacing expensive resources, equity, on the balance sheet with less expensive resources, debt. Otherwise, L'Oréal's share price would have outperformed the index. This is despite the 4% increase in EPS induced by this operation, which translates, at a constant price as we have seen in real life, into a 4% lower P/E ratio, reflecting a marginally increased financial risk with net debt rising from - €4.5bn to €4.4bn on a pro forma basis as at 31 December 2020, but which is more than easily sustainable! Nestlé's withdrawal from the capital of L'Oréal is an expected operation (see the May 2018 Vernimmen.comNewsletter). While a placement by Nestlé of a €8.9bn block would probably have weighed on L'Oréal's share price, which has a daily trading volume of less than €150m, this clever operation was carried out without weighing on the share price, but without creating value, which is logical for a financial operation on a liquid stock. Although financial markets are far from being always efficient, they are most often efficient for large caps. Have a nice day

08-12-2021 : “Question from a student ”

How to recognize that a debt is subordinated to another?

There are several ways of subordinating debts. Subordination can be:
1/ temporal; a one-year debt is by definition repaid before a three-year debt; the latter is therefore subordinated to the former.
2/ legal: a debt issuance contract provides that this debt cannot be repaid until another debt has been repaid.
3/ structural: the debt of an operating company is generally repaid before the debt of the holding company since the repayment of the holding company debt requires a dividend flow from the operating company to the holding company, which may be blocked by the covenants of the debt of the operating company until x% of the latter is repaid.

Have a nice day

02-11-2021 : “Answer to the weekend teaser ”

Let’s first remind the issue A young M&A analyst values an unleveraged company at 1,000 using a DCF. Its share capital is composed of 40 common shares and 60 non-voting preferred shares. The value of the share is therefore 1000/(60+40) = 10 After analysis, she considers that the absence of voting rights requires a discount of 20%. She therefore has 40 ordinary shares valued at 10 euros and 60 preference shares at 8 euros. She notices that the equity value is equal to 10 * 40 + 8 * 60 = 880 and not 1000. She wonders if this is not a nonsense since the cash flows have not moved. Can you help her? And here is our suggestion. Her error in reasoning is to consider that the discount is a complete loss of value, like evaporation. In fact, it benefits the voting shares and their holders. She should thus reason : 40 x P + 60 x P x (1 - 20%) = 1000, where P = 11.36 and the value of the preferred shares at 9.09. Have a nice day.

29-10-2021 : “Teaser for the weekend ”

A young M&A analyst values an unleveraged company at 1,000 using a DCF. Its share capital is composed of 40 common shares and 60 non-voting preferred shares. The value of the share is therefore 1000/(60+40) = 10 After analysis, she considers that the absence of voting rights requires a discount of 20%. She therefore has 40 ordinary shares valued at 10 euros and 60 preference shares at 8 euros. She notices that the equity value is equal to 10 * 40 + 8 * 60 = 880 and not 1000. She wonders if this is not a nonsense since the cash flows have not moved. Can you help her? Good thinking and good weekend.

27-10-2021 : “Question from a student ”

Should the parent company require a different return on the equity of the subsidiary depending on the financing scenario (shareholder loan versus a conventional loan from a bank)? It should require a higher rate of return on the equity of the subsidiary when it is financed by a bank loan than when it is financed by a shareholder loan (of itself) since the parent company is not schizophrenic, and that it will not put in default its subsidiary, whereas a bank lender could do it. So, the equity of the subsidiary is riskier when it is financed by a debt loan compared to a financing with a shareholder loan. Have a nice day

25-10-2021 : “Quote of the day. ”

"When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home." Warren Buffett, American investor and philanthropist

20-10-2021 : “Question from a reader ”

“How are mandatory convertible bonds (MCB) treated in a merger?” After a merger, the rate of remuneration of MCBs remains the same and there is no reason to change it unless both parties (the issuer and the MCB holders) decide otherwise since the remuneration of a MCB is an interest rate independent of the dividend paid on the share. On the other hand, the new conversion basis is adjusted to take into account the merger parity. For example, if an MCB was redeemed in 2 A shares and A is absorbed by B on the basis of 3 A shares for 5 B shares, then the MCB will be redeemed in 2 x 5/3 B shares, i.e. 3.333 B shares. Have a nice day.

18-10-2021 : “Question from an ICCF@CBS participant ”

I find it counter-intuitive that a risky investment that will be disbursed in some time has a lower present value than its face value. What do you think about this? It is normal that an investment whose disbursement is not immediate has a lower present value than its face value by the very mechanism of discounting. The fact that the investment is very risky does not change the case. Indeed, having postponed in time the moment when you will have to disburse for the realization of the investment, you free up today funds that you can invest in the meantime at the same rate of return (or at another one) and it is indeed this opportunity of making a profitable investment in the meantime that measures the lower net present value of the negative flow that occurs only for some time and not now.

14-10-2021 : “Quote of the day ”

Life is too short for accounting. - Andréas Barckow, IASB chairman

13-10-2021 : “Question from a practitioner ”

"Can we say that if ROCE is higher than WACC, then the return on equity is higher than the cost of equity?" Yes, there is no doubt about that and it can be seen in the following way: If the ROCE is higher than the WACC, then the entreprise value is higher than the carrying amount of the operating assets. Since the value of the net debt has no reason to be greater than its carrying amount simply because the ROCE is higher than the WACC (since the debt does not participate in the creation of value beyond the interest rate paid), and since the value of equity is equal to the entreprise value less the value of the net debt, the surplus between the entreprise value and the carrying amount of operating assets, benefits only to shareholders and not to debt holders. Therefore, the value of equity is greater than the book value of equity as it is equal to the book value + this surplus. And if the value of equity is greater than its book value, it is that the return on equity is higher than the cost of equity. For more see, chapter 26 of the Vernimmen. Have a nice day.

13-10-2021 : “Question from a practitioner ”

"Can we say that if ROCE is higher than WACC, then the return on equity is higher than the cost of equity?" Yes, there is no doubt about that and it can be seen in the following way: If the ROCE is higher than the WACC, then the entreprise value is higher than the carrying amount of the operating assets. Since the value of the net debt has no reason to be greater than its carrying amount simply because the ROCE is higher than the WACC (since the debt does not participate in the creation of value beyond the interest rate paid), and since the value of equity is equal to the entreprise value less the value of the net debt, the surplus between the entreprise value and the carrying amount of operating assets, benefits only to shareholders and not to debt holders. Therefore, the value of equity is greater than the book value of equity as it is equal to the book value + this surplus. And if the value of equity is greater than its book value, it is that the return on equity is higher than the cost of equity. To go deeper, see chapter 26 of the Vernimmen. Have a nice day.

12-10-2021 : “Question from a student ”

"How do you buy 13 new shares with a ratio of 2 new shares for 5 old ones in a right issue?" In this case, you use 30 rights to subscribe 12 new shares and buy one more share in the market, or you use 35 rights to subscribe 14 new shares and sell one in the market. Have a nice day.

04-10-2021 : “Question from a reader ”

"The ROCE (operating income / operating assets) may improve over a given period simply because of the depreciation that reduces the fixed assets. Therefore, and in order to eliminate the impact of depreciation, would it make sense to calculate the ROCE as EBITDA/ (Gross fixed assets + working capital)?" Keep in mind that while the depreciation expense reduces the denominator of ROCE by reducing net fixed assets, it also reduces its numerator the EBIT. So, the impact of depreciation is not unambiguous. Reasoning in gross fixed assets only seems to make sense in the few sectors where the depreciation charge has no financial reality because it does not correspond to a loss of value. They are few in number, for example the hotel industry, rather high-end, or the portfolios of cinema films. For more details, see chapter 13 of Vernimmen. Have a nice day

01-10-2021 : “Quote of the day. ”

"The market value of any firm is independent of its capital structure." Franco Modigliani - Merton Miller, American economists, authors of Modigliani-Miller's theorem

30-09-2021 : “Question from a reader ”

"Could you explain how to calculate the logarithmic returns of a share portfolio and provide an example?" Assume you have the following share prices: 100 ; 105 ; 110 ; 105 ; 120 ; 125. You transform them by taking their log: 4.605; 4.654 ; 4.700; 4.654; 4.787; 4.828. And then you calculate the returns by the differences of these figures: 4.654 – 4.605 = 0.05, ie 5%; then 4.700 – 4.654 = 0.046; - 0.046; 0.133; 0.041. Then if you wish, you can calculate the average, the standard difference for this series of returns. Have a nice day

29-09-2021 : “Quote of the day. ”

« Not every stock is deserving of going up to the moon.” - Nathan Anderson, well known short seller

27-09-2021 : “The IPO of Antin Infrastructure ”

Achieved at the top of the range at €24, it can only leave a good memory to the shareholders of the first day with a daily gain of 26% and a market capitalization that reaches €5.6 billion. On this basis, the 2021 P/E ratio is 93 times. Less if we consider the 2023-2024 results when Antin will have raised its next fund of €10-11bn, compared to the €19bn of assets under management. But the fact that we have to mention results in 2-3 years to justify the current price shows that today's valuation is generous. You have to be financially crazy not to be listed today when you are a very successful asset management company. A few years ago, the management fees charged to investors by the funds roughly covered management costs and broke even, making it impossible to list. The managers were able to make money thanks to the carried interest, i.e. their profit-sharing on the capital gains realized when the funds sells investments. The continued strong development of private equity and the emergence of star management companies in their segments, such as Antin in infrastructure, whose performance is attracting investors, mean that the results of these asset management companies are becoming significant, despite the fall in management fees as a percentage of assets, which is largely offset by the growth in capital entrusted. From then on, the best of them can go public, as Antin brilliantly demonstrated on Friday. Have a nice day

17-09-2021 : “Quote of the day ”

"Managing risk means imagining futures". - Sylvestre Frézal, insurer

16-09-2021 : “Question from a Facebook follower ”

"In a capital reduction, is it equivalent to carry it out by reducing the number of shares of the company or by reducing the value of the shares"? Good morning, In terms of the value of the company's equity, financial structure and the signal sent, the two techniques are equivalent. On the other hand, in terms of capital table, there is a big difference since the payment to all the shares of an identical sum representing a part of the share capital and reserves does not lead to a reduction in the number of shares, nor consequently to a modification of the shareholder structure. In the other technique, on the contrary, by reducing the number of shares of those bought by the company, the capital table of the company is modified, because some shareholders will sell all or part of their shares and others, by not selling any, will see their stake in the company increase. Have a nice day. "In a capital reduction, is it equivalent to carry it out by reducing the number of shares of the company or by reducing the value of the shares"? Good morning, In terms of the value of the company's equity, financial structure and the signal sent, the two techniques are equivalent. On the other hand, in terms of capital table, there is a big difference since the payment to all the shares of an identical sum representing a part of the share capital and reserves does not lead to a reduction in the number of shares, nor consequently to a modification of the shareholder structure. In the other technique, on the contrary, by reducing the number of shares of those bought by the company, the capital table of the company is modified, because some shareholders will sell all or part of their shares and others, by not selling any, will see their stake in the company increase. Have a nice day.

15-09-2021 : “Quote of the day ”

“Time is the friend of a wonderful business and the enemy of the mediocre.”)- Warren Buffett, American investor and philanthropist

14-09-2021 : “Question from a reader ”

"Concerning the analysis of working capital ratios (Customers, Suppliers, Inventories), if we want to monitor internally, should we use a 12-month moving average or is there another method?" Internally, we obviously have much more data and elements than an external observer. You can track the information for the past month by multiplying your ratio of working capital to the last month's revenues, not by 365 but simply by 30. So, you are more responsive than if you were using a 365-day moving average. That said, there will naturally be noises, linked to specific and contingent operations that an average over a longer period of time would have made it possible to eliminate/hide, but that is the whole point from an operational management control perspective to uncover abnormal items. Have a nice day

13-09-2021 : “Answer to the weekend's brainstorming ”

Let us first recall the question: Why is Berkshire Hathaway, Warren Buffett's company, currently not included in the Dow Jones, which includes 30 of the largest US companies by market capitalisations, and is unlikely to be included despite being the 7th largest US market capitalisation with a market capitalisation of $638bn? Because the Dow Jones weights its components, not by their market capitalisation or free float, but by their share price (see the Vernimmen.com Newsletter of December 2006). As Warren Buffet has always refused to proceed with a stock split, his shares are currently priced at around $424,000, and if they were included in the Dow Jones, the Berkshire Hathaway share would then represent 98.9% of the index, depriving it of any representativeness, except for that of the fluctuations of the Berkshire Hathaway share! Have a nice day.

10-09-2021 : “Weekend brainstorming. ”

Why is Berkshire Hathaway, Warren Buffett's company, currently not included in the Dow Jones, which includes 30 of the largest US companies by market capitalisations, and is unlikely to be included despite being the 7th largest US market capitalisation with a market capitalisation of $638bn? Have a nice week end.

08-09-2021 : “Question from a young professional ”

"In the provisions for retirement, I did not understand how to determine the part to be considered as financial expenses ( it is financial expenses related to the annual revaluation of the debt, can you give me an example?" Let's say you have to pay a retirement benefit of 100 in 2 years and you discount at 10% per year. This benefit is a liability that appears on your balance sheet as 100 / 1.1^2 = 82.6. One year later, there will be only one year left before this indemnity is paid. Therefore, the debt will then appear on the balance sheet as 100 / 1.1 = 90.9. In accounting terms, the difference between 82.6 and 90.9 the following year, i.e. an increase of 8.3, constitutes a financial expense because the debt has been discounted by one year. This difference is included in financial expenses to ensure the balance of the balance sheet. Have a nice day

07-09-2021 : “Dilution of the capital increase and destruction of value ”

The CEO of SPIE, which has made a proposal to take over Engie's subsidiary Equans, put up for sale by its parent company, financed in part by debt and equity, indicated yesterday, when talking about the dilution of the capital increase, that "it does not mean a loss of value for shareholders, on the contrary, because the operation would increase the earnings per share from the first year". A capital increase in itself cannot create or destroy value for the shareholders, it is the investment of its product that will create or destroy value depending on the rate of return that will be achieved compared to the cost of capital of this investment. Too often we see a Malthusian discourse around the capital increase under the pretext of the induced dilution, i.e. the reduction of the power of a shareholder on a company after the capital increase. The dilution of a shareholder's control that does not follow, or partially follows, a capital increase is congenital to the latter and is not a reason in itself to disqualify this method of financing, in particular in companies without a controlling shareholder. Without capital increases, there would never have been Apple, Amazon, Tesla or LVMH, and we don't feel that their shareholders have any complaints about past capital increases! As for the second part of the sentence, it is a cliché of investment bankers or financial communicators who forget, because it suits them, that EPS growth is only synonymous with value creation if, among other things, the financial structure is the same before and after the acquisition. SPIE's post-acquisition financial structure would increase from 2 times EBITDA to 3 times EBITDA. Under these conditions, it is therefore not possible to compare EPS before and after the acquisition, because the risk of EPS is not the same (it would increase). It is true that EPS would be higher because of the current low interest rates, but there is no guarantee that the P/E at which investors would value SPIE shares would remain the same; on the contrary, it would have reasons to fall to reflect a higher financial structure risk, without this risk being unbearable. Have a nice day

03-09-2021 : “Question from a LinkedIn follower ”

"How do you deal with a scrip dividend in a cash flow statement and how do you balance it in the balance sheet?" In a proper cash flow statement, the dividend paid in stock (scrip dividend) does not appear since it is not paid in cash. Only the cash dividend appears. In the projected balance sheet, in which the net income before distribution is part of the equity, you simply subtract the cash portion of the dividend from the equity and add it to the net debt as a dividend payable. The balance of the net income, i.e. the income not paid out as a dividend and the dividend paid in shares remains in equity, which it is. Have a nice day.

02-09-2021 : “Quote of the day ”

People love the idea of being in a hedge fund because it sounds mysterious and awesome?.?.?.?That doesn't mean it's going to produce long-term sustainable results. - Chris Ailman, chief investment officer of Calstrs

01-09-2021 : “Fixed costs and variable costs ”

If you have a vague idea of what a cyclical business is, the example of German shipowner Hapag Lloyd is instructive. In the first half of 2021, helped by an average freight price up 46% to $1,612 for a 20-foot container, Hapag Lloyd had a net income of €2.7 billion. That may not mean much to you. That's 10 times more than for 2020, and above all almost 3 times the sum of the net results (profits and losses after taxes) of the last 10 years (€977 million)! This is what a significant price increase in turnover can do to a company whose costs are essentially fixed. We can also say that if transporting a 40 feet container from China to the West Coast of the United States has never been so expensive in spot at more than $20,000 against 10 times less before, this would have increased the selling price of a Vernimmen by only 1%. Admittedly the Vernimmen is probably not representative of an average good, but it shows the efficiency of the shipping groups who charge in usual times at 23 € the movement of a cubic meter across the whole Pacific. Have a nice day.

31-08-2021 : “Quote of the day ”

Managing risk means imagining futures. - Sylvestre Frézal, insurer

30-08-2021 : “DWS: This is what it costs to lie about ESG ”

A 15% drop in share price in two sessions when it appeared that Europe's second largest asset manager, a 79% subsidiary of Deutsche Bank, had probably greatly overestimated the fraction of its €820 billion of assets under management managed in compliance with ESG rules; more than half according to it and probably much less in the facts that are being investigated by the American and German regulators. And that's fine, because deceiving Mrs. Schmidt who wants her money to finance the energy transition is not acceptable from an Environmental, Social or Governance point of view. We will not be surprised if the share of assets declared as following ESG rules in the asset management industry decreases in the coming months, as the fall of the DWS share price has obviously not gone unnoticed and DWS is probably not the only one to green-label its funds with impunity until now. And if we wanted a proof that investors in listed securities do care about ESG, beyond simple displays, we would hardly find a better proof. Word to the wise!

23-08-2021 : “Question from a LinkedIn follower ”

"Given that dividends are wealth-neutral, can we say that investment strategies aimed at high dividend yields are therefore meaningless." However, we cannot say this for two reasons: 1 / the market is not always efficient and it can go through phases where dividend paying companies are undervalued because they have lower growth which is then little appreciated, and phases where they are on the contrary overvalued because investors appreciate their lower risks of value fluctuation due to their high dividends in a market where investors are brooding. Some investors try to detect the different phases and anticipate them in order to profit from a change of phase. 2/ some investors like high dividend stocks because it corresponds well to their risk profile (low) and their need for liquidity to meet the needs of everyday life (e.g. retirees), without knowing or being aware that it is enough to sell a few shares of a company that does not pay dividends to obtain the same amount of liquidity, but they then have the impression of eating the capital, forgetting the appreciation of the share price in the long term which reconstitutes the capital for growing companies that do not pay dividends. Behavioral finance analyzes this type of behavior. Have a nice day

21-07-2021 : “Quote of the day ”

But, of course, our aim is to be profitable: not to have this aim is to deprive ourselves of freedom. - Vincent Montagne, French publisher

20-07-2021 : “Question from a student ”

Can we say that the sale of a share bought at a lower price than the current price does not enrich the shareholder? But I find this very paradoxical in the end: if dividends and capital gains do not enrich the shareholders, what is the point of investing? For a financier, it is not the sale that makes the capital gain, it is the progression of the value that makes the capital gain. For example, Bernard Arnault never sold a share of LVMH, and hence never made a capital gain, yet he became the richest man in Europe. Selling a share does not make you richer, it simply transforms part of your portfolio into cash. To complete the picture, see the Vernimmen Newsletter No. 128 of March 2020, which is available on the Vernimmen website, and its article: If the dividend does not remunerate equity, what does? Have a nice day

20-07-2021 : “Question from a student ”

"Can we say that the sale of a share bought at a lower price than the current price does not enrich the shareholder? But I find this very paradoxical in the end: if dividends and capital gains do not enrich the shareholders, what is the point of investing?" For a financier, it is not the sale that makes the capital gain, it is the progression of the value that makes the capital gain. For example, Bernard Arnault never sold a share of LVMH, and hence never made a capital gain, yet he became the richest man in Europe. Selling a share does not make you richer, it simply transforms part of your portfolio into cash. To complete the picture, see the Vernimmen Newsletter No. 128 of March 2020, which is available on the Vernimmen website, and its article: If the dividend does not remunerate equity, what does? Have a nice day

19-07-2021 : “Quote of the day ”

Not every stock is deserving of going up to the moon. - Nathan Anderson, well known short seller

16-07-2021 : “Question from a LinkedIn follower ”

How to treat in a DCF calculation for a company whose free cash flows are negative, a capital increase that recapitalizes it? Hello, In a DCF, we only take into account the free cash flows generated by the operating assets. A recapitalization through a capital increase to pay off financial debts is therefore out of place. Once the entreprise value has been established by discounting free cash flows, the amount of net bank and financial debt and similar items is deducted to obtain the equity value. It is at this level that the recapitalization will take place. You will have less net bank and financial debt and more shares in circulation. Indeed, if the company has made between the last known date for its debt, for example December 31, 2020 and today July 16, 2021, a capital increase, it is necessary to take this into account by reducing the net bank and financial debt as of December 31, 2020 in this example by the amount of the capital increase, and by increasing the number of shares by the number of new shares created since December 31, 2020. Have a nice day

15-07-2021 : “Quote of the day ”

Lenders risk losing their licence to operate if they fail to make green finance a priority. - Christian Sewing, CEO of Deutsche Bank

15-07-2021 : “Quote of the day ”

« Lenders risk losing their licence to operate if they fail to make green finance a priority.” - Christian Sewing, CEO of Deutsche Bank

02-07-2021 : “Question from a LinkedIn follower ”

Why are gold and the dollar said to move in opposite directions? When interest rates rise on dollar investments, this encourages investors to invest in dollars rather than in another asset because they get a better return. Under these conditions, holding gold becomes more and more penalising, as there is no return on gold. So investors arbitrate gold in favour of the dollar. Hence the opposite evolution of these two assets. Have a nice day

08-06-2021 : “Quote of the day ”

"Good financing never cancels out a bad investment." Pierre Vernimmen, French investment banker and educator

04-06-2021 : “Sic transit gloria mundi ”

Once upon a time in the 1990s, there was a listed group (Poliet), active in the distribution of building materials (Point P), the manufacture of building materials (Weber and Broutin), controlling a large cement producer and holding 100% control of a nugget of industrial joinery, Lapeyre. As its share price was far from reflecting the value of its assets, Poliet decided to float Lapeyre on the stock exchange, and this was the first time in France that the technique of book building was used to do so. It was a huge success thanks to Lapeyre's qualities at the time: strong growth, high profitability, high market share: the L'Oréal of industrial joinery! A few days ago, Saint Gobain, which acquired control of Poliet in 1996, sold Lapeyre to Mutares, a fund specialising in the recovery of companies in serious difficulty, for a negative price of €243 million, i.e. about three times the annual loss. Mutares will thus find enough money in Lapeyre's coffers to finance a recovery plan, and Saint Gobain, which has not succeeded in turning it around, is making an ultimate investment in Lapeyre with a payback of 3 years, which is not something you find easily nowadays. Have a nice day

03-06-2021 : “Question from a reader ”

I just read the following news: "Amazon has agreed to buy MGM for $8,45 bn, including debt. I'm not comfortable with "including debt": is the $8.45bn the entreprise value or the equity value? It is not only under the influence of investment bankers who want to inflate the amounts of the transactions in which they participate that the practice is increasingly to give the amount of the transaction as the entreprise value, i.e. the value of the operating assets, that is to say here including net financial and banking debt. Of course, this is not the amount that the company will pay when the transaction is finalised, which is the amount paid for the shares, but this including debt amount is not uninteresting either, because sooner or later the debt of the acquired company will have to be repaid. Moreover, most often this debt is refinanced when the transaction is finalised, either because covenants make it payable in the event of a change of control, or because the acquirer does not find it to his liking (rate, residual term, covenants) and repays it with its cash or with a new loan. Have a nice day.

02-06-2021 : “Is the CAC40 index currently close to its historical highs of 2000? ”

No. It exceeded them in January 2007, then again in October 2013 and is currently at about twice its 2000 record. Only if dividends are not taken into account will we succumb to the optical illusion that the level of 6,500 in 2021 is equivalent to the level of 6,500 in 2000. No one would confuse a euro of today with a euro of 2000. The principle is the same, and yet this error is making the headlines in many media today. It probably originates from a situation where individuals were the first direct shareholders of companies, but for that we have to go back a few hundred years. Since then, the development of collective investment vehicles and more generally of asset managers has reduced them to less than 10% of the capital of most listed companies of significant size. And what does a mutual fund that receives a dividend do? It reinvests it while waiting to sell securities in its portfolio to meet possible redemptions in excess of subscriptions. What does an individual do with a dividend received on his/her life insurance contract? They reinvest it. Rather than the CAC 40, in the long term it is better to follow the CAC 40 GR, with reinvestment of dividends. Have a nice day.

01-06-2021 : “Quote of the day ”

"I was struck by the notion that the investor should be as interested in risk as in earnings." Harry Markowitz, professor of finance, Nobel Prize in economics in 1990

27-05-2021 : “The IPO of PHE ”

Better known under the name of one of its main brands, Autodistribution, PHE, a distributor of car parts in Europe, is under LBO and is floated on the Stock Exchange, if all goes well, to raise in a few days a minimum of €450 million through a capital increase, which will enable it to reduce its debt. Indeed, with a ratio of bank and net financial debt to EBITDA of 4.8, a company cannot go public because, if its level of debt is perfectly suitable for an LBO fund, it is not to the taste of stock market investors, who are much more conservative from this point of view. Therefore, the IPO of PHE takes the form of a primary operation which will allow to instantly reduce this debt ratio to 2.8, much more to the taste of stock market investors. Only the eventual greenshoe could take the form of a sale of existing shares. This is an illustration of the unwritten, but very real, rule that it is difficult to go public with net debts of more than 3 times EBITDA. Have a nice day.

25-05-2021 : “Question from a financial analyst ”

How to treat equity loans that have been created to help companies out of the pandemia: debt, quasi-equity or equity? Hello, We need to call a spade a spade and fight against the complacency that too often consists of pleasing ourselves by qualifying as quasi-equity a debt that matures in eight years, with a repayment deferment of four years, as is planned for these equity loans. In four years, the equity loan will have to start being repaid in some way. It is therefore not equity because equity is not repayable. It is debt because anything that is repaid is called debt. These loans can nevertheless reinforce the financial structure by lengthening the average duration of the company's debt. For a creditor who would lend with a repayment taking place before the beginning of the repayment of the participative loans, the participative loan is a nice tool since it contributes to the operating assets by the investments which it will allow to finance, but is repaid only after his or her debt. It is a bit like Louis XV and his famous "après moi le déluge". Have a nice day.

24-05-2021 : “Quote of the day ”

"There are people whose power is based on all of the money they have lent and others whose strength is based on all they money that they owe." Auguste Detoeuf, 19th century French economist and industrialist

19-05-2021 : “M6 -TF1 or the triumph of margins over sales. ”

The time is long gone when a minister of communication declared that the "little channel that's going up" (M6's slogan at the time) was "the channel that's too much in the audiovisual landscape"! If the M6-TF1 merger is approved by the competition authorities, it will be a triumph for M6 and its teams, led since 1986 by an unchanged management team (Nicolas de Tavernost and Thomas Valentin). With only 60% of TF1's revenues, M6 has more than three times the operating income of its competitor. Where TF1 has an operating margin of 5%, M6 is at . . . 30 %. No wonder that M6 is worth more than €2 bn on the stock market, while TF1 is worth less than €2 bn despite having twice the audience of M6. It is also not surprising that TF1's share price rose yesterday more than M6's (7% vs. 4%). Finally, it is not surprising that the future leader of the merged group will be the man who does not like unnecessary expenses. Hats off to Mr de Tavernost. Have a nice day

18-05-2021 : “Quote of the day ”

"One thing is certain, things are going to change, one way or another." John Pierpont Morgan, American banker of the 19-20th century

10-05-2021 : “Quote of the day. ”

"The financial manager does not create value, he shares it." Pierre Vernimmen, French investment banker and educator

07-05-2021 : “Quote of the day. ”

"Managers and investors should understand that accounting data are a beginning and not an end in valuing a firm" Warren Buffett, American investor and philanthropist

06-05-2021 : “Quote of the day ”

"Every morning you should imagine that your fortune has doubled overnight, and if you have creditors, go and pay them out of the sums you have imagined. They too should be able to use their imaginations." Montesquieu, philosopher, 18th century French political thinker

06-05-2021 : “Question from a Vernimmen fan. ”

"Is a LBO structure a viable solution for management to acquire a minority interest in a company by leveraging debt? " Not an easy solution as lenders will be worried about the capacity of the management, being a minority shareholder, to decide a high enough pay-out ratio to allow a fluid flow of dividends to be paid to the holdco to repay its debt. This is the key reason why nearly all LBOs are built around a 100 % stake in the operating company, leaving no doubt about this capacity. We think is it doable in the current context, but lenders will not lend you as much money as they would in a classic LBO structure. And they need to be reassured about this point, for example by a pre-defined pay-out ratio included in the shareholders's agreement or the articles of association Have a nice day,

03-05-2021 : “LagardÃ¨re, incompetence and debt ”

When Arnaud Lagardère took over from his father in 2003, thanks to his name and a very protective legal status, that of a limited partnership, Lagardère was making €9 billion in sales and owned 15% of Airbus. Last year, Lagardère's sales were half as much and the stake in Airbus was sold long ago. A pity. Had it been kept, it would have been worth €11.5 billion, or 4 times Lagardère's current capitalization. Its CEO preferred to sell it to invest in sports, a branch that was then sold for less than 10% of its acquisition price. This shows that when you are incompetent, it is better to do nothing. Confident in his talents, Arnaud Lagardère bought shares in his group by going into debt. Given the massive destruction of value that he orchestrated, his personal net worth became negative. He then had to give up the status of limited partnership, which was so protective of his incompetence, and obtained 230 M€ in compensation, allowing him to have positive personal net worth and to escape personal bankruptcy. Amber Capital, a shareholder who defends its interests, was the catalyst for this return to a quasi-normal governance situation. A sad illustration of Yvon Gattaz's statement, "When it comes to succession in family businesses, bosses are divided into two categories: those who think that genius is hereditary and those who have no children. " Have a good start to the week.

03-05-2021 : “Lagardere, incompetence and debt. ”

When Arnaud Lagardère took over from his father in 2003, thanks to his name and a very protective legal status, that of a limited partnership, Lagardère was making €9 billion in sales and owned 15% of Airbus. Last year, Lagardère's sales were half as much and the stake in Airbus was sold long ago. A pity. Had it been kept, it would have been worth €11.5 billion, or 4 times Lagardère's current capitalization. Its CEO preferred to sell it to invest in sports, a branch that was then sold for less than 10% of its acquisition price. This shows that when you are incompetent, it is better to do nothing. Confident in his talents, Arnaud Lagardère bought shares in his group by going into debt. Given the massive destruction of value that he orchestrated, his personal net worth became negative. He then had to give up the status of limited partnership, which was so protective of his incompetence, and obtained 230 M€ in compensation, allowing him to have positive personal net worth and to escape personal bankruptcy. Amber Capital, a shareholder who defends its interests, was the catalyst for this return to a quasi-normal governance situation. A sad illustration of Yvon Gattaz's statement, "When it comes to succession in family businesses, bosses are divided into two categories: those who think that genius is hereditary and those who have no children. " Have a good start to the week.

30-04-2021 : “Question from a start-up founder ”

"The unlevered beta of a young fast-growing restaurant chain computed from stock market prices and its debt ratio of is 0.90. The average of the unlevered betas of restaurant chains is 0.70. Is there a start-up effect? Or should we use the industry's beta?" As you can see in Chapter 18 section 5 of the Vernimmen, one of the determinants of beta is the degree of youth of a company. Indeed, a young company usually has a much higher growth rate than the more mature companies in its sector. It is not illogical if it has a higher beta. Indeed, because of its youth, most of the cash-flows it will generate are distant in time, and in any case more distant than those of more mature companies. This company is therefore much more sensitive to any variation in the market and the rate of return required by investors. To take an analogy with bonds, its duration and modified duration are higher. This is the definition of beta, which is the relative sensitivity of a company to the market. Another manifestation of this beta differential is the greenfield premium which is discussed in Chapter 29 of the Vernimmen. In conclusion, it is therefore only logical that in a given sector, a young company should have a higher beta than the sectorial beta Have a nice day.

28-04-2021 : “Quote of the day ”

"Economics is the only field where two people can share the Nobel prize for saying opposing things (Myrdal and Hayek)." Roberto Alazar

27-04-2021 : “Quote of the day ”

"Nobody takes advice, but everybody will take money. Accordingly, money is worth more than advice." Jonathan Swift, Irish writer and pamphleteer of the 17th-18th centuries

26-04-2021 : “Question from a follower of the Vernimmen.com Facebook page ”

"What items are included in a cash flow statement on the line: non-cash expenses and revenues, which comes just before cash flow?" Hello, This line can include many things, of which : . The results of companies accounted for by the equity method, which are removed (when they are positive) because they are not a cash flow for the group . Dividends received from companies accounted for by the equity method, which are the cash received by the group for its share of the net income of these companies . The fraction of the value of stock options granted to employees which, under IFRS, is considered as an accounting expense whereas it will never result in a cash disbursement. . The capital gain (which is removed) or loss (which is added) on disposals of fixed assets . Changes in deferred taxes . Changes in exchange rates . Etc I won't hide from you the fact that although it is easy to find the details of this item for simple companies, as soon as you are dealing with a group that is active in different countries and makes acquisitions and disposals, it becomes much more complicated, especially as this item is used as an adjustment so that the variations in the net banking and financial debt on the balance sheet correspond to the one that you see on the cash flow statement. In general, as an external analyst, we are not able to explain it 100%. If the difference between what you see and what you calculate yourself is too great, we advise you to recalculate the cash flow statement yourself from the variations in the balance sheet and the income statement according to the methodology we explain in chapter 5 of the Vernimmen, section 3. Have a nice day

23-04-2021 : “Quote of the day ”

"You can't compare apples with pears" Popular saying

22-04-2021 : “Question from a subscriber to the Vernimmen.com newsletter ”

"A company announces a share buyback. Shouldn't its share price go up?"

Academic studies have shown that your intuition is wrong, and that the announcement or implementation of a share buyback programme has a negligible impact on the share price.

Why do you want investors to automatically buy the stock because the company announces share buybacks? Some will see this as a sign that the share is undervalued, but others will see that the company no longer has any value-creating projects and will therefore sell. Those who think the current price is good, if they see it going up, will sell some of their shares, which will bring the price down.

So you see, it's much more complicated than the widely held belief that share buybacks = rising prices. Hence the usefulness of researchers to go out and flush out false impressions.

Have a nice day.

22-04-2021 : “Question from s student. ”

"In the 2020 cash-flow statement, should dividends be taken from the results of 2019 but paid in 2020, or should the amount of dividends decided in the 2021 AGM regarding the 2020 financial year be taken?" In principle, in a cash-flow statement, cash flows are taken into account when they are received or disbursed and not when they are generated. Thus, in the 2020 cash-flow statement, we will see the dividend paid in 2020, i.e. the dividend linked to the 2019 net income and not the dividend linked to 2020 net income, which will appear in the 2021 cash-flow statement. If necessary, review Chapter 5 of the Vernimmen. Have a nice day.

21-04-2021 : “Quote of the day ”

"Nothing is ever created, nothing is ever lost, everything just changes." Lavoisier, French chemist, philosopher and economist of the 18th century

20-04-2021 : “Question asked on the Vernimmen.com website. ”

"I am quite confused about the calculation (interpretation) of inventory turnover in a function-based income statement. Indeed, the formula is as follows: Inventory turnover = Inventories x 365 / Cost of sales. If we take 2 almost similar companies with the same inventory of 100, but assuming that one of the 2 companies has a production process that is twice as efficient as the other (production costs twice as low), then the inventory turnover is higher in the more efficient company. The more efficient company is at a disadvantage via this formula compared to its competitor who has lower margins. Can you clarify this point for me?" If company B's cost of production is half that of company A, then necessarily company B's inventories will be half the value of company A's inventories, since the book value of an inventory of finished goods is only the sum of the costs incurred by the company in making those inventories. This is a key point to understand. Therefore, the inventory turnover ratios will be the same, since the inventory turnover ratio measures how long the inventory remains in the firm, not the higher or lower margin that firms will make by selling the inventory. Have a nice day.

19-04-2021 : “Quote of the day ”

"You can't have your cake and eat it." Popular saying

16-04-2021 : “Question asked on the Vernimmen.com website ”

"I don't understand the point of calculating a net debt/equity ratio since equity is not necessarily available to repay debt." We totally agree with you! This ratio is a holdover from the old days, when it was thought not normal, or even not moral, for lenders to finance more of the operating assets than shareholders, hence a critical ratio of 1 at that time. As finance progressed, the ratio of net debt to EBITDA rightly surged to prominence because EBITDA is a convenient proxy for operating cash flow which, unlike equity, allows for the repayment of debt. The inertia of habits, especially for SME loans, means that the net debt/equity ratio has unfortunately not yet been completely eradicated from practice. Have a nice day

15-04-2021 : “Quote of the day ”

"If you see a Swiss banker jumping out of a window, then jump out after him. There must be money in it." Voltaire, French writer and philosopher of the 18th century

14-04-2021 : “Question from a participant ICCF@Columbia Business School ”

"A company announces a share buyback. Shouldn't its share price go up?" Academic studies have shown that your intuition is wrong, and that the announcement or implementation of a share buyback programme has a negligible impact on the share price. Why do you want investors to automatically buy the stock because the company announces share buybacks? Some will see this as a sign that the share is undervalued, but others will see that the company no longer has any value-creating projects and will therefore sell. Those who think the current price is good, if they see it going up, will sell some of their shares, which will bring the price down. So you see, it's much more complicated than the widely held belief that share buybacks = rising prices. Hence the usefulness of researchers to go out and flush out false impressions. Have a nice day.

12-04-2021 : “Goldman Sachs and the Deliveroo IPO, a poor consolation. ”

After a totally unsuccessful IPO on the London Stock Exchange, down 31% on the first day of trading, one of the introducing banks, Goldman Sachs, bought Deliveroo shares on the market for £75m in the following days. Goldman Sachs then made a profit as this intervention was part of the classic post-IPO price stabilisation mechanism known as the "green shoe". In a nutshell, Goldman Sachs sold more shares at the time of the IPO than there were to be sold, and to deliver the sold shares that it did not own, GS bought back some on the secondary market after the IPO to limit the extent of the disaster. Hence the profit due to the fall in prices. But this profit was returned to Deliveroo, and therefore indirectly to its shareholders, which is little consolation for such a poorly conducted price discovery process. And for a more in-depth look at the green shoe, in particular what happens when the price rises after the introduction, it's in your Vernimmen, chapter 27. Have a nice day.

09-04-2021 : “Quote of the day ”

"There is more to life than finance." Anonymous

07-04-2021 : “Quote of the day ”

"Time is money" Popular saying

06-04-2021 : “Question from a Facebook follower. ”

"Why do some groups, particularly listed ones, have a financial interest in the current context in increasing their payment terms, even if it means paying a little more for the goods and services they acquire?" Let's take an example. A group which buys every month for 100 of staples asks its supplier to pay them with a delay increased by one month. It thus reduces its working capital by 100 and improves its equity value by 100 as its net financial debt is reduced by 100. Assume it accepts to pay them 0.2% more for their staples to offset the increased payment terms. Over a year its cost base has increased by 100 x 12 x 0.2% = 2.4. Assume its EBIT multiple is 15. The negative impact on its value is 2.4 x 15 = 36. Way below the gross increase in value which is 100, hence a net impact of 100 - 36 = 64. For suppliers, getting 0.2 per month for an increase working capital of 100 is tantamount to an interest rate of 2.43% which is bigger than their likely cost of debt. Obviously in value term, they are losing: 15 x 2.43 = 36 which is less than 100 (you cannot create value out of thin air), but if they are not listed or if they are cash rich, they do not really care/understand and may even like it if they are cash rich (difficult nowadays to find short term investment opportunities yielding 2,4 % a year. Have a nice day.

02-04-2021 : “Quote of the day ”

"Options or you pay your money and you live on tenterhooks!" Pierre Vernimmen, French investment banker and educator

31-03-2021 : “Governance issues ”

If you want to know how Google's two founders holding 11% of the shares can successfully oppose other shareholders, for example on the CEO's remuneration, which is 1,085 times the median remuneration at Google ($259,000), it's in the March Vernimmen letter, available on the Vernimmen website if you are not one of the subscribers who received it in the last few days. Have a nice day

31-03-2021 : “Governance issues ”

If you want to know how Google's two founders holding 11% of the shares can successfully oppose other shareholders, for example on the CEO's remuneration, which is 1,085 times the median remuneration at Google ($259,000), it's in the March Vernimmen letter, available on the Vernimmen website if you are not one of the subscribers who received it in the last few days. Have a nice day

30-03-2021 : “Question from a Facebook follower. ”

"Should production for the company own use be removed from revenue to determine cash flows?" Good morning, There is no need to make an adjustment in a cash flow statement because production for the company own use increases the fixed assets, and therefore the amount of capex that will be found in the cash flow statement. Admittedly, it is not at the level of operating flows, but if the production for the company own use corresponds to an economic reality, it is logical that it should be recorded as an investment and not as an operation. If you now have doubts about the economic reality of this production for the company own use, fear that it is fictitious and that it is only a way of improving the result, in this case it should be removed from the income statement and the balance sheet. You will then have a pure operating cash flow and a pure investment cash flow. Have a nice day.

29-03-2021 : “Quote of the day ”

"The power of money leads us to the gloomiest of aristocracies, the locked safe." Balzac, 19th century French writer

26-03-2021 : “Question from a colleague ”

"Don't sustainable bonds, whose cost varies in part inversely with the achievement of ESG objectives, misalign creditors and shareholders? In fact, if the penalty is anything other than a mere token, lenders, once the contract has been concluded, only want one thing: for the company not to achieve its objectives in order to receive a higher interest rate. Perhaps to the detriment of the shareholders, but also to the detriment of the planet." Perhaps this is the real revolution in this product, which shows that even for a financial investor, one can prefer a less profitable product if it is good for the planet. We don't think that those who subscribe to it want the company not to achieve its sustainable development objectives, any more than the lender who includes in his/her credit contract a variable margin according to the rating wants the company to experience a deterioration in its solvency in order to obtain a better interest rate. This is both a penalty for the company to encourage it to be virtuous and thus avoid paying it, and a compensation for the investor in the event that, contrary to its expectations, the company does not achieve its sustainable development objectives. And the lender may pay the extra margin to environmental NGOs as provided for in some sustainable loan contracts. Have a good day

25-03-2021 : “Quote of the day ”

"It is the size of the pizza that matters, not how many slices you cut it into." Merton Miller, professor of American finance, 1990 Nobel Prize in Economics

24-03-2021 : “Global Money Week. ”

It is intended to make children and teenagers aware of money issues and how to manage it, and could be extended to adults. One of our children, who has been working for some time, discovered on receiving an annual statement that his employer paid him into a Pension Savings Plan (PSP) every quarter. This is good news, but employers don't often make the most of it with their employees. But someone with the basic financial skills of an average Mr.Smith, i.e. not much, misses the point. The money was automatically invested in a bond fund at 1.5% and will be capitalised until our child retires in 45 years time. Whereas the best thing would have been to invest in an equity fund because over such a long period the probability of the equity fund outperforming should be close to 100%. So over 25 years, capitalisation at 1.5% per year multiplies the initial sum by 1.5, and by 6.8 for an equity investment that would yield as much as the CAC 40 over the last 25 years (8% per year). Then, at age 50, our child could reduce the equity portion to increase the bond portion in order to reduce his risk as retirement approaches. But here, despite his father's help, this is not possible: the riskiest fund proposed by the specialist pension manager is 2/3 bonds and 1/3 equities... ... Moral: Check your Pension Savings Plan and make your HR aware of basic financial reasoning, especially if you are under 40. Have a nice day

23-03-2021 : “Quote of the day ”

"Beware of small differences between large numbers. " Popular saying

22-03-2021 : “Answer to the teaser for the weekend ”

Let's recall the question asked: What is the beta of the cash? This question, which is classic in recruitment interviews for trainees or analysts in investment banking, is easily solved if you remember that the beta measures the relative volatility of an asset compared to the volatility of the market as a whole. However, the volatility of one euro of cash is zero, since one euro of cash will always be worth one euro, in one day, in one month, in one year or in ten years (be careful not to confuse this with the value today of one euro received in ten years, which is another question where you need to discount cash flows). So, the beta of the cash is 0 since its «price" is one euro whatever the market fluctuations. Have a good start to the week

19-03-2021 : “Teaser for the weekend ”

“What is the beta of the cash?” On our shortest question ever, we leave you to think about it and wish you a good weekend.

17-03-2021 : “Quote of the day ”

There is more money than talent in the world. That's why talent is expensive. This applies to sport, art and business. Lindsay Owen-Jones, former head of L'Oréal

16-03-2021 : “Question fom a colleague ”

Don't sustainable bonds, whose cost varies in part inversely with the achievement of ESG objectives, misalign creditors and shareholders? In fact, if the penalty is anything other than a mere token, lenders, once the contract has been concluded, only want one thing: for the company not to achieve its objectives in order to receive a higher interest rate. Perhaps to the detriment of the shareholders, but also to the detriment of the planet somewhere. Perhaps this is the real revolution in this product, which shows that even for a financial investor, one can prefer a less profitable product if it is good for the planet. We don't think that those who subscribe to it want the company not to achieve its sustainable development objectives, any more than the lender who includes in his/her credit contract a variable margin according to the rating wants the company to experience a deterioration in its solvency in order to obtain a better interest rate. This is both a penalty for the company to encourage it to be virtuous and thus avoid paying it, and a compensation for the investor in the event that, contrary to its expectations, the company does not achieve its sustainable development objectives. And the lender may pay the extra margin to environmental NGOs as provided for in some sustainable loan contracts. Have a good day

15-03-2021 : “When greed meets incompetence ”

You have the situation of a number of German public entities that had deposited €500m of their cash with Greensill Bank, because unlike other German banks, Greensill Bank did not charge 0.5% for deposits. But as this bank is now bankrupt and deposits of public sector entities deposited with private sector banks are no longer covered by the public deposit guarantee scheme since 2017, this is probably as much money gone forever. In short, in order to save 0.5% per year, some people have taken the risk of losing 100% of their capital. It cannot be repeated often enough that when a bank pays above-market interest on deposits, it is not to please you, but because it cannot get into debt at market rates, and therefore presents a higher risk. No need to do a financial analysis, no need to check its rating, just GET OUT! When the risk-free rate is - 0.5%, anything above that, even at - 0.2%, contains a greater or lesser degree of risk. This has been in the Vernimmen for several decades. A special prize to the city of Monheim, North Rhine-Westphalia, 42,000 inhabitants, and 38 M€ deposited with Greensill Bank ... . Good day to those of you who were not Greensill Bank customers, and to the others too.

12-03-2021 : “Question from a follower of the Vernimmen.com Facebook page ”

In calculating the weighted average cost of capital, should a liquidity premium, also known as an illiquidity premium, be added to the rate of return requested by shareholders or to the cost of capital itself? The liquidity premium is added to the cost of equity and not to the weighted average cost of capital calculated in the indirect approach. Indeed, bank lenders have no reason to ask for a liquidity premium since they know from the outset that their debt is not listed and that it will find its liquidity through repayments. On the other hand, the reasoning holds for shareholders since the cost of equity is determined on the basis of the expected of return of the stockmarket calculated on a perimeter of large or very large companies whose application to small and medium-sized companies is, to say the least, questionable without taking into account a liquidity premium. Indeed, the liquidity of the latter share markets has nothing to do with the liquidity of these large companies, which is used to calculate the expected return, and therefore the risk premium of the equity market once the risk-free rate is deducted.
Have a nice day

11-03-2021 : “Quote of the day ”

Generosity is the best thing that can happen to you when you are lucky enough to have money. Bill Gates, American entrepreneur and philanthropist, co-founder of Microsoft

10-03-2021 : “Question from a business advisor ”

"In a business negotiation, my counterparty asks me not to take into account changes in tax and social security liabilities in the computation of changes in working capital for the calculation of free cash flow because, according to her, these expenses are already taken into account in EBITDA or tax on operating income. What is your opinion on this? The reason for including changes in total working capital in the calculation of free cash flow is to move from an accounting aggregate, EBITDA or tax computed on EBIT, to cash flow. Indeed, only cash flows can be discounted and not accounting balances that have not yet been received or paid. So to say that tax and social security liabilities (via their variations) cannot be taken into account on the pretext that they are already included in expenses is false. Since they have not been paid, they appear on the balance sheet. If they had been paid, they would no longer be on the balance sheet, but the available cash would have been reduced accordingly. However, as you take in your bridge from entreprise value to equity value, the cash available at the balance sheet date, you have to be consistent and take into account the fact that these accounting charges will sooner or later have to be paid and impact the level of cash since they are at this stage debts to be paid. Otherwise you are overvaluing the company by not taking into account an accrued liability. Suggest to your counterpart to buy a copy of the Vernimmen. Have a nice day

09-03-2021 : “Quote of the day ”

The fluctuating emotions and irrational behaviours governing human activity ensure that markets will always be inefficient and mispricings will always exist. Seth Klarman, US hedge fund manager

08-03-2021 : “Answer to the teaser for the weekend ”

Let's recall the question asked: What is the beta of the cash? This question, which is classic in recruitment interviews for trainees or analysts in investment banking, is easily solved if you remember that the beta measures the relative volatility of an asset compared to the volatility of the market as a whole. However, the volatility of one euro of cash is zero, since one euro of cash will always be worth one euro, in one day, in one month, in one year or in ten years (be careful not to confuse this with the value today of one euro received in ten years, which is another question where you need to discount cash flows). So the beta of the cash is 0 since its "price" is one euro whatever the market fluctuations. Have a good start to the week

05-03-2021 : “Teaser for the weekend ”

What is the beta of the cash? On our shortest question ever, we leave you to think about it and wish you a good weekend.

04-03-2021 : “Question from a participant ICCF@Columbia Business School ”

"Doesn't the meteoric rise in Tesla's share price or that of Bitcoin show that the markets cannot be rational?" It seems to us that markets are a mixture of rationality and human passions, as we write in chapter 15 of Vernimmen devoted in part to this subject. And this is quite logical, since men are a mixture of passions and rationality, the financial markets, which they created and operate, can only be in their image. The financial markets are efficient in the sense that the arrival of new information is very quickly integrated into the share price, such as the announcement that Gucci's growth has stopped in Q4 2020, contrary to its competitors Hermès and Vuitton and to investors' expectations, immediately caused the share price of its parent company Kering to drop by 7%. This is also true in the sense that very few asset managers, despite being market professionals, are capable of outperforming the markets over the long term. But the existence of repeated crashes and booms shows that our creature, the financial markets, has not escaped us and are no more capable than we are of predicting the future with certainty. Finally, markets exist by construction because the players have divergent and non-uniform opinions or needs or behaviours. Fortunately, on these last two points, otherwise life would lose much of its interest. Have a good day.

03-03-2021 : “Reading Warren Buffett's Annual Letter ”

We found 4 interesting reflections from a financial point of view in this year’s edition: Still as impressive as ever, the comparison since 1965 of the average annual performance of an investment in the stock market index (10% per year) and in its investment holding company (20%), which leads in the first case to a 235-fold increase in the invested assets and an increase in the portfolio of.... 28,106 for investors who put their trust in Warren Buffett in 1965. There is no typo, you have read 28,106 correctly, i.e. 120 times more for a "simple" doubling of the annual performance. That's the power of compound interest over time, here 55 years. It is true that treating shareholders as partners and associates, and not as customers who are charged management and possibly performance fees, changes a lot in terms of governance and incentives. A detailed analysis of the mechanism and consequences on shareholder wealth of the share buybacks carried out by Berkshire Hathaway in 2020. We are not fans of share buybacks per se. We think it is a stupid tool for companies that are able to regularly find investments that yield more than their cost of capital, and a relevant tool for those that can no longer do so. As it so happens that cash is accumulating in Berkshire, in the order of $140 billion invested in U.S. Treasury bonds, i.e. 24% of its market capitalization, without its managers finding relevant investments, $25 billion has been returned to shareholders in 2020, and it is up to those shareholders who have sold their shares to do better than Warren Buffett's team. Finally, an analysis of the financial performance of conglomerates, which is both a defense and an illustration of Warren Buffett's investment approach. Just as companies that excel in their sector, such as L'Oréal, Apple or BMW, for example, have no desire to lose their independence, a conglomerate is condemned to acquire second-rate companies, and therefore is not the best investment vehicle that you can imagine. Whereas Berkshire Hathaway can take long-term financial minority stakes in these massive creators of value. Thus the 5% stake in Apple acquired since 2016 for $31 billion and which is now worth $120 billion. Have a nice day

02-03-2021 : “Question from a CFO of a listed company ”

"How do you recommend calculating the return on capital employed (ROCE) with IFRS 16 on leases? Should outstanding operating leases be added to the capital employed? » We believe that IFRS 16 is inappropriate because it leads to treating two situations that are very different in terms of the intentions of companies and which have nothing to do with each other: operating leases and finance leases, the same way. We have on several occasions over the 10 years of its gestation explained all the harm we think about it, most recently in La LettreVernimmen.net n° 122 of September 2019, where we advise our readers to completely unravel, as far as they can, the effects of this standard on the accounts. This is what we ourselves do as part of our activities as investors. We doubt that many companies will include outstanding operating leases in operating assets since, in most cases, IFRS 16 leads to a dilution of ROCE. The arguments of continuity of measurement over time, of the pre-existence of profitability to its measure and to accounting standards, or even of comparison with competitors under US standards which are different on this point, can be invoked, especially as accounting standards do not deal with or standardise the calculation of returns, which leaves greater freedom than for accounts. Finally, no investor, including landlords, has entrusted the amounts in question to the tenant like a shareholder in a capital increase or a banker in a loan. However, the principle of profitability is a return on cash that you have been able to invest and manage, which is not factually the case here, even if the accountants with IFRS 16 wrongly claim this. Have a nice day

01-03-2021 : “Daily quote ”

"A rating is an opinion, not a guarantee or a recommendation. « Standard and Poor's, debt rating agency

26-02-2021 : “Question from a Vernimmen reader. ”

"Why do you write in the Vernimmen that the asset value of a company in a declining sector is particularly speculative?" Because usually a phase of decline begins with a slow decline, then at some point the decline accelerates and can quickly become abrupt. A very good example is currently the oil sector. Since 2015, the decline is real but relatively slow, and at the moment there is an acceleration of this decline with a conviction increasingly shared by investors that part of the oil resources of the earth, mapped and well known, will never be pumped out, they will remain, contrary to the assumptions of 3-4 years ago, forever in the bowels of the earth. From then on, the value of these oil fields becomes highly speculative, i.e. uncertain, volatile and likely to fall very quickly, as illustrated by the tens of billions of dollars in provisions that have just passed Shell and Exxon. Have a good day.

25-02-2021 : “Quote of the day ”

"The intervention of activists is an element that contributes to the proper formation of prices on the markets, all the more so as the rise of passive investors and/or institutional investors in some cases singularly reduces the diversity of analyses and participants." Robert Ophèle, chairman of the AMF, the French watchdog market authority

24-02-2021 : “Question from a reader ”

How is it determined whether or not the risk covered by a provision has resulted in an expense already included in the earnings forecast for the purpose of calculating a discounted free cash flow? It is necessary to look in the details of the business plan to see whether or not the charge corresponding to the provision has been included in the expenses in a given year. If this is not visible to the naked eye, then the person who drew up the business plan must be asked to find out what the situation is and give a clear answer, so that a treatment can then be adopted that is unambiguous: if it is there, there is no need to take it into account in the bridge from the entreprise value to the equity value; if it is not there, subtract it in the bridge from entreprise value to equity value. Have a nice day.

23-02-2021 : “Shell submits its Zero Carbon in 2050 Plan to the vote of its shareholders ”

While more and more groups are announcing plans to reduce their net carbon emissions to zero by 2050, including in the use of their products by their customers, few like Shell include in this scope the carbon emissions of products traded by its trading arm, and less put it to the vote of their shareholders. While the outcome of the vote is not in doubt, the vote makes it possible to involve shareholders in the strategy followed, to anchor it solemnly in the long term and to widen the gap in investors' perceptions with competitors which will have difficulties in making such a commitment quickly (American oil companies, Aramco, etc.). As in Europe, half of the investors say they follow ESG criteria in their investment choices, it is important not to be in the bottom 15 or 20% of a sector that will be eliminated from the field of investable companies by more than 50 % of investors. Have a good day

22-02-2021 : “Answer to the weekend brainstorming ”

Let us first recall the question asked: A company pays an exceptional dividend representing 40% of its equity value financed by new debt (a leverage recapitalisation). What is the impact on its P/E ratio? Too many people try to do the calculation in their head, which leads nowhere because not all the data are available, such as the cost of debt or the corporate tax rate, or they make the mistake of forgetting the additional financial costs of the debt. The correct reasoning is much simpler. As every reader of the Vernimmen or these posts knows, the P/E ratio and risk vary in opposite directions. After this exceptional dividend, the share has of course become riskier because it bears a much higher amount of debt. So the P/E ratio will go down. Good start to the week.

19-02-2021 : “The weekend brainstorming ”

Question asked during the oral examination for admission to the Master in Finance programme at HEC Paris: A company pays an exceptional dividend representing 40% of its equity value financed by new debt (a leverage recapitalisation). What is the impact on its P/E ratio? Sleep on it and have a nice week-end.

18-02-2021 : “Quote of the day ”

Generosity is the best thing that can happen to you when you are lucky enough to have money. - Bill Gates, American entrepreneur and philanthropist, co-founder of Microsoft

17-02-2021 : “Question from a student ”

"Where does risk come into play in the discounted amount of future repayments to determine the value of a debt? If we consider that 33% of the debt will never be repaid, are the actual repayments calculated as 66% of the theoretical repayments?". You have two possibilities: Either you discount the repayment and interest flows at an interest rate much higher than the face interest rate of the loan to take into account the risk of partial repayment of the debt. Either you estimate that part of the debt will not be repaid and you then eliminate it from the flows, which you discount at a normal rate for a borrower who would normally repay its debt. Have a nice day.

16-02-2021 : “Return and risk. ”

Last week, Spain issued €5bn worth of 50-year bonds which were swallowed like churros. A few weeks before, Belgium and France had done the same on this maturity, at a rate of 0.5% for France, and the same enthusiastic welcome from investors. Are they aware that, if in 10 years time, the 40-year rate double to 1%, this bond would only be worth 84% of its par, and 59% if it goes to 2%, its level not so long ago? As for a jump to 5%, it would reduce the value of this bond to 23% of its par value, the logical consequence of having to be satisfied with a 0.5% coupon against a market rate of 5% for another 40 years. This gives a certain bitterness to this sentence attributed to Franz Kafka or Woody Allen, "Eternity is long, especially towards the end". Indeed, the sensitivity of a bond to market interest rates is never as high as when the bond is long and the nominal rate is low. Exactly the conditions we are talking about. Have a nice day

15-02-2021 : “Question from a journalist. ”

"Why is it that when a share pays a dividend, its value goes down?" Hello, Take the case of a company that is worth 100 because of its results, prospects and assets, 10 of which are cash. Now this company pays 4 in dividends to its shareholders. In other words, it is depriving itself of an asset of 4 that is leaving its coffers to go into those of its shareholders. Logically, how much is this company worth now? It's the same as before, except that it has just deprived itself of an asset of 4, so it's worth 100 - 4 = 96. So that's why a company that pays a dividend sees its value drop. If this were not the case, we would have finally found a way to eradicate poverty from this lowly world. Unfortunately, this is not the case! Have a nice day!

12-02-2021 : “Question from a subscriber to the Vernimmen.com newsletter ”

"When a company has cash that is restricted, for example, as a collateral on a loan, do you consider it as cash in the net bank and financial debt calculations? And for the liquidity ratio?" In the liquidity ratios, it must be excluded because this cash is blocked as a collateral for a credit elsewhere. It can not serve twice. For net debt, it is necessary to be consistent and take this restricted cash into account since it is a partial counterpart of a bank or financial debt. Have a nice day

11-02-2021 : “Another IPO cancelled ”

And no small size, €10bn expected on the London Stock Exchange, where the private equity fund EQT was thinking of IPOing Evidensia, a chain of veterinary clinics, but who would blame it?, accepted an offer from Silver Lake and Nestlé that values the company at €12.3bn, allowing EQT to exit in part and reinvest for a new round for the balance. The frontier between the stock markets and the private equity world has therefore been steadily rising since its fall in 2007. Have a nice day

10-02-2021 : “Question asked by a participant of ICCF@Columbia Business School. ”

"When the 10-year government bond rate is negative, what should I do in my CAPM? Should I use another risk-free rate or put this negative value?". Hello, it is very important to take a risk-free money rate that is the one used to calculate the risk premium. If the risk premium was calculated using a rate such as the 10-year government bond rate, then take the same 10-year government bond rate as the risk-free money rate. If the risk premium was calculated using a short-term risk-free money rate, such as a treasury bill, then use the same short-term rate in your formula to be consistent, homogeneous and fair. Indeed, in the CAPM equation where: required rate of return = risk-free rate + beta x (market rate of return - risk-free rate), the risk-free rate can only be one, even if the expression (market rate of return - risk-free rate) is replaced by what it means, i.e. the risk premium. It does not matter whether the risk-free rate is positive or negative. Have a nice day.

08-02-2021 : “Question asked on the Vernimmen.com website ”

"What is the correct definition of free cash flow and is it useful to compare a company from one year to the next based on this free cash flow and its evolution?". Free cash flow is defined as: operating income - corporate income tax calculated at the corporate income tax rate on operating income - change in working capital - capital expenditures + depreciation and amortisation expense. The evolution of free cash flow is interesting, but its annual volatility, due to that of capex, means that it has not in financial analysis the central place it has in valuation for example. Have a good day.

05-02-2021 : “Question from a reader ”

"In order to obtain a more accurate picture of net debt, must all available cash be taken into account, bearing in mind that some of the cash is necessary for operational needs and some is superfluous (excess cash) ? Wouldn't the only real cash to be deducted from the gross debt be the one that could be used without disrupting the company's operations?" You are right, even if in the practice of calculating net debt the D/EBITDA ratio, monitoring compliance with covenants, or valuing the company in a indirect approach, this is never done. This should only be done by the financier who internally forecasts his/her cash needs and who knows that part of the cash is not available and is "in the pipes". This part is however decreasing with time and progress in terms of means of payment (instant payment). This is not done by third parties who do not have the means to make these estimates but it doesn’t impact very much their estimate of net debt for their own needs. It would be different of course if part of the cash was in a country with exchange control style restrictions, but that is another story. Have a nice day.

05-02-2021 : “Question from a reader ”

In order to obtain a more accurate picture of net debt, must all available cash be taken into account, bearing in mind that some of the cash is necessary for operational needs and some is superfluous (excess cash)? Wouldn't the only real cash to be deducted from the gross debt be the one that could be used without disrupting the company's operations? You are right, even if in the practice of calculating net debt the D/EBITDA ratio, monitoring compliance with covenants, or valuing the company in an indirect approach, this is never done. This should only be done by the financier who internally forecasts his/her cash needs and who knows that part of the cash is not available and is "in the pipes". This part is however decreasing with time and progress in terms of means of payment (instant payment). This is not done by third parties who do not have the means to make these estimates but it doesn’t impact very much their estimate of net debt for their own needs. It would be different of course if part of the cash was in a country with exchange control style restrictions, but that is another story. Have a nice day.

04-02-2021 : “Quote of the day ”

"One of the surest signs that a bubble is close to bursting is when the retail investor piles in with leverage." Albert Edwards, market strategist at Société Générale

03-02-2021 : “Aviva, a new illustration of shareholder power ”

After BlackRock, which had raised the possibility, Aviva is raising its voice to 30 mining, oil and gas groups, to whom it has written to ask that they set themselves the objective and the means to achieve zero greenhouse gas emissions, both in their activity and in the use of their products made by their customers. If they fail to do so, Aviva will sell the shares and loans/bonds it holds in those 30 groups that have not (yet) made the commitments that Total or Shell have already made on their side, for example. As Aviva manages €400bn on behalf of third parties, it is unlikely that this letter will go straight to the bin. Few managers like falling share prices and rising financing costs. Have a nice day.

02-02-2021 : “Question from a philosopher loving finance ”

"I know you don't give stock market advice, but are there any reasons not to buy puts, with a maturity of 2 years for example, on Tesla?" Here are 2 reasons not to write a put on Tesla : 1/ A put on Tesla may be as expansive as a Tesla share. A 2-year put option on Tesla in the money ($830) is currently worth €339, and shows an implied volatility of 66% per annum. This means that if you want to have a 30% return on your option investment, Tesla's share price must fall by 69% within 2 years. If you think Tesla's share price will be divided by 10 in 2 years, your return will be 48%. 2/ This is money you may need in the future, and there is no guarantee that you will not lose the full value of this put option. It's up to you. Have a nice day.

18-01-2021 : “Question from a reader. ”

"What's the point of straight-line versus accelerated depreciation? Indeed, since the accelerated depreciation makes it possible to defer part of the tax over time by initially recognizing a larger expense, one might think that all companies should opt for the accelerated method when allowed since deferring an expense over time means reducing it. » The vast majority of companies that are eligible for accelerated depreciation make this choice for the reason you indicate. But not all of them. Indeed, it is not of interest to a company that is not taxable and does not expect to be taxable for some time, or a company that has other ways of optimising its taxation and for which the accelerated depreciation method is redundant. In addition, some companies may have an objective of achieving a minimum pre-tax profit over the next few years that would be thwarted by the use of an accelerated depreciation method, for example in the case of an earn-out mechanism in the event of the sale of the company, because a lower accounting result could minimise the earn-out to be paid to the sellers that would be indexed to the accounting result. Have a pleasant day.

30-12-2020 : “Question asked by a participant of ICCF@Columbia Business School. ”

“I have a project in the process of being created, part of the work on which has been carried out for a value of 205 and the work remaining to be done is estimated at 235. When calculating the NPV, is the amount of the investment to be taken into account 440 or just the remaining work to be done?” Either the investments you have already made have a market value irrespective of the completion of the investment you plan to finish, in which case the selling price of the initial investments (which may be different from the 205 spent) should be taken into account in the cost of the investment. In fact, by finalising your investment, you are depriving yourself of the opportunity to sell the initial investments for a given price, which is a cost for you to take into account. Or they are only of value in the continuation of the initial investment project, for example having repainted your car in yellow to make it a New York taxi, in which case they should not be taken into account because the continuation of your investment project does not deprive you of an opportunity to sell the initial investments, an opportunity which does not exist. To use my example, the question is no longer whether you should become a New York taxi driver, but whether, having repainted your car yellow, you should buy a taxi licence or not. Have a nice day

28-12-2020 : “Question from a reader. ”

"What is the interest for a shareholder during a capital increase with preferential subscription rights (rights) to sell his/her rights to subscribe to the capital increase? He/she will be diluted in any case, won't he/she?". Hello, it will be partially diluted to the extent of the real dilution which corresponds exactly to this situation of selling part of the rights to obtain cash, and subscribing to new shares with the balance of the rights and the cash thus obtained. It is better to do this than to give up the rights which will have no value after the capital increase. Perhaps your shareholder does not want to be diluted to the extent of the apparent dilution and is willing to make a cash neutral transaction for him/her. Alternatively, perhaps the price of the rights is poorly arbitrated and he/she does not want to sell them at a price lower than their theoretical value. So he/she uses them to partially subscribe to the capital increase. Have a nice day.

24-12-2020 : “The December issue of the Vernimmen.com Newsletter is now available ”

If you want to know more about the quantum leap of sustainability-linked bonds that is currently storming the corporate bond market, read the news article in this month issue of the Vernimmen.com Newsletter. Should be in your inbox if you are a subscriber, if not available on the vernimmen.com website. Have a nice day.

22-12-2020 : “Quote of the day ”

"The intervention of activists is an element that contributes to the proper formation of prices on the markets, all the more so as the rise of passive investors and/or institutional investors in some cases singularly reduces the diversity of analyses and participants." Robert Ophèle, chairman of the AMF, the French watchdog market authority

21-12-2020 : “Quote of the day ”

"The intervention of activists is an element that contributes to the proper formation of prices on the markets, all the more so as the rise of passive investors and/or institutional investors in some cases singularly reduces the diversity of analyses and participants." Robert Ophèle, chairman of the AMF, the French watchdog market authority

21-12-2020 : “ Answer to the teaser of the weekend ”

The correct answers are A7, B1, C10, D8, E2, F3, G9, H4, I5, J6. In other words: : "There is only one class in the community that thinks more about money than the rich, and that is the poor.) - Oscar Wilde, 19th century Irish poet and playwright" "Writing is the only profession where no one considers you ridiculous if you earn no money." - Jules Renard, 19th century French author "Stop listening to economists; listen to traders!" - Bruno Crastes, asset manager and founder of H2O "A debt must be repaid." - Bruno Le Maire, French finance ministre. "The best expert on the price is the one who writes the cheque." - Guy Verrecchia, CEO and owner of the movie theatre group UGC "All good investing is value investing." - Charlie Munger, Warren Buffett's partner at Berkshire Hathaway "It's expensive on what we know, and cheap on what we don’t." - A Morgan Stanley' buy side analyst on Tesla "My work is close to life, so money is inevitably present, it's the elementary sense of reality." - Paul Veyne, French historian, specialist in antiquity "Money likes silence.") - Araz Agalarov, Russian oligarch "The market can be really stupid." - James Gorman, CEO of Morgan Stanley Have a nice day

18-12-2020 : “Teaser of the weekend ”

Here are the last ten quotes that we have added to our database as we read and that will appear on these pages in 2021 and beyond. And we suggest that you try to find their authors, so that you don't leave your brains idle this weekend. Have a nice day.10 quotations: A: "There is only one class in the community that thinks more about money than the rich, and that is the poor." B: "Writing is the only profession where no one considers you ridiculous if you earn no money." C: "Stop listening to economists; listen to traders!" D: "A debt must be repaid." E: "The best expert on the price is the one who writes the cheque." F: "All good investing is value investing." G: "It's expensive on what we know, and cheap on what we don’t." H: "My work is close to life, so money is inevitably present, it's the elementary sense of reality." I: "Money likes silence." J: "The market can be really stupid. » 10 authors: 1 - Jules Renard, 19th century French author 2 - Guy Verrecchia, CEO and owner of the movie theatre group UGC 3 - Charlie Munger, Warren Buffett's partner at Berkshire Hathaway 4 - Paul Veyne, French historian, specialist in antiquity 5 - Araz Agalarov, Russian oligarch 6 - James Gorman, CEO of Morgan Stanley 7 - Oscar Wilde, 19th century Irish poet and playwright" 8 - Bruno Le Maire, French finance ministre. 9 - A Morgan Stanley' buy side analyst on Tesla 10 - Bruno Crastes, asset manager and founder of H2O

17-12-2020 : “Quote of the day ”

"It is not enrichment that is the problem, but the passionate, obsessive will to get rich; it is not money that is an obstacle to virtue, but the fact of loving its accumulation." Giacomo Todeschini, Italian historian born in 1950, talking about the Franciscan economic concept

16-12-2020 : “Question from a participant ICCF@Columbia Business School ”

In a company valuation, should shareholders’ short term loans be reintegrated into shareholders' equity or assimilated to net debts? As a general rule, they are considered for what they are, i.e. a loan from the shareholders. You would only consider them as equity if there was a firm and irrevocable commitment by the shareholders to convert them into share capital. In this case, you would take into account the number of additional shares to be issued in the total number of shares of the company to be consistent. Have a nice day

15-12-2020 : “Quote of the day ”

"A bird in the hand is worth two in the bush" Aesop, Greek fabulist of the 6th century B.C.

14-12-2020 : “Question from a follower of the Vernimmen.com Facebook page ”

"In the calculation of return on equity, the numerator subtracts exceptional charges from net income, but not in shareholders' equity in the denominator, which includes the net income impacted by exceptional charges. Isn't it an aberration to remove non-recurring items from the numerator and not from the denominator?". We don't think so: the capital gain generated is not part of the company's current, recurring income, so it should be removed from net income in the numerator. On the other hand, once the shareholders have decided not to pay the capital gain as a dividend and therefore to reinvest it in the company, regardless of its legal or accounting qualification, it has become equity capital on which it is normal to expect a certain rate of return as on the rest of the equity capital. So in the denominator, there is no reason to reverse it. Have a nice day

11-12-2020 : “Quote of the day ”

"What is most difficult is not to bring into effect new ideas, but to break from old ones." John M. Keynes, 20th century British economist

10-12-2020 : “Question asked on the Vernimmen.com website. ”

"How to conduct the financial analysis of a holding company". The financial analysis of a pure holding company is of little interest unless it is indebted to banks or the financial market. Indeed, the notion of margin does not exist because there are no sales, investments excluding financial fixed assets are non-existent, as is the working capital. As for returns, it is biased, because possible dividends only reflect part of the profitability of portfolio companies, and capital gains are rarely regular every year. The only point of interest, if the holding company is indebted, and it is crucial then, is to study carefully how the holding company can repay this indebtedness through dividends received, disposal of assets, capital increase to be subscribed by the shareholders of the holding company if they can. Have a nice day

09-12-2020 : “Quote of the day ”

"The easiest way to become a millionaire is to start out with a billion euros and then buy an airline" Richard Branson, British entrepreneur and businessman, founder of the Virgin Group

08-12-2020 : “Question from a follower of the Vernimmen.com Facebook page ”

Should the break-even point be calculated in relation to production or in relation to sales? In relation to sales, because production, if you don't sell afterwards, is not enough to cover your costs! That said, in the presentation of the income statement by nature, and if you don't have access to the company's management accounting, there is a small bias since the expenses correspond, not to the costs incurred to produce the products or services sold, but to the costs of the goods or services produced. This does not mean that the result displayed is not the result on sales but on production, because the line changes-in-inventories-of-finished-goods among products thus indirectly neutralizes, at the level of the result, the expenses recorded during the year that are to be attached to products or services that will be sold the following years. Most of the time, the difference between production and sales is very small, even if it is not zero. Especially since an external observer is led to make assumptions about the sharing of costs between fixed and variable costs, which have a much larger margin of error. This means that we are no longer down to one small error. Let us hope that one day, in the presentation of the income statement by nature, we will eliminate the line changes-in-inventories-of-finished-goods and that the various components that make it up will then be deducted from the expense items from which they are derived. A much simplier way of presenting results. Have a nice day.

07-12-2020 : “Quote of the day ”

"Above all, it is better to think than to follow. " Warren Buffett, American investor and philanthropist

04-12-2020 : “Reading for the weekend ”

The M&A Review Europe publication has released its third issue dedicated to Private Equity in Europe, featuring some 15 articles written by professionals in the sector. You can find it on https://www.linkedin.com/posts/ma-review_ma-review-europe-032020-ipem-private-activity-6735137775131086848-4nIa Enjoy your reading

03-12-2020 : “Quote of the day ”

"In finance, everything is about the future - return, risk and value!" Pierre Vernimmen, French investment banker and educator

02-12-2020 : “Question from a participant of ICCF@Columbia Business School ”

Unibail-Rodamco-Westfield announces a €1 billion bond buyback offer. What is the purpose behind this manoeuvre? In view of the difficulties encountered by the company, wouldn't the cash used be better used for capex or to keep a liquidity cushion in case of further difficulties? This is a classic bond debt management operation that large issuers frequently engage in. At the same time as URW announced this bond tender offer for 5 bonds issued by it in the past and maturing between 2021 and 2024 for a maximum amount of €1 billion, URW launched the issuance of two new bonds for a total of €2 billion with a maturity of 6.5 years and 11 years. It has thus extended the average maturity of its debt and provided itself with additional resources that will enable it to meet its short-term debt repayments. For more details, see chapter 41 of Vernimmen on the management of bank and financial debts by companies.

01-12-2020 : “Quote of the day ”

"The day that brings us money is a happy day" Proverb

30-11-2020 : “The Vernimmen.com Newsletter #133 is now available ”

The IASB’s plan to improve the presentation of the income statement is certainly worth looking at, as it would end the sad practice of some groups to publish P&L with a cost of goods sold representing 95 % of sales (sic, as Arcelor did in 2019). Indeed they would have a publish a P&L by nature in the appendix to the accounts giving much more information. More is available in the Novembre issue of the Vernimmen.com Newsletter which has arrived in your mailbox if you are a subscriber. If not, you can read it on the Vernimmen.com website. Also included are an article about the allocation of securities during a bond issue, with similar effects to IPOs, and a table showing the presentation of P&L for the 30 largest listed companies in 12 countries. Have a nice day.

27-11-2020 : “Quote of the day ”

"Avarice starts where poverty ends" Balzac, 19th century French writer

26-11-2020 : “"What is the difference between systematic risk and systemic risk?" ”

Systematic risk, or market risk or non-diversifiable risk, is the risk that one incurs when intervening in a financial market, mainly the equity market, and which affects all listed securities to a greater or lesser degree. It is due to general macroeconomic developments, interest rates, taxation, inflation, the political context, etc. It is contrasted with the specific (or intrinsic, or diversifiable or idiosyncratic) risk, which is specific to each security and is independent of the phenomena affecting all securities: it is the risk of a technological breakthrough by a competitor that undermines your business model, that of the fire in your main factory, the death of a charismatic and excellent manager, etc. A systemic risk is a risk that can endanger the survival of the financial system (or another system outside the financial sector). For example, the collapse of Lehman Brothers in 2008 was a systemic risk because it led to a severe liquidity crisis that almost brought the global financial system to its knees. For example, the UK financial authorities decided to rescue Northern Rock, which was not a major bank, but when they saw a queue of people lining up to withdraw their savings from the bank's counters, they felt that a potential systemic risk could materialise if the customers of the major banks were to do the same by mimicry. Have a nice day

25-11-2020 : “Quote of the day ”

"The greatest advantage of wealth, is that it allows you to get into debt" Oscar Wilde, 19th century Irish poet and playwright

24-11-2020 : “Question from one of our students. ”

"Why do you say that maximising a value is the same as minimising an interest rate? » Let's take as an example a company that issues a 5-year bond at a fixed rate of, say, 1%, which is about the same as market conditions for a company with its level of risk over that term. The banks placing the bond will approach investors. Some will be ready to subscribe to the issue at its face value, others may be ready to pay a little more, perhaps because they have received since the previous day an influx of cash to invest, and may go as far as to subscribe for example at 100.3% of the face value. In this case, the yield to maturity of this bond will fall to 0.94%. By increasing the value at which the bond is sold, and since cashflows are constant, the cost to the issuer is minimised. Mathematically, since the value is the sum of the future cashflows, discounted at the required interest rate, its first derivative with respect to interest rates is negative, so the value and rates vary in the opposite direction. Therefore, maximising a value, at constant cashflows, is equivalent to minimising the interest rate. Have a nice day

23-11-2020 : “Quote of the day ”

"Things can only be predicted after they've happened." Eugene Ionesco, French playwright of the 20th century

20-11-2020 : “Question from one of our students. ”

"In the leverage formula, should the just financial expenses of the gross debt or the financial expenses net of financial income be taken into account?" Hello, The leverage formula: ROE = ROCE + (ROCE- i x (1-CITR)) x D/E is based on an accounting tautology, which is total assets = total liabilities + shareholders’ equity, and which is quite generally observed in our time :-). Consequently, all balance sheet and income statement accounting items must be taken into account, hence the reasoning in net debt (cash and cash equivalents and marketable securities), since cash, cash equivalents and marketable securities cannot be ignored. Similarly, the cost of debt cannot be limited to financial expenses, leaving aside financial income (even if nowadays they are usually zero due to the context of very low interest rates). Let's take an example to illustrate this. A company has operating assets (fixed assets + working capital) of 1,000, financed by shareholders' equity of 500, gross bank and financial indebtedness of 700, and 500 net, once 200 of cash and cash equivalent are taken into account. Operating profit is, say, 100, and corporate income tax rate (CITR) is 33.3%. The ROCE of this company is therefore 6.7% i.e. 100 x (1 - 33.3%) /1,000. The average interest rate on the gross debt is, say, 5%. The return on cash before corporate tax is 1%. The pre-tax profit is therefore 100 - 5% x 700 + 1% x 200 =67. The corporation tax is therefore 67 x (1- 33,3 %) = 22,3 and the net result is therefore 67 - 22,3 = 44,7. The ROE is 44.7 / 500 = 8.94%. When we inject the ROE and the ROCE just calculated into the leverage formula recalled at the beginning of this post, the cost of debt before corporate taxes is 6.6%. This 6.6% corresponds to the financial result divided by the net bank and financial debt, i.e. (5% x 700 - 1% x 200) / (700 - 200), and not to the interest rate on the gross debt of 5%. It is therefore the net debt and net financial income that must be taken into account and not the gross debt and just financial expenses. Admittedly, this results in a higher interest rate (here 6.6%) than that charged by your lenders. But this only makes apparent the cost that you incur to keep cash on the balance sheet, in a sound financial management which is not without cost, without using it to repay a part of your debt, cash which naturally brings you less than the gross debt costs you. Have a nice day.

19-11-2020 : “Quote of the day ”

"There is nothing more unbearable than the regularity of the exceptional" Cioran, 20th century French philosopher

18-11-2020 : “Question from an ICCF@Columbia Business School participant ”

"I don't understand why a call writer takes more risk than a put writer? » Take for example Tesla in November 2019. The stock price is $63. I sell a $63 put option at one year at a price of P. As the seller of this option, my risk is that Tesla goes bankrupt and, in that case, the put option is exercised and I lose 63 - P. I can't lose any more. I am now selling a €63 call option at one year at a price of P' still on the Tesla share. My risk is that Tesla's share price will rise to heaven, for example to $422. As the seller of this call option, I lose 422 - 63 - P. And I could lose even more if the price goes up to $500 or $1000. So the seller of a call option runs more risk than the seller of a put option, because a stock can lose up to 100% of its value, but its price can be multiplied several times as shown in this example. Have a nice day.

17-11-2020 : “Quote of the day ”

"Financial synergy doesn't exist" Pierre Vernimmen, French investment banker and educator

17-11-2020 : “Quote of the day ”

"You can't get rid of risk, it's part of the economy" Francis Mer, French industrialist

16-11-2020 : “Question from one of our students ”

"I don't understand why stock valuation methods don't have a direct influence on the company's net debt" If you increase your working capital by buying precautionary stocks, for example, the counterpart of this increase will at some point be an increase in net debt once you have paid the suppliers who have delivered these additional stocks to you. But this is not what we're talking about here, but an increase, at constant volume, in the price at which your stocks are valued. This is not a cash movement, but an accounting valuation where you value a stock more expensively (by including more or less justified cost). This does not mean that you owe more money to your suppliers. Simply because you have taken costs out of the income statement and put them on the balance sheet as inventory, you have inflated your net profit and therefore your equity. That's how you balance the balance sheet. Have a nice day.

13-11-2020 : “Quote of the day ”

You don't fall in love with a growth rate. - Graffiti on a Parisian wall in May 1968

12-11-2020 : “Question from a student ”

"I read in a Breaking into Wall Street document that I use to prepare my M&A interviews that financing an acquisition with cash is cheaper than financing it with debt because cash often brings in less than 5% and debt costs more than 5%. And that equity financing was more expensive because the cost of equity is higher than the cost of debt. Since this is not what my professor taught us, I would like your opinion." That's bad thinking by bad investment bankers! Just because you are using cash that earns you 0% does not mean that the cost of the acquisition for you, i.e. the rate of return to be required from this acquisition, is 0%! It is a short-sighted mistake that makes you forget the risk. The risk of investing in cash is very low if you have invested it in a solid bank. The risk of an acquisition is of course much higher. The only good reasoning is to tell yourself that, faced with a given investment, all sources of financing have the same cost; which is the cost of capital of this investment, i.e. the return to be required from this investment in view of its market risk. Under no circumstances can this be the cost of the source of funding that finances it. An accounting cost is not a financial cost, and vice versa. These are different notions, because a financial cost incorporates risk, not an accounting cost as poorly illustrated by Breaking into Wall Street. For more details, read chapter 35 of the Vernimmen. Have a nice day.

11-11-2020 : “Quote of the day ”

Money likes silence. - Araz Agalarov, Russian oligarch

10-11-2020 : “Question of a student. ”

"What is the clearing house's basis for determining the amount of the security deposit for futures contracts?" In general, it is equal to a maximum of two days' losses, taking into account the maximum price changes allowed in one day. Thus, if after one day's loss, an operator does not respond to the margin call intended to offset it, the clearing house unwinds the position the next day, without normally losing more than the margin deposit. However, in times of high market volatility, clearing houses have been known to increase the size of the margin deposit to reflect this. Have a nice day.

09-11-2020 : “Quote of the day ”

The market can be really stupid. - James Gorman, CEO of Morgan Stanley

06-11-2020 : “Question asked on the vernimmen.com website. ”

Some calculate working capital ratios with 360 days and others with 365 days. What to do? We used in the old days 360 to simplify the calculations (because 360 is divisible by many numbers, contrary to 365). But with the arrival of pocket calculators, then Excel, one calculates more often with 365, which is the number of days in the year. Some did not update their practice. But this is not very important, because the gap between 360 and 365 is very small (less than 2%) and a difference of one or two days in a working capital does not make a significant difference. Have a nice day.

05-11-2020 : “Quote of the day ”

Many people in down markets will hold on to losing assets, and instead sell the things that are going up. Which is, of course, the wrong way round. - Greg B Davies, head of behavioural finance at Oxford Risk.

04-11-2020 : “Question from a reader ”

"We are seeing a lot of convertible bond issues at the moment. What is the advantage of this fund raising versus a classic capital increase?" The high volume of convertible bond issues at the moment is the consequence, for a certain number of companies, of low share prices which discourage them from issuing new shares. They therefore prefer to issue convertible bonds, leading, if they are converted at maturity into shares, to issue fewer new shares since they are issued with a premium of 30 to 60% in general compared to current prices. The counterpart of this lower dilution is the risk taken by the company, which is not sure that the convertibles bonds will be converted into shares, and if they are not converted into shares, they will have to be repaid in cash. It is therefore a hybrid product which is not comparable to shares (which are never to be repaid). Have a nice day.

03-11-2020 : “Quote of the day ”

"We don't seek enough information out of statistics, and we demand too many conclusions from them." Auguste Detoeuf, 19th century French economist and industrialist

02-11-2020 : “Do you want to know what is a covenant holiday or a covenant reset? ”

The answer is in the last edition of the Vernimmen.com newsletter which is already in your mailbox if you have subscribed to it. If not, this is the place: http://www.vernimmen.com/Read/Vernimmen_letter.php There is also an article about how a wider access to collateral prompted a democratisation of credit, not to mention a chart about the changing creditworthiness of non-financial US groups since the 1990s and the last part of a study regarding stockmarket or investment fund shareholding. Have a nice day

30-10-2020 : “LVMH Tiffany, all for this? ”

We remember that LVMH and Tiffany agreed in November 2019 that LVMH would acquire Tiffany by paying a 50% premium on the share price before the announcement for a total price of $16.2 billion, and that in September LVMH launched a legal battle in the United States to obtain a price reduction by arguing Covid and using very harsh words. The parties have just agreed to reduce the price paid from $135 to $132.08 per share, a decrease of 2.2%. It should be noted that the price of $131.5 mentioned in the press release must be increased by the dividend of $0.58 paid by Tiffany to its shareholders before the takeover, as this is as much money as LVMH will not find in Tiffany's coffers. Two days before, it was learned that the American company Teledyne had obtained a 15% reduction on the acquisition price of the French company Photonis. The two situations are of course different. Ardian, the fund that owns Photonis, had put Photonis, which it had owned for 16 years, up for sale, whereas the shareholders of Tiffany had not put their company up for sale when LVMH came to offer them a final premium of 50%. However, one cannot help but think that American law is much more protective of the interests of the sellers than other rights, and that the reputation of LVMH with the shareholders of its future targets is somewhat damaged. But it is the privilege of rich entities to have credit and to be able to use it. Let's hope that the shareholders of Tiffany will have the elegance to break out the champagne (for breakfast, of course) with Dom Pérignon or Veuve Clicquot. Have a nice day.

29-10-2020 : “Quote of the day ”

"God doesn't play dice" Albert Einstein, physicist, Nobel Prize in Physics (1921)

28-10-2020 : “Question from an ICCF@Columbia Business School participant. ”

"I read that a capital increase is complicated to do when the share price is low. I don't understand this point, there will be no more dilution in case of a high or low share price? On the other hand, the capital increase will very often take place at a lower price. Is this the reason why the capital increase can be cashed in at a high price?" If you need to find €1,000,000 of equity capital and your share is worth €10, you will have to issue (without subscription rights to simplify) 100,000 shares. If your share price now falls to €5, to raise the same amount, you will have to issue twice as many shares. If you have a 51% controlling shareholder who can't afford to put money back into the pot, this will pose the problem of control. So the lower the share price, or the lower the value for an unlisted company, the greater the dilution. When the capital increase is done at a discount to the stock market price or value, then there are preferential subscription rights (PSRs) that change the appearance of the capital increase, but not its reality. If the price is 100 and the new shares are issued at 70, the new shareholder does not pay 70, but the value of the share. Indeed, in order to be able to subscribe at 70, the new shareholder must purchase preferential subscription rights whose value in theory and in practice is set at a level that makes him indifferent to participate in the capital increase by subscribing for new shares and purchasing PSRs to do so, or to simply buy shares that are similar in all respects on the stock exchange. For more details, see chapter 38 of Vernimmen. Have a nice day.

27-10-2020 : “Quote of the day ”

"Buy low, sell high, play golf" Anonymous

26-10-2020 : “Question from a reader ”

"We are seeing a lot of convertible bond issues at the moment. What is the advantage of this fund raising versus a classic capital increase?" The high volume of convertible bond issues at the moment is the consequence, for a certain number of companies, of low share prices which discourage them from issuing new shares. They therefore prefer to issue convertible bonds, leading, if they are converted at maturity into shares, to issue fewer new shares since they are issued with a premium of 30 to 60% in general compared to current prices. The counterpart of this lower dilution is the risk taken by the company, which is not sure that the convertibles bonds will be converted into shares, and if they are not converted into shares, they will have to be repaid in cash. It is therefore a hybrid product which is not comparable to shares (which are never to be repaid). Have a nice day.

23-10-2020 : “Quote of the day ”

"The single cause of the crisis is prosperity." Clément Juglar, 19th century French economist

22-10-2020 : “Question from a reader. ”

“Why is Capgemini simultaneously announcing a capital increase reserved for its employees and share buybacks for the same amount (€322 million)?” This is a classic employee shareholding operation (ESOP) for a listed group. For Capgemini, this is the 7th plan of this kind, which aims to increase the share of its employees in the capital (currently 5.1%) based on the principle illustrated by the agency theory that employee who are also shareholders are more efficient and productive than employees who are only employees. As the transaction is not intended to strengthen Capgemini's shareholders' equity or liquidity, the group is proceeding in parallel, to neutralize all or part of the increase in the number of shares resulting from this employee savings scheme, to share buybacks. In total, the impact on cash, shareholders' equity and the number of shares is virtually nil. The only impact is an increase in the proportion of employee share ownership, which could rise from 5.1% to 6.9%, with a corresponding reduction in the free float. Some investors, who are not very sensitive to the interest of involving employees in the capital, only accept theses scheme if the company compensates for the resulting dilution of capital. Hence the share buy-back branch. Have a nice day

21-10-2020 : “Quote of the day ”

"Extrapolation is a dead future." Bertrand de Jouvenel, 20th century French philosopher and political economist

19-10-2020 : “Quote of the day ”

"The sleep of reason produces monsters" Francisco de Goya, Spanish painter of the 18-19th century

16-10-2020 : “The world upside down? ”

Read yesterday in an economic daily newspaper: Veolia has placed two new hybrid perpetual bonds on the financial markets for a total of €2 billion. The first for €850 million has a maturity of 5.5 years; the second €1.15 billion has a maturity of 8 years; and the journalist continued with a paragraph entitled: "Debt accounted for as equity". So the end of the world is in 8 years since these two perpetual debts will then have been repaid, and this financial product, which is indeed a debt as the journalist understood it very well, is part of the shareholders’ equity! It is therefore high time that the IFRS reformed its standard for accounting for hybrid debts, as it has planned to do, in order to put an end to these aberrations. It is nevertheless sad to have to point out that a perpetual debt has no maturity and that a debt is accounted for as debt and not as equity! Unless you take it with a smile, which we wish you on the eve of this weekend! Have a good weekend PS: For those who may have forgotten, a hybrid bond is a bond that is in theory perpetual but with the issuer's option to redeem "early" at a given date, here in 5.5 years and 8 years. Otherwise, the coupon paid is significantly increased, which is a particularly strong incentive for the issuer to "voluntarily" exercise its early redemption option. Under IFRS, the classification in equity can be obtained if a clause suspending interest payments is provided for. More details can be found in chapter 24 of Vernimmen.

15-10-2020 : “Quote of the day ”

"When the train's gone, everybody saw it." James Goldsmith, 20th century Franco-English businessman

14-10-2020 : “Question from a reader ”

"Is there a special case where the cost of equity can be lower than the cost of debt?" Hello, This is not possible in a rational world, it's a bit like wanting to go below absolute zero or go faster than light. The case that one could imagine would be that of a company with a massively overvalued share price, which would then make the cost of equity capital very low, to the point of making it lower than the rate of return demanded by the lenders, who would have kept a cool head. Have a nice day

13-10-2020 : “Question from a journalist ”

"Why does the acquisition price negotiated by Alstom relate only to the shares forming the capital of Bombardier Transport, and not to the debt carried by the latter?" Because by acquiring 100% of Bombardier Transport, Alstom implicitly becomes guarantor of the debts of its new subsidiary (indeed, it is hard to see it letting its subsidiary not repay them, which would make it go bankrupt). It is therefore not useful for this purpose to provide for a repurchase of the debts held by the lenders, unless the loan agreements explicitly provide for it in the event of a change of control. But Bombardier Transport's lenders have every reason to be pleased with this capital evolution, as Alstom's financial standing is much better than Bombardier's, and it is unlikely that they would ask for early repayment of their debts if this were provided for in the contracts. Perhaps you are confused with the habit of expressing the purchase price in terms of entreprise value, adding the price paid for 100% of the shares and debts that Alstom is taking over, via its new subsidiary, at its expense and which represents the true price it is paying. Have a nice day

12-10-2020 : “Answer to the weekend brainstorming. ”

Let’s first remind you of the problem: A football club acquires a player from another club with whom it signs a 5-year employment contract. After 3 years, by mutual agreement, this player is transferred to a third club which compensates the previous club handsomely because the player in question has gained in dexterity and reputation. Is the gain made in this way a capital gain or a component of the turnover of this club under IFRS standards? Since the existence of an employment contract had led this club to include the player among its fixed assets, the gain realised on a fixed asset under IFRS can only be considered as a capital gain and not as a component of turnover. All in all, nothing but logic! Have a nice day

09-10-2020 : “ Weekend brainstorming ”

A football club acquires a player from another club with whom it signs a 5-year employment contract. After 3 years, by mutual agreement, this player is transferred to a third club which compensates the previous club handsomely because the player in question has gained in dexterity and reputation. Is the gain made in this way a capital gain or a component of the turnover of this club under IFRS standards? Answer on Monday. Until then, have a good weekend.

07-10-2020 : “2 thoughts on the sale by Engie of its stake in Suez ”

On Monday evening, the board of directors of the energy company Engie agreed to the sale of 30% of Suez to Veolia for €18 against a price of €10.3 at the end of July, before Engie declared itself the seller of its 32% stake. The State, a 24% shareholder in Engie, announced in a press release that its three representatives on Engie's board voted against the sale due to the lack of an amicable agreement between Veolia and Suez. On this occasion, we would like to remind you of two points: That the rules of governance normally require directors to act within the Board of Directors, and if necessary to vote, according to the interest of the company of which they are directors and not according to the interest of the shareholder they may represent. And it is somewhat difficult to understand why a cash offer with an 80% premium on a pre-announced share price is not in the interest of Engie, which only holds this stake without synergy with the rest of its activities for historical reasons. Especially as there were no other offers on the table. Let us salute the courage of Engie's other directors who did not let themselves be impressed by the refusal of the State representatives. That a merger operation between two companies is only qualified as hostile by the target's managers and/or directors, never by its shareholders who are offered a more or less significant premium to acquire their shares. The desire of the Minister of the Economy to reach an amicable agreement between Suez and Veolia is surely based on good sentiment. But unfortunately, this does not resist the analysis of the facts. Major merger operations between large French groups, those that succeeded, that created value and jobs were hostile operations (at least at the beginning): BNP for Paribas, Sanofi for Aventis, Total for Elf, AXA for UAP. The big friendly operations: Carrefour and Promodès, France Télécom and Orange, Cap Gémini and Ernst & Young Conseil, Crédit Agricole and Crédit Lyonnais, led, on the contrary, to negative synergies, loss of positions and jobs, not to mention destruction of value. The reason is quite simple and let's call a spade a spade. When, in the long run, a company performs less well (Suez's share price at the end of July 2020 was 26% below that of July 2010, against the same for Veolia), it's because some of its main managers are less good. When their company is taken over after a friendly operation, they can often stay because the management of the new group is the result of a friendly haggling between the managers of the two groups. When the under-performing company is bought out after an unfriendly transaction, the buyer's managers have much less reason to keep the less good ones, and that makes all the difference. Have a good day

06-10-2020 : “Quote of the day ”

There is no opposition between profit and social responsibility. The company that makes a profit does not steal from society. - Peter Drucker, American management thinker

05-10-2020 : “Sic transit gloria mundi ”

Exxon Mobil, long the world's largest market capitalization and the world's largest oil company, with a market value of $500 bn in 2007, $400 bn in 2016, and $300 bn at the beginning of the year, is now worth only $140 bn, 27% less than its book equity. And it is surpassed in value by NextEra which claims to be the world's leading producer of green energy, and which gained in the first half of this year as much as Exxon lost: $1.7 billion in net income. NextEra still produces 74% of its electricity from natural gas. But investors' enthusiasm for one is the inverse reflection of the disenchantment for the other, which has just been ejected from the Dow Jones. In Europe, the changes are less brutal, because oil companies have turned to renewable energies, unlike Exxon: Total at €75 billion, capitalizes nearly two-thirds of Exxon, and is the 5th French market capitalization behind Hermès at €79 billion and ahead of Kering at €73 billion, while Exxon is now only 45th American capitalization. Shell value is only €80 bn and BP is only worth €57 bn, but they are still ranked in the top 10 UK groups. What a massive destruction of value for those who have not been able to turn the corner! Have a nice day

02-10-2020 : “Quote of the day ”

“The possession of money is only an advantage if it is put to good use.” Benjamin Franklin

01-10-2020 : “Quote of the day ”

“History has not dealt kindly with the aftermath of protracted periods of low-risk premiums.”
Alain Greenspan

30-09-2020 : “Question from a participant ICCF@Columbia Business School ”

Could you explain how to calculate the logarithmic returns of a share portfolio and provide an example? Assume you have the following share prices: 100 ; 105 ; 110 ; 105 ; 120 ; 125. You transform them by taking their log: 4.605; 4.654 ; 4.700; 4.654; 4.787; 4.828. And you calculate the returns by the differences based on these figures: 4.654 – 4.605 = 0.05; then 4.700 – 4.654 = 0.046; - 0.046; 0.133; 0.041. Then if you wish, you can calculate the average, the standard difference for this series of returns. Have a nice day.

29-09-2020 : “Quote of the day ”

“History has not dealt kindly with the aftermath of protracted periods of low-risk premiums.” Alain Greenspan

28-09-2020 : “When valuing a company, how much importance should be given to the company's book value? ”

A company is worth its book value if its expected ROCE is equal to its weighted average cost of capital (WACC), or put differently, if it is not creating value. If its expected ROCE is lower than the weighted average cost of capital, the company is worth less than its book value. In this case, it is interesting to study book value, especially with a view to do a sum-of-the-the parts valuation. For more details, see chapter 31 of the Vernimmen and also the site glossary.

25-09-2020 : “Quote of the day ”

“The propensity for bankers and financial analysts to spout nonsense obviously increases in line with the size of their annual bonuses.” François Lenglet

24-09-2020 : “Question from a participant ICCF@Columbia Business School ”

"It is said that the remuneration of the providers of funds should not be taken into account in the free cash flow for the calculation of NPV or IRR, otherwise the net present value of the project is biased and the IRR is overestimated since the impact of the financing is double counted. I do not see why it is double counted. Can you explain it to me?" It is double counted for the following reason. First of all, at least coming from the free cash flow if the financial expenses were deducted from it. Then, remember that when you discount a sum of 110 in one year at 10% for example and you find 100, the 110 you expect to receive in this investment project, you only take it into account for 100, not for 110. Because the 10 that you do not take into account to calculate the value creation of the investment are not taken into account because they will remunerate the fund providers who finance this investment. This is therefore the second time, through the discounting mechanism itself, that the remuneration of the fund providers is taken into account. It is therefore one time too many, and that is why the free cash flows do not take into account the financing flows of the planned investment. Have a nice day.

23-09-2020 : “Quote of the day ”

“Money is a consequence of success, not a goal.” Loïc Le Meur

22-09-2020 : “ "Is the cost of capital a relevant concept in the banking field? Â» ”

Bank finance differs from corporate finance on a number of points. This is due to the fact that the notion of working capital, fixed assets and net debt does not exist or is transposed differently from the business world to the banking world. Indeed, because of their business, banks do not take on debt to invest but to lend, they do not have inventories, nor really significant suppliers, and their customers can pay them over 20 or 30 years (in the case of real estate loans), therefore not really working capital. Under these conditions, the cost of capital does not exist in the banking industry. Even if one measures the profitability of a bank's assets (the ROA, return on assets) to which one would expect to compare a weighted average cost of capital, it is almost never calculated. Only the cost of equity is of great importance. Have a nice day.

18-09-2020 : “Unibail Rodamco Westfield, the anti-Tesla? ”

From a financial point of view, certainly! URW announced yesterday a capital increase of €3.5bn while the shopping centre group was worth €5bn on the stock market for a book equity of €21.5bn. This means that the new shareholders will contribute 14% of the book equity, but will be granted at least 41% of the shares (the operation should be carried out with a preferential subscription right and therefore a discount on last night's price, unknown at this time and therefore not included in the calculation). It is true that when your equity is worth less than a quarter its book, when 96% of the real estate assets on your balance sheet are valued at market price (and not historical cost), when you have recently purchased assets at the highest level by financing them with debt, and when the first page of your website proudly displays a dividend yield of 15%, which is unsustainable over time, it is difficult to do better. If governments have effectively addressed liquidity risk, solvency risk clearly weighs on the most affected sectors. The only positive point for URW is that it is among the first one to raise equity even if a deal in June would have been much better as its June's price was 80% higher), but those who will come last (Air France, Vallourec, Europcar, etc.) risk making their shareholders swallow a bitterer potion. Have a good weekend

17-09-2020 : “Quote of the day ”

“Equity is soft, debt hard. Equity is forgiving, debt insistent. Equity is a pillow, debt a sword.” Bennett Stewart and David Glassmann

16-09-2020 : “Question from a reader ”

"How does the company set the number of rights issued in a capital increase and the subscription parity between new and old shares?". The number of rights is not set by the company at its discretion as it is equal to the number of shares existing at the time of the capital increase. Each existing share receives automatically one right. Then the proportion of rights necessary to subscribe to new shares depends entirely on the company which sets it according to the funds it wants to recover in the capital increase and the issue price of the new shares. A company whose capital is made up of 300 shares each worth €100 and which wants to raise €6,000 with an issue price of €75 would have to set a subscription parity of 4 new shares for every 15 old shares held. If market conditions (increased volatility) now lead to an issue price of €50, the parity would then be 2 for 5. Have a nice day

15-09-2020 : “Quote of the day ”

“Because the market makes diversification easy and inexpensive, the average level of risk taken by society and by the economy is heightened.” Jack Treynor

14-09-2020 : “"The social responsibility of business is to increase its profits" ”

50 years (and 1 day) ago, Milton Friedman published his article on corporate social responsibility in the New York Times. Often quoted, even if most of those who quote him stop at his title that is the title of today's post, and which is perhaps a title written by the NY Times as often in this situation. It is easy to find it on the Internet and its full reading (a few pages in A4 format) is very interesting for several reasons. 1/ Mr. Friedman writes that if "the social responsibility of companies (…) will be to make as much money as possible", he immediately specifies in the same sentence, and this is very rarely repeated "while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom". 2/ Corporate social responsibility is not a theme born with this century, as is often believed, nor was it invented by M. Friedman. It appeared in the 1930s and certain passages in M. Friedman's article resonate with a very topicality . . . today. 3/ M. Friedman's reflections are set in a context that is no longer ours and which explains them a lot on two points: the struggle of communism against capitalism, which seems very distant to many today, whereas in 1970 the final collapse of communism because of its own inefficiencies was a hope but not a shared certainty; and the world of the listed company where the leader reigned unchallenged with a board of directors most often populated by friends and with a non-existent shareholder dialogue. Hence the proliferation of conglomerate structures, most of which were to disappear from the 1980s onwards (Gulf and Western, ITT, GEC, Compagnie Générale des Eaux, etc.). 4/ According to M. Friedman, the manager of the listed company is an employee of the shareholders and must comply with their wishes (even if in 1970, as recalled above, this was far from being the case for large companies with a fragmented shareholding). For him, social responsibility can only exist at the level of individuals, shareholders or managers as citizens and not at the level of companies. And if it is not at the level of the company, it is to prevent a single individual, its manager, from deciding to use company resources that belong to the company, and therefore to all its shareholders, at his or her sole initiative, thus reducing the profits that accrue to all shareholders to make expenditures that most likely will not benefit the company, but a small minority of the shareholders, or even the manager alone (for example, donating the company money to a museum so that the manager can then celebrate his or her birthday there with friends). M. Friedman makes an analogy which revolts him with the power of the totalitarian, undemocratic state to tax and spend, without being controlled by the National Representation, or by a rogue National Representation (the Supreme Soviet), to the benefit of a nomenklatura. Therefore, according to M. Friedman, if the company wanted to develop social responsibility, it would have to set up political control mechanisms, which could lead progressively to collectivism and which would sooner or later undermine the foundations of the company, and more generally that of a free Society. And we find here Milton Friedman, author of the book Capitalism and Freedom, whose thesis is that economic freedom is a necessary condition for political freedom (1962). Have a nice day in a free country (hopefully).

10-09-2020 : “Congratulations to Tesla's CFO! ”

By proceeding with a capital increase placed in the market of $5 billion which increases the number of Tesla shares by around 1.3%, he increases the shareholders' equity on the balance sheet by ... 50 % (sic!). This is made possible by an PBR of 40 times (Tesla's market capitalization last Friday, $390bn, was 40 times its book equity at June 30, 2020, $9.9bn). When there's such a craze for your stock (which has been multiplied by 9 in one year), you shouldn't hesitate for a second to take advantage of it to issue capital, at a very good price, because no one knows what the future holds, especially for a company whose price is very volatile (see stock market movements of the last few days). In our opinion, not making capital increases in such a context is tantamount to professional misconduct. Tesla's CFO brilliantly avoided it. This example shows the marketing dimension of a CFO who has to sell good products at a high price. Have a nice day

10-09-2020 : “Congratulations to Tesla's CFO! ”

By proceeding with a capital increase placed in the market of $5 billion which increases the number of Tesla shares by around 1.3%, he increases the shareholders' equity on the balance sheet by ... 50 % (sic!). This is made possible by an PBR of 40 times (Tesla's market capitalization last Friday, $390bn, was 40 times its book equity at June 30, 2020, $9.9bn). When there's such a craze for your stock (which has been multiplied by 9 in one year), you shouldn't hesitate for a second to take advantage of it to issue capital, at a very good price, because no one knows what the future holds. In our opinion, not making capital increases in such a context is tantamount to professional misconduct. Tesla's CFO brilliantly avoided it. This example shows the marketing dimension of a CFO who has to sell good products at a high price. Have a nice day

08-09-2020 : “Quote of the day ”

“Putting money aside so that it will be there going forward, is, paradoxically enough, as good a way as any of covering yourself from behind.” Pierre Dac

07-09-2020 : “Answer to the teaser of the weekend ”

Let's first recall the problem: P holds 9% of Q's shares but 67% of its voting rights. Q in turn holds 11% of L's shares but 22% of its voting rights. P also holds 29% of L's voting rights, but none of its shares (via a securities loan). L in turn holds 82% of M (shares and voting rights), of which Q holds 9% (shares and voting rights). What is P's percentage of control and interest in M? What then is the consolidation method used by P to consolidate M, if P consolidates M? As stated in chapter 6 of Vernimmen, the percentage of control is calculated by adding the percentages of control of all group companies in the subsidiary, provided that these companies are directly or indirectly controlled by the parent company, i.e. at each level of the cascade, the percentage of exercisable voting rights is greater than 50% or there is de facto control. P controls Q through its 67% of the voting rights and as Q holds 22% of the voting rights of L and P holds 29% in parallel, P exercises 29 + 22 = 51% of the voting rights of L. P therefore controls L. As L controls M with 82% of the voting rights P controls M with a percentage of voting rights of 82% + 9% = 91%. P must therefore fully consolidate M. As stated in Chapter 6 of Vernimmen, the percentage interest is calculated as the sum of the proceeds of the percentages of capital held, directly or indirectly, by the parent company in the subsidiary. In other words, it is 9% x 11% x 82% + 9% x 9% = 1.6%. Although P controls more than 90% of M's voting rights, it only has an economic interest of 1.6%. In other words, P works to the benefit of other people Have a nice day

04-09-2020 : “Teaser of the weekend ”

P holds 9% of Q's shares but 67% of its voting rights. Q in turn holds 11% of L's shares but 22% of its voting rights. P also holds 29% of L's voting rights but none of its shares (through a securities loan). L in turn holds 82% of M (shares and voting rights), of which Q holds 9% (shares and voting rights). What is P's percentage of control and interest in M? What then is the consolidation method used by P to consolidate M, if P consolidates M? Good thinking between now and Monday, when we give you the answer.

03-09-2020 : “Warren Buffett's 90th birthday ”

On this occasion (a few days ago, 30 August), let us recall that a person who would have invested one dollar in Berkshire Hathaway, its listed investment company launched in 1964, would today have $27,373! That is an IRR of 20% per year. The same dollar invested in the S&P 500 index would have given you $198, or 138 times less, but with a very correct IRR of 9.9%, half as much as Warren Buffett, which you wouldn't have said spontaneously when comparing values. Over time (here 56 years) modest differences in IRRs produce large differences in values. Another argument in favour of value at the expense of the IRR as a tool to allocate capital.

02-09-2020 : “Quote of the day ”

I'd rather own an expensive asset with some level of cash flow surety going into a down market than owning something cheap with cash flow uncertainty. - Rob Almeida, global investment strategist for MFS Investment Management

01-09-2020 : “Question from a reader ”

I'm studying the accounts of a company that owns and rents student residences in the city centre and I'm scared by its level of debt: 9 times the EBITDA! What do you think about it? Often the debt of a real estate company like yours is accepted, not as a multiple of EBITDA as for a classic industrial or commercial company, but as a percentage of the market value of its real estate assets, for example 80%. This is known as loan to value (LTV). These are assets that are perceived as low risk with an easily determinable sale value and an active transaction market. And lenders consider that their repayment is more guaranteed in the end by the resale value of the assets than by the cash flows generated. These assets are moreover mortgaged to their benefit and the loans have a much longer duration than in industry or services. Have a nice day

31-08-2020 : “Quote of the day ”

Wall Street isn't a mirror of Main Street. - Brad Neuman, director of market strategy for Alger, a New York fund manager

25-08-2020 : “Quote of the day ”

If you don't invest for the long term, there is no short term. - G. David, former chief consultant to the Truman Committee

24-08-2020 : “Question from a reader ”

In a squeeze-out, are the valuation methods the same as for an IPO? In a squeeze-out, which is a legal expropriation, in addition to the valuation methods used for an IPO, transaction multiples are also used. Furthermore, if the squeeze-out follows a change of control transaction, the price of the change of control will be used in the vast majority of cases as the squeeze out price. Have a nice day

21-08-2020 : “Quote of the day ”

Time is better spent winning over clients than financiers. - Jacques Antoine Granjon, French businessman, CEO of VeePee

20-08-2020 : “Quote of the day ”

Men accept change only in necessity and they see necessity only in crisis. - Jean Monnet, French politician, founding father of the European Union

19-08-2020 : “Quote of the day ”

Performance is more than just increasing profit. - Jean-Paul Agon, CEO of l'Oréal

18-08-2020 : “Quote of the day ”

I'll never blow my brains out over debts. First of all, my brain will never be as large as my debts.) - Jules Berry, 20th century French actor and director

17-08-2020 : “Quote of the day ”

Money is just a new form of impersonal slavery in place of the old personal slavery. - Léon Tolstoi, 19th-20th century Russian writer

14-08-2020 : “Quote of the day ”

The company is the place of wealth creation and is common property whose ownership is difficult to define. - Louis Gallois, French businessman, former Chairman and CEO of SNCF and Airbus

13-08-2020 : “Quote of the day ”

Fortune only changes for those who do not know how to keep up with the times. - Machiavel, politician from Florence in the 15-16th century

12-08-2020 : “Quote of the day ”

Success is a precarious state that requires constant vigilance. - Maurice Lévy, President of Publicis (1987-2017)

11-08-2020 : “Quote of the day ”

The stock market is the monopoly of the rich. - Max Weber, German sociologist and philosopher of the 19th-20th century

10-08-2020 : “Quote of the day ”

Not investing results in a slow death; investing unwisely results in a quick death. - Octave Gélinier , 20th century French economist and author, former head of Cegos

07-08-2020 : “Quote of the day ”

The finance we get is determined by our real collective values, or by those that thrive in the absence of such values. - Pierre de Lauzun, French essayist

06-08-2020 : “Daily quote ”

One of the great lessons of history is the constant advent of the unpredictable. - Thierry de Montbrial, French economist and geopolitologist

05-08-2020 : “Quote of the day ”

The unlimited search for immediate profit leads to the loss of meaning, to the programming of minds and to the dehumanisation of beings. - Tzvetan Todorov, French literary critic and semiologist

04-08-2020 : “Quote of the day ”

Money is very valuable if you despise it. - Montesquieu, philosopher, 18th century French political thinker

03-08-2020 : “Quote of the day ”

The two most important things in any company do not appear in its balance sheet : its reputation and its people.) - Henry Ford, US businessman, 20th century

31-07-2020 : “Quote of the day ”

Financial performance is important, but so is exemplary and extra-financial performance. - Jean-Paul Agon, CEO of L'Oréal

30-07-2020 : “Daily quote ”

Failing to consider all long-term investment value drivers, including ESG issues, is a failure to fiduciary duty. - UN PRI and UNEP Finance Initiative.

29-07-2020 : “Quote of the day ”

I prefer to put all my eggs in a basket and hold the handle. Never any debts, short, medium or long term. It's better to appeal to shareholder-partners than to bankers.) - Paul Delorme, founder of Air Liquide

28-07-2020 : “Quote of the day ”

When it comes to so-called market timing there are only two sorts of people: those who can't do it, and those who know they can't do it. - Terry Smith, British investor

27-07-2020 : “Daily quote ”

Shareholders' equity is, in economic terms, the equivalent of masks in the sanitary field: they protect and, in this function, have no substitute. - Jean Peyrelevade, economist

24-07-2020 : “Daily quote ”

Without social justice, there will be no economy... - Emmanuel Faber, CEO of Danone

23-07-2020 : “Long-term returns ”

Over the last 40 years, equities have earned 13.2% per year according to the calculations of the Institut de l'Épargne Immobilière et Foncière (IEFI), which has had the good idea to compare the returns and risks of several investments since 1979. Parisian appartments follows behind at 11.4%, but we remind our reader that a small annual difference over a long period produces much larger gaps than she imagines: over the period, the shareholder multiplied his assets by 142 (assuming reinvestment of dividends and no withdrawals), compared with almost half as much (sic) for the Parisian owner who multiplied his assets by only 76. As for the barbaric relic (gold), its annual rate of return was only 3.4%, leading the hoarder to multiply his assets by only 3.8, barely protecting him from inflation, which required a 3.1 multiplication to avoid real impoverishment. As if there is a moral in finance! Have a nice day

22-07-2020 : “Question from a reader ”

I'm valuing a holding company and I have a problem because I find that the value of the sole holding company's stake is less than the value of the debts. How is this possible? The value of the debts cannot be higher than the value of the economic assets (the value of the holding company's stake). If the value of the economic assets is less than the amount of the debt to be repaid, then the value of the debts is less than their nominal amount. If the debts are to be repaid in the short term, the equity has no value. If now the debt is to be repaid in the near future, then the value of the equity may still be low, but not zero, because it is hoped that by the time the debt is repaid, the value of the economic assets will have risen sufficiently to become greater than the amount of debt to be repaid, thus giving value to the shares. For more details, see Chapter 34.

21-07-2020 : “ESG and short selling ”

The asset management subsidiary of BNP Paribas announces the launch of an investment fund, named Earth, in equities selected according to ESG criteria, nothing more than a very trivial matter at this stage, but with 30% of its exposure to financial markets consisting of short selling of companies with poor ESG scores. For the French, it is rather comical to see a practice considered virtuous, ESG, resorting to short selling, which is regularly doomed to moan (cf. the shameless speculation, unbearable pressure on managers, etc. of those who talk without knowing what they are talking about when they vilify short selling). When we realize that Shell, the leading European oil company, now has a market capitalization of only €110 billion compared to €190 billion 4 years ago when the price of oil is not very different, and that Total with a market capitalization of €90 billion could be overtaken in a few years by Hermès after having been overtaken by LVMH, L'Oréal and Sanofi, we say to ourselves that those who would have sold them short a few years ago would not have made a bad deal. Have a nice day.

20-07-2020 : “Question from a reader ”

Why are the stock markets near their highs when tens of thousands of business failures are predicted in the fall and unemployment is rising sharply? - There are around 4.5 million companies in France, of which only 800 are listed on the stock exchange. And these 800, although they are not the 800 best, are still among the most successful companies. Hence a first bias; it's a bit like judging the level of French people in finance by just doing a survey of Vernimmen owners; - structurally the stock market is in anticipation. Indeed, historically, it bounces back five months on average before the economy reaches the bottom following a crisis. Developments are rarely linear, because behind the stock market there are men and women whose reasoning is not always rational and contains an element of emotion. The current price level shows a belief in a definitive end to the health crisis rather quickly and in a violent shock on the economy that should fade away rather quickly. It was a gamble.

10-07-2020 : “Quote of the day ”

Not investing resultes in slow death; investing unwisely results in a quick death. - Octave Gélinier , 20th century French economist and author, former head of Cegos

05-06-2020 : “Quote of the day ”

“Stop yearning for what you don’t have, and you’ll ruin the economy.” Marcel Proust

04-06-2020 : “Question from a follower of the Vernimmen.com Facebook page ”

"When calculating the value of a business or the NPV of an investment, are negative cash flows also discounted? If so, what is the logic behind this discounting? Because normally when you discount a positive free cashflow by the WACC, it's to remunerate the capital providers, isn't it?" We also discount negative cash flows. Indeed a negative flow corresponds to a financing need that will have to be found, but as it does not occur immediately, but later, it is normal that it is discounted, i.e. its present value is depreciated in relation to its nominal amount to take into account the fact that it is an advantage for us to have to spend this sum later, and not now. Have a nice day.

03-06-2020 : “Quote of the day ”

“Stop yearning for what you don’t have, and you’ll ruin the economy.” Marcel Proust

03-06-2020 : “Question from a follower of the Vernimmen.com Facebook page ”

"When calculating the value of a business or the NPV of an investment, are negative cash flows also discounted? If so, what is the logic behind this discounting? Because normally when you discount a positive free cashflow by the WACC, it's to remunerate the capital providers, isn't it?" We also discount negative cash flows. Indeed a negative flow corresponds to a financing need that will have to be found, but as it does not occur immediately, but later, it is normal that it is discounted, i.e. its present value is depreciated in relation to its nominal amount to take into account the fact that it is an advantage for us to have to spend this sum later, and not now. Have a nice day.

02-06-2020 : “Solvency, solvency (and liquidity), continued and illustrated. ”

Automotive equipment supplier Novares, €1.35 billion in sales, €100 million in EBITDA in 2019, 12,000 employees in 23 countries, announced last week a recapitalization operation following an express (one month!) receivership procedure. The lock-down that has affected 40 of its 45 plants cost it €4 million a day, so much so that under LBO with a debt/EBITDA ratio of 3.3, high for a cyclical sector like the automobile industry, its days were numbered, especially since a takeover by a competitor or a fund was very complicated to organize when it was impossible to visit the plants. De facto, none of them made a firm offer. The banks agreed to convert €260 million of the holding company's €330 million debt into equity, giving them 25% of the capital, and the shareholders contributed €30 million of new equity, solving the group's solvency problems. The banks, which had refused to grant a loan under the French PGE State Guarantee Scheme last March (and understandably so given Novares' debt), have granted €71m of such a loan and the shareholders have granted a €45m loan to reconstitute the group liquidity, just as its business is starting up again. It is fair to say that obtaining 25% of the capital in return for the LBO holding company waiving 79% of its debts, the banks do not seem to have abused the situation, to the greater benefit of the Equistone fund, which retains its majority. Be prepare to see many more rescue operations of this kind for groups whose solvency is in jeopardy. Have a nice day.

01-06-2020 : “Quote of the day ”

“Creditors have better memories than debtors.“ Benjamin Franklin

28-05-2020 : “Quote of the day ”

“You must go and get money where it is to be found – amongst the poor. Yes, I will grant you that they don't have a lot of it, but there are a lot of them!” Alphonse Allais.

27-05-2020 : “Question from a Vernimmen reader. ”

"Why, in order to hope for a given rate of return, do I have to discount future cash flows at this interest rate and not at another? Let's take a simple example: a cash flow of 110 in one year. Because I want a rate of return of 10% per year, I cannot buy the promise of 110 in a year's time at a price greater than 100 today, 100 resulting from discounting 110 at 10% over one year (110/(1+10%)). And if everything goes as planned, having bought 100 today and getting 110 in a year, I will make a gain of 110 - 100 = 10, or, relative to my investment of 100, the 10%, what I wanted. If now I no longer want 10% but 6% as a rate of return, I will buy today the promise to receive 110 in one year at 103.8 (110/1.06). And if everything goes as planned, having bought 103.8 today and receiving 110 in a year, I will make a gain of 110 - 103.8 = 6.2, which is, in relation to my investment of 103.8, the 6%, what I wanted. So, I discount at the rate of return I want and that's the only way for me to get that rate of return. So, investors, based on the rates of return they want, set the prices of assets today. Good thinking and have a good day.

26-05-2020 : “Quote of the day ”

“My main objection to money is that money is stupid.” Alain, French philosopher

25-05-2020 : “Question from an ICCF@Columbia Business School participant ”

"With the recent oil crisis, have we seen companies with a negative beta?" A beta is calculated over several years to be significant, so the recent oil crisis is too short to observe this. A company of receivers, if there were any listed companies of that kind, would probably have a structural negative beta, or a debt collection firm or an investment bank specializing solely in helping states restructure their debts. But you understand that this can only be the exception at company level, because we all participate, to a greater or lesser extent, in the same overall economic environment, hence beta coefficients for companies that are almost always positive. Furthermore, such companies, once they become a little significant in size, will want to diversify in order to reduce their excessive risk and to occupy their workforce during the low-activity phases for them. Hence, for example, the development of a financing or M&A advisory business for restructuring advisory shops, and thus the return to a positive beta. Apart from companies, there are of course financial instruments with negative betas such as put options on shares or stock market indices. Have a nice day

22-05-2020 : “Danone announces that it will maintain the dividend it indicated when it published its annual results at the beginning of February, and we believe it is right to do so. ”

Because of its sector, its business is significantly less affected than that of many other groups, its liquidity is good, and its balance sheet structure is solid. It can therefore afford to return to its shareholders some of the equity it has secreted over the past year, which it has no use for. Taxes will thus be paid by the shareholders who will receive the dividend, helping the States that are in great need of it at the moment to reduce their surge in indebtedness. Most of the balance will be reinvested, in particular to subscribe to future capital increases needed to restore the solvency of groups badly affected by the sanitary and economic crisis. If there is a true spirit of responsibility and solidarity, it is this one, rather than asserting, as groups that could afford to maintain their dividends, that reducing or cancelling their dividends was showing solidarity with their stakeholders as if such a move had brought just one more mask or respirator to the hospitals. Have a good day and a good weekend.

19-05-2020 : “Question from an investment fund intern ”

"Some analysts, particularly in the small and mid cap universe, are interested in the existence of a discount in the share price compared to the book value per share (from which goodwill is sometimes subtracted). When the discount is very significant, it may suggest that the investor would get a very good deal if he bought the stock at this "bargain" price. What is the relevance of this reasoning, however? There are indeed large discounts on some stocks." This reasoning is not false, provided that the company has a sustainable ROCE at least equivalent to its cost of capital. Indeed, then it should be worth at least its book equity. If it is not worth it, it can be said to be undervalued. However, in the case of midcaps, the undervaluation may stem from a very low free float, which leads to low liquidity and therefore high price variability, pushing investors to buy and sell with a margin of manoeuvre in relation to book equity. Finally, small stocks have weaker and more unstable strategic positions than large stocks, which can lead to the discount you see. Have a nice day

18-05-2020 : “Quote of the day ”

(Money is very valuable if you despise it.) - Montesquieu, philosopher, 18th century French political thinker

15-05-2020 : “Question asked by a participant of ICCF@Columbia Business School ”

“I would like to know if it is possible for me to create a score function on my own from a sample like all the companies in the CAC 40? “ Hello, When creating score functions, one needs a fairly large sample of companies in which some have experienced serious difficulties and others have not, in order to be able to find financial ratios to discriminate between them in advance. By this yardstick, the CAC 40 poses two problems: it is a small sample of only 40 companies, and above all, and this is the main problem, as these are the 40 best French companies, none of which have historically gone bankrupt or experienced significant financial difficulties, especially since before reaching this stage their value drops significantly, which excludes them from this sample. De facto, the score functions are rather created on unlisted companies by banks or central banks that have easy access to unlisted company accounts that may be difficult to gather. That said, if you have the database and some statistical skills, it is possible to build a score function. Have a nice day.

13-05-2020 : “Question from a follower of the Vernimmen.com Facebook page ”

"If the DCF method is used to value a share over a period of 15 years, for example, the impact of 2020 (lower earnings) will be attenuated on the valuation. In this case, why are shares such as Volskwagen or Airbus being devalued so much during this sanitary crisis? " Good morning, For several reasons. Firstly, the year 2020 weighs more than the year 2025 in the value because being closer it is much less depreciated by the discounting mechanism than the year 2025. If you limit yourself to 15 years in your DCF calculation, the weight of 2020 is much higher than one fifteenth. Then nothing tells you that only the year 2020 will be affected by the consequences of the Coronavirus, and that 2021, 2022 and beyond will not be affected as well. Thus a number of airlines say that they do not expect a return to the same level of air traffic before 2022 at the very least. Think of the difficulty for the low-cost model to ensure a distance between passengers of at least one meter in their planes. Finally, for many companies, the shock will not simply be a blank year in 2020 in terms of results or cash flow, but a loss and a negative free cash flow this year, or even in 2021. All this may explain the falls in stock market prices for the companies most exposed directly or indirectly to this pandemic. Have a nice day

11-05-2020 : “Answer to the weekend brainstorming. ”

“First of all, let's recall the problem: You are evaluating a motorway concession that expires in 15 years and is no longer in debt and has no cash today. It plans to pay a constant dividend over the next 15 years and to pay the balance of its cash in the sixteenth year because it will have to hand over the motorway free of charge to the community at the end of its concession. How can you explain the fact that you cannot find the same share value when you use the discounted free cash flow method and the discounted dividend method, when you start from the same operating cash flows and the discount rates are consistent with each other?” It is logical that you do not find the same figure between these two methods because in this example the annual dividend is lower than the free cash flow since the company pays at the end of the concession its cash at the time which can only be constituted by the progressive accumulation over the remaining duration of the concession of the difference between yearly free cash flows and dividend paids. In the current interest rate environment, this gradually building up of cash does not yield any return. Therefore, over 15 years, sums that yield nothing are capitalized and then discounted at a positive interest rate to find a present value that is naturally lower than their initial amount. Hence the difference in estimated values between discounting free cash flows that are assumed to be immediately paid out and discounting dividends, which defers in time the portion of annual free cash flows not immediately paid out as dividends. Good start to the week

07-05-2020 : “Weekend brainstorming. ”

You are evaluating a motorway concession that expires in 15 years and is no longer in debt and has no cash today. It plans to pay a constant dividend over the next 15 years and to pay the balance of its cash in the sixteenth year because it will have to hand over the motorway free of charge to the community at the end of its concession. How can you explain the fact that you cannot find the same share value when you use the discounted free cash flow method and the discounted dividend method, when you start from the same operating cash flows and the discount rates are consistent with each other? Have a nice week-end

04-05-2020 : “Quote of the day ”

“Many an optimist has become rich by buying out a pessimist. “ Robert Allen

30-04-2020 : “A cross-over that does not pollute ”

If you want to discover a cross-over that doesn't pollute an ounce, it's in the April issue of the vernimmen.com newsletter, which you must have already devoured if you subscribed to it. Otherwise, it's here: http://www.vernimmen.com/Read/Vernimmen_letter.php PS: We have not become an advertising medium for electric vehicle manufacturers, cross-over is a category of bonds straddling investment grade and non-investment grade. Good day and have a nice week-end

29-04-2020 : “Quote of the day ”

“Many an optimist has become rich by buying out a pessimist. “ Robert Allen

29-04-2020 : “Question from a student ”

“How are mandatory convertible bonds (MCB) treated in a merger?” After a merger, the rate of remuneration of MCBs remains the same and there is no reason to change it unless both parties (the issuer and the MCB holders) decide otherwise since the remuneration of a MCB is an interest rate independent of the dividend paid on the share. On the other hand, the new conversion basis is adjusted to take into account the merger parity. For example, if an MCB was redeemed in 2 A shares and A is absorbed by B on the basis of 3 A shares for 5 B shares, then the MCB will be redeemed in 2 x 5/3 B shares, i.e. 3.333 B shares. Have a nice day.

28-04-2020 : “Answers to the weekend Brainstorming ”

First, lets’ remind question 1: Which is this large oil company (no need to look in market capitalizations below €70 billion), with no significant diversification outside energy, whose stock market price since January 1, 2020 has only fallen by 15% compared to 30 to 40% for all of its peers? And why in all likelihood? Well, it is Aramco, probably because its small free float (2%) allows the Saudi authorities to do what they need to do so that it does not stray too far from the price of its IPO last December. And now the second question: Why has the share price of Occidental Petroleum (OXY), which a few semesters ago would have been listed in the first question, fallen by two thirds since the beginning of the year? What effect does this illustrate? Because Oxy took on a lot of debt to buy Anadarko a year ago, and with the fall in oil prices, the resulting fall in the value of the value of its operating assets prompt a much greater fall in its equity value, which now represents only a third of the face amount of its debts, whereas all the other oil groups, which are much more cautious than Oxy in terms of financial structure, have logically seen their share price fall much less. This is another manifestation of the leverage effect, not in terms of profitability this time, but in terms of impacts on value. Have a nice day.

27-04-2020 : “Quote of the day ”

“Creditors have better memories than debtors. “ Benjamin Franklin

24-04-2020 : “Weekend Brainstorming. ”

A double question this time. 1 - Which is this large oil company (no need to look in market capitalizations below €70 billion), with no significant diversification outside energy, whose stock market price since January 1, 2020 has only fallen by 15% compared to 30 to 40% for all of its peers? And why in all likelihood? 2 - Why has the share price of Occidental Petroleum (OXY), which a few semesters ago would have been listed in the first question, fallen by two thirds since the beginning of the year? What effect does this illustrate? Good thinking and have a good weekend. See you on Monday.

23-04-2020 : “Quote of the day ”

“Business? Why that’s simple, it’s other people’s money.” Alexandre Dumas

22-04-2020 : “Another negative price. ”

Good morning, After negative share values during M&A transactions (such as the sale by Auchan of its Italian assets in 2019 for 2.5 years of losses), which is always hard for the layman to imagine, negative interest rates that were long thought impossible, here are now negative raw material prices. The price of oil in the United States on Monday was -$37 a barrel. Why what seems to be a market aberration? Because stopping and restarting a well is expensive, storage capacities are limited and saturated and because consumption has fallen sharply due to the health crisis, not to mention the market share wars. Of course, this will not help the energy transition, but this low oil price is still good news for the European economies which are highly importing. If it could help the recovery a little bit... Good day and see you tomorrow.

21-04-2020 : “Quote of the day ”

“Men purchase goods, but it is in fact the goods that hold a purchase on men.“ Anonymous

20-04-2020 : “ Answer to the weekend Brainstorming ”

Let's first recall the subject: “Vallourec, a group active in the production of seamless tubes for the energy, construction and automotive sectors, announced on 20 February 2020 a capital increase of €800 million in order to reduce its very heavy debt, which it is unable to do with its free cash flow after years of losses. Vallourec employs 18,000 people. Via Bpifrance, the French State owns 15% of Vallourec and in this context, has announced that it will participate in this capital increase to the tune of €120 million. Do you interpret this latest decision as a signal to financial investors? If so, is it positive or negative? Why is it positive or negative?” The French State's shareholding in Vallourec is, in all probability, not of a financial nature but meets the objectives of preserving employment or the French character of the company. As the French State's decisions are not taken according to financial criteria, it is difficult to see its subscription to the capital increase as a signal that investors could take advantage of it. Have a good day and see you tomorrow.

17-04-2020 : “Weekend brainstorming. ”

Vallourec, a group active in the production of seamless tubes for the energy, construction and automotive sectors, announced on 20 February 2020 a capital increase of €800 million in order to reduce its very heavy debt, which it is unable to do with its free cash flow after years of losses. Vallourec employs 18,000 people. Via Bpifrance, the French State owns 15% of Vallourec and in this context, has announced that it will participate in this capital increase to the tune of €120 million. Do you interpret this latest decision as a signal to financial investors? If so, is it positive or negative? Why is it positive or negative? Have a good think about it and see you on Monday for the answer.

16-04-2020 : “Quote of the day ”

“Debts are like children – the smaller they are the more noise they make.” Anonymous

15-04-2020 : “Question asked by a participant of ICCF@Columbia Business School. ”

“When calculating the TSR (Total Shareholder Return), should the amounts paid by the company for any share buybacks be taken into account?” When calculating your own TSR as a shareholder, you only have to take into account the cash flows you have received or disbursed, i.e. the purchase price, the sale price and any dividends paid in the meantime, but not share buybacks since you have not received them. If you now want to do the computations at the level of a company, you can do the same for a share over a certain period of time. Alternatively, you could take the market capitalization, beginning of period, end of period, all dividends paid, and the amount of any share buybacks (which offsets the decrease in the final market capitalization from the beginning, since there are fewer shares outstanding and therefore a lower market capitalization at a constant share price). The result is the same. As a reminder on this topic, academic research has shown that share buybacks do not lead to a rise in share prices, contrary to widespread popular belief. Good day and see you tomorrow.

14-04-2020 : “Quote of the day ”

“My ventures are not in one bottom trusted, Nor to one place; nor is my whole estate, Upon the fortune of this present year: Therefore my merchandise makes me not sad.” William Shakespeare, The Merchant of Venice, Act 1, Scene 1

13-04-2020 : “Answers to the weekend Brainstorming ”

Let's first recall the problem: How to estimate the cost of capital in Haiti for a project to install of a cable network delivering TV, internet and telephone, knowing that the yield on treasury bills is 7%, the interest of bank loans is 16% and that there is no local stock market? The cost of capital is surely higher than the cost of bank borrowing of 16% because banks run less risk than shareholders. This 16% is equivalent to 7% of Treasury bills plus a risk premium to cover the risk of the company which is probably greater than the risk of the government. A bit on the wet finger, given the experience, a rate of return required by shareholders of an unindebted company of 16% to 25% seems correct. Then you modulate according to the beta of the business. It doesn't seem that cable and internet access activities deserve a beta higher than unity, as it is a commodity, at least for those who can afford to subscribe to it. So a rate of around 20% seems correct. Our colleague Damodaran, teaching at Stern School of Business at New York University, a specialist in valuation calculations, gives for Haiti a risk premium for the stock market of 14% which, added to the Treasury bill rate of 7%, gives for the stock market an average rate of return requested by the shareholders of 21%. Have a nice day.

10-04-2020 : “Weekend brainstorming. ”

How to estimate the cost of capital in Haiti for a project to install a cable network delivering TV, internet and telephone, knowing that the yield on treasury bills is 7%, the interest of bank loans is 16% and that there is no local stock market? Good thinking and see you on Tuesday.

08-04-2020 : “The dividend is neither an idol nor a taboo! ”

Good morning, While we have never been for or against dividends, we are against their sacredness. And we are currently witnessing their re-sacralization. In a previous post, we welcomed companies that were cutting or sharply reducing their dividends because they suddenly had unexpected cash requirements due to the health crisis. And this is perfectly rational and logical, because the dividend is an excess of cash that is not useful to the company. Just as paying a dividend is not value-creating, stopping paying one for good reasons (because the company needs it in its business) is not value-destroying. The position of AFEP (which groups together 110 of the largest private companies in France) advising its members who have opted for short-time working for part of their workforce to reduce their dividend to be paid in 2020 by 20% is difficult to understand. Either the large group has the necessary cash flow, without penalizing its operating activities, to pay a dividend that reflects its distribution policy and 2019 results, and in this case we see no reason why it would reduce it by 20%, as if it were a symbol to be addressed to public opinion. Either it cannot afford it, which is implied by his recourse to partial unemployment financed by the State, which allows it to avoid cash outlays, and in this case we do not understand why a reduction of 20% and not 100%. It is also hard to understand the rumour that a large group is thinking cutting its dividend when it is only marginally affected by the health crisis. Out of solidarity, there is a whisper of solidarity. But out of solidarity with whom? Abolishing the dividend will not increase the resources of hospitals, but will reduce the tax revenues of States, which are in great need of them at the moment. It is also hard to understand the rumour that one other large group across the Rhine wants to maintain its dividend when its business is obviously significantly affected. If there is a single dividend fetish, it is that the liquidity of the listed company must take precedence over that of the shareholders. Indeed, if the shareholder of the listed company needs liquidity, he or she can always sell the few percentages of his or her portfolio which the dividend yield of large groups represents on average, whereas it is obviously almost impossible to carry out capital increases at the moment. This rule of common sense should, if necessary, simplify the debates within the boards of directors, which naturally need time, as we all do, to reach the best decision. Good day and see you tomorrow.

06-04-2020 : “Question asked on the Vernimmen.com website ”

"I would like to know how to estimate the impact of this sanitary crisis on the risk premium that goes into the cost of capital calculation. I have received from my client the downward operating assumptions in view of the drop/shift in the order book to be expected in the coming months/years."

It is difficult to quickly estimate the prospective risk premium in the wake of a sharp and large drop in share prices: if prices adjust to new information downwards, analysts' adjusted forecasts take some time to be produced and incorporated into the models used to determine this premium. Otherwise, you may initially overestimate the new risk premium since it is calculated with lower prices but with little change in the cash flows. During the 2008-2009 crisis, the forward-looking risk premium in Europe tangled very fleetingly at 11%, its highest historical level since it was calculated, before very quickly returning to 8% and then 7%, i.e. the levels prior to March 2020. See the risk premium chart in Chapter 21 of Vernimmen. Part of the increase was most likely due to this calculation bias. You could certainly go back to the highs of late 2008 - early 2009 at 10% - 11%, but that seems excessive to us because the fall at the time was about double the current one. And all the more so as you tell us that you have adjusted the coronavirus impact on cash flows As we explained in our post of March 16, we cannot ask for risk premiums of 7-8% and expect life to be a long, quiet river!

Have a nice day

03-04-2020 : “Question asked on the Vernimmen.com website ”

Good morning, It is difficult to quickly estimate the prospective risk premium in the wake of a sharp and large drop in share prices: if prices adjust to new information downwards, analysts' adjusted forecasts take some time to be produced and incorporated into the models used to determine this premium. Otherwise, you may initially overestimate the new risk premium since it is calculated with lower prices but with little change in the cash flows. During the 2008-2009 crisis, the prospective risk premium in Europe had tangled the 11% very fleetingly before returning very quickly to 8% and then to 7%, i.e. the levels prior to March 2020. See the risk premium graph in chapter 19 of Vernimmen. Part of this increase is probably due to this calculation bias. You could certainly go back to the highs of late 2008- early 2009 at 10%-11%, but that seems excessive to us because the drop in share prices at the time was about double the current one. And all the more so as you tell us that you have adjusted the coronavirus impact on cash flows As we explained in our post of March 16, we cannot ask for risk premiums of 7-8% and expect life to be a long, quiet river! Good work and good day

02-04-2020 : “Quote of the day ”

“Debts are the scissors that cut apart friendship.” Anonymous

01-04-2020 : “If turnover falls by 10% as a result of the coronavirus crisis, how much will profits fall? ”

This is a question that is easy to answer ... to a certain extent. In each edition of Vernimmen we give a breakdown of the fixed and variable costs estimated by Exane for the main European listed companies. With an operating leverage of 2.7 estimated for 2019, a 10% drop in sales translates, on average, into a 27% drop in operating income and probably a little more for net income due to the fixed nature of financial expenses. That said, like the slope of a tangent to a hyperbola, operating leverage becomes distorted and increases the closer one gets to breakeven. For example, with the 10% drop in sales, operating leverage is no longer 2.7, but 3.2. A further 10% drop in sales would this time lead to a 32% drop in operating income. This is in line with the first break-even law, which states that the closer you are to break-even, the greater the sensitivity of earnings to a change in business. However, many companies have higher operating leverage than listed companies because their margins are lower than those of the tenors of the stock market, which averaged an operating margin of 15.1%. Good day and see you tomorrow

31-03-2020 : “Quote of the day ”

“We should let the markets take care of all that is important, and leave what is essential to the State.” André Comte-Sponville

30-03-2020 : “Should companies applying for state financial support be prohibited from paying dividends? ”

It should be remembered that dividends in well-managed companies correspond to liquid assets that the company does not need to use in its business once it has reached a financial structure that corresponds to its objective. If, as a result of the health crisis we are experiencing, a company has liquidity needs, we have to be consistent and eliminate or sharply reduce the dividends paid, which are in no way an eternal commitment set in stone, but a discretionary cash outflow. Then, and only then, can the company turn to the public authorities for help. By ceasing to pay dividends, it will thus strengthen its solvency (or avoid weakening it) before increasing its liquidity and indebtedness thanks to the Public Authorities (see our note of Friday 20 March). It therefore seems to us financially (and politically) appropriate for the Public Authorities to make their financial assistance conditional on the cessation of dividend payments and share buybacks. Good day and see you tomorrow.

27-03-2020 : “A doubly intelligent deal ”

On March 10, in a climate of rising tensions, a listed company, Digigram, for whom this status had become a handicap, synthetically sold its listing to a financial group wishing to be listed in order to offer liquidity to its shareholders and raise funds to develop its business in its sector adored by stock market investors, green energy. The transaction had been prepared for a long time. Digigram contributed all its assets and liabilities to a wholly-owned subsidiary. This subsidiary was then acquired by Digigram's management and main shareholders, who financed themselves by selling their Digigram shares, which had become a pure shell, to Evergreen which thus took control of it. In a short while, after the minority shareholders of Digigram have paid the same price, Evergreen will be absorbed by Digigram and will thus be listed, which is a performance in the current market. . As for the new Digigram, which has become unlisted, nothing has changed for it from an operational point of view except that it can raise equity capital without having to pay 25% of the funds raised (sic) in various fees. And that changes everything! Like what goes (the Stock Exchange) to some (groups) is really not made for others (SMEs). In short, in this field too, everyone must find the right shoe for him or her. See you on Monday.

26-03-2020 : “Quote of the day ”

“There's no point in being right when the rest of the market has adopted a different position.” Popular saying among investors

25-03-2020 : “Question asked by a participant of ICCF@Columbia Business School. ”

"I'll probably go back on the stock market in the next few days gradually, betting on a rebound at the end of Q2/Q3... What do you think? » The role of the Vernimmen is not to give stock market advice, which we do not do as you have seen. It's to help you get a better grasp of finance. Here are 4 thoughts or facts to help you make your decision: Rebounds in the face of a major crisis have rarely been quick: it was not until March 2003 after the internet bubble burst in 2000 and March 2009 after the 2008 financial crisis that began in the summer of 2007. Moreover, the decline is not linear, there is more volatility, which means that there is a very rapid alternation of upward and downward phases as you see every day. But the magnitude of the latter and their frequency is naturally greater than that of the increases. It is the most liquid values that fall first, they are also the first to rise again. These are called blue chips. You only invest in the stock market if you can absorb a 75% loss without feeling less well psychologically. On the stock market, the USA very often gives the upper hand and when Wall Street goes down, Europe goes down as well. However, the United States is becoming aware that it will have to do the same as China, Italy, France, etc., even though their health system is said to be less efficient than ours for the majority of citizens and social security cover is looser. The short-term impact is therefore likely to be even more violent there than in Europe. Good day and see you tomorrow.

24-03-2020 : “Quote of the day ”

“The nice point in a crisis is that it corrects excesses and reminds us of risk.” Bertrand Jacquillat

23-03-2020 : “Friday reopening of the euro bond market for corporate issuers ”

Good morning, On Friday, two European issuers reopened the closed bond market for a few days. Unilever was thus able to issue €2bn, when it was initially looking for €1bn, and Engie €2.5bn in 3 tranches, of which the longest (8 and 12 years) are green. For Unilever, which borrowed at 5 and 10 years, the rates were 1.251% and 1.793%, i.e. approximately 0.5% higher than 6 months ago and with a new issue premium of 0.35 to 0.45% compared to approximately 0.10% in normal times. For Engie, yield to maturity ranged between 1.445 % and 2.221 %. Launched in the early morning, the two issues were closed at juste before lunchtime and oversubscribed by about 5 times, which is a superb performance. Market operators estimate that more than 80% of investors subscribed from home. None of them had a pressing need for cash, but what is issued is not to be issued. It is likely that only issuers of this quality (Unilever is rated A+ stable and Engie A- stable) could have made it last Friday. Unsurprisingly, the US bond market has been less closed and more active last week with issues from Exxon, Verizon, Walt Disney, UPS, Grumman among others. Have a good day and see you tomorrow.

20-03-2020 : “Quote of the day ”

“I am coming to the conclusion that bubbles are inevitable. Humans beings cannot avoid them ... They cannot learn.” Alan Greenspan

20-03-2020 : “Liquidity and solvability ”

The demand by shopkeepers forced to close down that their rents be cancelled and not just postponed by their landlords illustrates the difference between solvency and liquidity, but also, it seems to us, the difference between the financial crisis of 2008 and the coronavirus crisis of 2020. Temporarily suspending the payment of certain rents is, of course, helping the tenants' cash flow. Cancelling them exceptionally is to help the cash flow AND the solvency of the tenants who thus make a charge disappear, reducing their losses and thus mitigating the negative impact of these on the amount of their equity, improving their solvency in total (or rather avoiding to deteriorate it too much). It should be remembered that solvency measures a firm's ability to meet its debts in the event of difficulties and is measured by the ratio of equity to net debt and by the liquidating quality of the assets. In 2008, the perceived deterioration in the solvency of banks, because they were suspected of holding assets that were losing value (sub-prime loans), led to a liquidity crisis when lenders became fearful and stopped lending to banks, which in turn sharply reduced their lending to businesses. But for the latter, the liquidity crisis did not translate into a solvency crisis because, with few exceptions, companies' economic activity did not collapse, and although results may have fallen, they did not become massively negative. Today, there are both liquidity problems for certain companies, of which the public authorities, banks and central banks are aware, judging by the thousands of billions of euros mobilised to deal with them, and potentially solvency problems in the near future, if business is slow to pick up again. Failure to operate, with fixed costs on the other side of the coin, will in fact lead either to losses which will eat away at equity, or, for those who do not have enough equity, to negative equity, which will then require rapid injections of new equity, or conversions of debt into equity, or bankruptcies. Hence the comments of certain government officials who do not rule out nationalisations, which will certainly not be carried out by buying the shares of current shareholders, but by capital increases designed to restore the solvency of the companies concerned, and therefore their ability to continue to operate when the time comes. When business picks up again, there is a risk that some companies will find it difficult to obtain supplier credit, as their suppliers will have doubts about their solvency and will not want to take the risk of delivering and not being paid. As there is no miracle in finance, the problem of solvency is transferred from the tenant to the owner, from companies that put employees on short-time working to limit the damage to their solvency to the State that takes over, and from States to central banks that buy up their debts. Since there is a real loss in the economy, since wealth that should have been produced is not, the loss in value at the global level does not disappear. At best, it is mutualized and borne by those who can afford it. As for the States, we believe that after such a shock, central banks will simply cancel, in one way or another, a good part of the debts they hold on them. The sooner and more clearly this is said, the better. We are not there yet. But we will get there. Good day and see you Monday.

18-03-2020 : “Quote of the day ”

“Gain all you can without hurting either yourself or your neighbour.” John Wesley

17-03-2020 : “Refine your mastery of corporate finance ”

We have just added 3 finance cases, which we have created for our HEC students, with their answers on the vernimmen.com website in the areas of valuation, financial analysis, and financial policy. For those who need to consult the Vernimmen, an electronic version is available on https://www.wiley.com/en-fr/Corporate+Finance%3A+Theory+and+Practice%2C+5th+Edition-p-9781119424529 and a kindle version is available from Amazon. Have a nice day and see you tomorrow.

16-03-2020 : “Two thoughts. ”

Good morning, From a financial point of view, the events of the past week illustrate, it seems to us, two facts: 1/ An equity market risk premium that remained high post-2008 at around 7% compared with a pre-2008 average of 4% has no other justification than that investors perceive an environment that has become structurally riskier, without it being possible to clearly identify where the risk will come from. For example, who would have thought that one of the Americans with the best knowledge of how the financial markets work because of his duties as head of Goldman Sachs, then Finance Minister, would take the risk of not coming to the rescue of a distressed bank (Lehmann Brothers)? 2/ Companies are drawing on their cash lines. Boeing, for example, which has just drawn down its entire $13.8 billion line in order to protect itself and face a certain drop in revenues. We have no doubt that the banks, given the liquidity they have accumulated due to post-2008 prudential constraints and the support of the central banks, will honour their signatures, allowing the major groups to survive and help their suppliers who need it by extending payment terms. Readers of Vernimmen who are familiar with Section 39.5 will not have been unprepared. Good day and see you tomorrow

13-03-2020 : “Question asked on the vernimmen.com website ”

“I'm trying to determine the volatility of an unlisted stock to estimate the price of an option on it. Even if Black-Scholes is the reference in terms of option valuation, volatility is complex to estimate on an unlisted stock. Which method should I use? “ Whether a company is listed or not, the volatility of its value is the same. When it is listed, we see this volatility on a daily basis. When it's unlisted, you don't see it, which doesn't mean it's not there. In the same way, at night you don't see the movement of windmills, and yet they turn as you will see without difficulty when the day comes. So, for your calculation, I suggest you find a listed company that is comparable in size, sector, financial structure and geography and calculate its volatility and apply it to your business. Have a nice day.

12-03-2020 : “Quote of the day ”

“Anyone who lived through the last cycle probably shares our view that the term disciplined lender probably constitutes an oxymoron.” Green Street Advisors

11-03-2020 : “Question asked by a participant of ICCF@Columbia Business School ”

Are prepaid expenses deducted in the calculation of trade payables? No, because prepaid expenses have nothing to do with supplier credit, it is simply a practical method that is not linked to payment terms. To illustrate: on 1 December you have taken out an annual subscription to a financial database, and closing your financial year on 31 December, the 11/12 of the annual subscription will appear as prepaid expenses on the balance sheet (the balance, 1/12, will appear on the income statement as operating expenses). Moreover, this subscription may be payable with a 45-day delay, which means that on 31 December you will also have a supplier line item increased by the annual subscription amount, instead of having a cash line item reduced by the amount of the subscription as would have been the case if you had paid cash. But in both cases, you have the 11/12 of the annual subscription as prepaid expenses on the assets side of your balance sheet. Have a nice day

10-03-2020 : “Question asked by a participant of ICCF@Columbia Business School ”

Are prepaid expenses deducted in the calculation of trade payables? No, because prepaid expenses have nothing to do with supplier credit, it is simply a practical method that is not linked to payment terms. To illustrate: on 1 December you have taken out an annual subscription to a financial database, and closing your financial year on 31 December, the 11/12 of the annual subscription will appear as prepaid expenses on the balance sheet (the balance, 1/12, will appear on the income statement as operating expenses). Moreover, this subscription may be payable with a 45-day delay, which means that on 31 December you will also have a supplier line item increased by the annual subscription amount, instead of having a cash line item reduced by the amount of the subscription as would have been the case if you had paid cash. But in both cases, you have the 11/12 of the annual subscription as prepaid expenses on the assets side of your balance sheet. Have a nice day

10-03-2020 : “Quote of the day ”

“Perhaps, at one time, the management of money was easy-going and social; today it is fiercely competitive and intellectually challenging.” Gilbert Kaplan

09-03-2020 : “Daily quote ”

“Don't worry about the price of your stock unless you are a buyer or a seller.” Kirk Kerkorian

05-03-2020 : “Daily quote ”

“If past history was all there was to the game, the richest people would be librarians.” Warren Buffett

05-03-2020 : “Question asked on the vernimmen.com website ”

“In the context of a fund raising, we propose a business plan and a spreadsheet on the evolution of the expected cash flows. This document is used to value the company before the capital increase. Does the evolution of cash flows, which includes the amounts of the fund raising (equity and bank debt), distort the valuation of the company? How to restate the amount of the fund raising in order not to impact the valuation of the company? “ This is a classic error of reasoning! No, it does not, because the entreprise value of a company is independent of the way the company is financed. When an investor values the company, he or she discounts free cash flows (which are independent of how the company is financed) and subtracts the present value of its current financial and banking debt, which is also independent of how the company will finance its investments. For more, have a second look at the Vernimmen.com Newsletter n°102, March 2017. Have a good day.

04-03-2020 : “Question asked by a participant of ICCF@Columbia Business School ”

"Does the distribution of free shares result in more dividends? Normally not, because the same amount of dividends is shared among a larger number of shares. What do you think about this?" You are right, the fact of distributing bonus shares should not result in an increase in the dividend received. We have more shares (2 times, 3 times, or more depending on the case, but the dividend per share is divided by 2, or 3 or more depending on the case). However, when companies distribute one bonus share for every 10 or 15 or 20, the convention is that the unit dividend should remain stable, thus resulting in an increase in the dividend paid and received of 10%, 6.7% or 5%. This is therefore a "marketing" way of increasing the dividend. For unsophisticated individual shareholders, often bonus shares and higher dividends are mistakenly equated with enrichment and an increase in value. And when I explained this to my grandfather, who believed in it as hard as iron, he replied that I was wrong and that in any case, since I had not fought the First World War, ... . This is behavioral finance, about which chapter 15 of Vernimmen will tell you more. Have a pleasant day.

03-03-2020 : “Daily quote ”

“Don't worry about the price of your stock unless you are a buyer or a seller.” Kirk Kerkorian

02-03-2020 : “Answers to the weekend Brainstorming. ”

Let's first recall the two questions that were asked last week to candidates for the Master in Finance at HEC Paris. “You create a company with a capital of €10,000 that you place in the bank. In addition, you take out a bank loan of €5,000 which you invest in a money market fund. What is the enterprise value of your company? “ Zero, because you have no trade or commercial activity. You simply have equity capital of €10,000 and a net bank and financial debt of -€10,000 (debt- cash, 5-15). “Can you give an example of a financial product with a negative beta? “ A put option on a stock market index. When the index rises in value, the value of the put option will decrease. Hence a negative beta.

28-02-2020 : “Weekend Brainstorming. ”

Weekend Brainstorming Here are 2 questions that were asked last week to candidates for the Master in Finance at HEC Paris. We will give you the answers on Monday morning. “You create a company with a capital of €10,000 that you place in the bank. In addition, you take out a bank loan of €5,000 which you invest in a money market fund. What is the enterprise value of your company? “ “Can you give an example of a financial product with a negative beta? “ Have a nice day.

27-02-2020 : “Danone builds a first bridge between the financial and the extra-financial criteria ”

Danone announces in the publication of its 2019 results a "First step to make visible the cost of the carbon footprint in financial performance". Danone now publishes a current earnings per share (EPS) adjusted for the cost of carbon emissions caused by Danone and the latter figure is based on a cost per ton of carbon at €35 per ton. To our knowledge, this is a first. Beyond the extra-financial communication through which Danone announces that this year it has reached its CO2 emission peak (5 years ahead of its objectives), the direct integration of environmental criteria into the traditional financial tools for measuring value creation seems to us to be an excellent initiative that finally links the two worlds of the financial and extra-financial. Perhaps current EPS adjusted for the cost of carbon will not ultimately be the criterion retained by the market or the most relevant, but we have to start somewhere... and above all, someone has to start. So, kudos to Danone! Have a good day and good thinking.

26-02-2020 : “The break-even point in commercial TV channels ”

The announcement of TF1 and M6's 2019 results illustrates, as last year, one of the three break-even laws, which states that the further a group is from its break-even point, the less sensitive its results are to a given change in activity. Thus, the two groups reported similar revenue growth (+2.1% and +2.4%), but very different trends in their recurring operating income: +28% and +7%. But performance is not where those who are unaware of these laws of the break-even point might think it is: with an operating margin of 19.5%, M6 is much more efficient than TF1, which generates €10.9 in current operating income for every €100 in sales, where M6 generates €19.5. Being further from its breakeven point, M6 naturally records lower growth in current operating income (+7% in 2019) than that published by TF1 (four times higher at +28%). TF1 is closer to its break-even point, as evidenced by its lower operating margin, without its situation being worrying! Moreover, the financial market is not mistaken, which values a third more M6 (market capitalization of €2,000 million) than TFI (€1,500 million), while TF1, the leading channel in audience share, has 60% more turnover. The other two break-even laws, which we will not discuss today, are set out in chapter 10 of Vernimmen. Have a nice day.

25-02-2020 : “Daily quote ”

“If past history was all there was to the game, the richest people would be librarians.” Warren Buffett

24-02-2020 : “Answers to the weekend brainstorming. ”

Let's first recall the two questions that were asked last week to candidates for the Master in Finance at HEC Paris. “Is the return on capital employed (ROCE) calculated most often before or after corporate income tax? “ Most often after tax, so that it can be compared to the cost of capital which is after corporate tax. That said, if you want to impress your interlocutors, you will mention a pre-tax figure, as is often done in the United States. “Do you think the cost of capital in the food industry is higher, equal to or lower than in the steel industry? “ The cost of capital in the food industry is lower than the cost of capital of the cyclical steel industry. Indeed, the latter's main clients are the automotive and construction industries, two cyclical sectors, whereas the food industry is much more stable, thanks to our regular meals! Have a nice day.

21-02-2020 : “Weekend Brainstorming. ”

Here are 2 questions that were asked last week to candidates for the Master in Finance at HEC Paris. We will give you the answers on Monday morning. “Is the return on capital employed (ROCE) calculated most often before or after corporate income tax? “ “Do you think the cost of capital in the food industry is higher, equal to or lower than in the steel industry? “ Have a good weekend.

20-02-2020 : “Daily quote ”

“Before Merton Miller and Franco Modigliani we had no general theory of corporate finance, only rules of thumb and folklore, and no recognition of the overwhelmingly powerful concept of arbitrage.” Peter L. Bernstein

19-02-2020 : “"Why did the now disappeared US Airways (acquired by American Airlines in 2015) name its loyalty programme Dividend Miles? Â» ”

To benefit from the confusion and assimilation in the minds of many between dividends and compensation. So many passengers flying on US Airways feel like they are earning and then receiving compensation. In fact, these miles, like all those of other airlines, are a real free remuneration for the passenger, not taxed, in addition to the salary received from his employer. And the employer pays for the ticket of the employee who flies at a higher cost than if there was no mileage program (there are no miracles in the business world!). Moreover, when loyalty programs were created, employers wanted to recover for their own account the miles collected by their employees. Needless to say, that this project could not be implemented due to the opposition of airlines ... and passengers! On the other hand, a dividend is not remuneration, since its payment automatically reduces the value of the share by the amount of this dividend, which means that you are neither richer nor poorer after it has been paid, unlike airline miles. Anyone who has received a dividend knows that. Anyone who does not know it, or does not understand it, should buy a share that pays a dividend and thus face reality rather than the poorly digested Marxist vulgate as true as 2 and 2 make 5. If you are interested in the errors that arise from this confusion, the research article in the February Letter vernimmen.net is for you, and it should normally be in your emails if you have subscribed to it. Otherwise, it is here: http://www.vernimmen.com/Read/Vernimmen_letter.php We will have completed our educational work in this area when a company renames its mileage dividends! Have a nice day.

18-02-2020 : “Daily quote ”

“The capital pricing mode (CAPM) is a theoretical triumph and an empirical disaster.” Eugene Fama

17-02-2020 : “Answers to the weekend brainstorming. ”

Let us first recall the questions asked: To a young Italian candidate who said he was passionate about cars and had highlighted the announced merger between Peugeot and FCA (Fiat Chrysler Automobiles) in his admission application: “Would the Peugeot FCA merger have been possible if FCA had not previously distributed all its Ferrari shares to its shareholders? To help you out, the market capitalization of Peugeot and FCA is around €17 billion and that of Ferrari is around €30 billion.” Probably not. Before the demerger with Ferrari, the market capitalization of FCA including Ferrari would have been significantly larger than that of Peugeot (about 3 times larger) making it difficult to merge with relative weights not far from 50/50, often very useful for a cross-border merger between two groups each with a major shareholder in a sector often perceived in Europe as emblematic of a country. “Are Ferrari shares valued with a car P/E ratio by investors?” The Ferrari share is valued on the basis of a P/E ratio of 40 (sic) which is that of the luxury industry and not that of the automobile industry which is rather valued at seven-eight times the current profits. Have a nice day.

14-02-2020 : “Weekend Brainstorming. ”

Here are 2 questions that were asked last week to candidates for the Master in Finance at HEC Paris. We will give you the answers on Monday morning. To a young Italian candidate who said he was passionate about cars and had highlighted the announced merger between Peugeot and FCA (Fiat Chrysler Automobiles) in his admission application: “Would the Peugeot FCA merger have been possible if FCA had not previously distributed all its Ferrari shares to its shareholders? To help you out, the market capitalization of Peugeot and FCA is around €17 billion and that of Ferrari is around €30 billion.” “Are Ferrari shares valued with a car P/E ratio by investors?” Have a good weekend.

13-02-2020 : “Daily quote ”

“A cynic knows the price of everything, but the value of nothing.” Oscar Wilde

12-02-2020 : “Daily quote ”

“Great wealth brings with it great responsibility.” Sir Tom Hunter

11-02-2020 : “Question from a follower of the Vernimmen.com Facebook page ”

"What's the point of straight-line versus accelerated depreciation? Indeed, since the accelerated depreciation makes it possible to defer part of the tax over time by initially recognizing a larger expense, one might think that all companies should opt for the accelerated method when allowed since deferring an expense over time means reducing it. » The vast majority of companies that are eligible for accelerated depreciation make this choice for the reason you indicate. But not all of them. Indeed, it is not of interest to a company that is not taxable and does not expect to be taxable for some time, or a company that has other ways of optimising its taxation and for which the accelerated depreciation method is redundant. In addition, some companies may have an objective of achieving a minimum pre-tax profit over the next few years that would be thwarted by the use of an accelerated depreciation method, for example in the case of an earn-out mechanism in the event of the sale of the company, because a lower accounting result could minimise the earn-out to be paid to the sellers that would be indexed to the accounting result. Have a pleasant day.

10-02-2020 : “Daily quote ”

The largest advantage of non being listed is not to be listed.” Leon Black

07-02-2020 : “Question asked on the vernimmen.com website. ”

“What do you think of the private equity industry environment? “ Hello, The environment for private equity is excellent both because fundraising has never or almost never been so strong: $100bn worldwide in 2003, $700bn in 2018, benefiting from a fundamental shift away from listed markets; and also because the economic climate is generally good, which can only be favourable, given that a large part of private equity works with the leverage effect of debt. After that, there are still the sympathetic embarrassments of the rich people: a lot of money to invest and therefore very high valuation levels which are also the counterpart of low interest rates and perceived to remain so for a long time to come. Have a nice day

06-02-2020 : “Daily quote ”

“Smart people don't sell shares when they think they are undervalued.” Steven Kaplan

05-02-2020 : “Question asked by a participant of ICCF@Columbia Business School ”

Why are increases in tangible fixed assets under construction included in the cash flow statement under the acquisition of fixed assets when they are produced by the company itself? Conversely, when the company decides to subcontract work on assets under construction, the item advances and down payments is also taken into account in the cash flow statement. Why are they considered as uses of funds in the cash flow statement? Hello, I'm afraid you're confusing two items: fixed assets under construction and self-production. Tangible assets under construction are not necessarily made by the company for itself. More often than not, it is one or more third parties that carry it out. On the other hand, the self-production that you may see in the income statement corresponds to a fixed asset that the company makes for itself, such as BIC, for example, which makes its own molds for its pens, lighters or shavers. Once this distinction has been made, it is logical that increases in intangible assets under construction give rise to a movement in the cash flow statement, because you must have paid the third parties who make them. It's a capex like any other and the fact that it's in progress doesn't change the case. In the same way, if you make down payments to these third parties, it is indeed a cash outflow that has its place in the cash flow statement under non-operating working capital. Have a nice day.

04-02-2020 : “Daily quote ”

“It is very dangerous to be in very concentrated positions.” Lloyd Blankfein

03-02-2020 : “IBM ”

Good morning A replacement has just been found for its CEO, who will leave in a few months at the age of 62, the average age of IBM executives when they leave the company voluntarily. IBM is the company behind the pseudonym E10, from the financial analysis case which is available at http://www.vernimmen.com/Training/Case_studies.php. Faced with a steady decline in its turnover, IBM has invested in new activities and numerous acquisitions without, to date, returning to growth (-3% in 2019). To keep its shareholders waiting, IBM has had a policy of dividend payments and share buybacks well in excess of its free cash flow, leading to a very significant increase in net bank and financial debt ($54 billion at the end of 2019) to three times EBITDA in 2019. The announcement of the CEO's departure was greeted by a 5.1% increase in the share price, which can hardly be taken as anything other than a relief, especially as the market was down 2.1% that same day. It is true that during his term of office, IBM's share price fell by 23% compared with a 131% increase for the Dow Jones. Those of you who have a bit of white hair or like economic history will remember that in the 1970s and 1980s, IBM was the world's largest market capitalization. Sic transit gloria mundi. Good start to the week.

31-01-2020 : “Quote of the day ”

“The market does have the virtue of being efficient, but this is not quite enough on which to base a civilization.” Henri Guaino

29-01-2020 : “Quote of the day ”

“Seeking substantial wealth is almost always a fool's game.” Felix Dennis, a British multimillionaire

28-01-2020 : “Question from a follower of the Vernimmen.com Facebook page ”

“In the case of a syndicated loan, why is it necessary to reduce the number of participating banks? And why does the company only report to and deal only with the lead bank, and it is the lead bank that is responsible for working on its own with the other members of the syndicate?” Given the interest rate conditions and credit margins that have lasted for several years now, a bank's participation in a syndicated loan is rarely profitable for it. Therefore, if a bank participates in a syndicated loan, it is because it wishes to obtain from the company an additional volume of business that will give it a fair return on its relationship: mandate for mergers and acquisitions, bond issues, management of employee savings, cash flow management, foreign exchange transactions, etc. The company does not have an infinite volume of such operations to grant. Therefore, it is better for the company to have a syndicated loan with five to six banks that it can satisfy with what professionals call side business, than to have fifteen or so banks, some of which with 3% of the syndicate, which will be frustrated and have no regard for the quality of the relationship with the company in the long term, in the event of a hard blow to the company. The fact that the syndicate's lead bank is centralizing relations with the company regarding this syndicated loan is a reality. This does not prevent the participating banks from maintaining bilateral relations with the company, arguing that their participation in the syndicated loan is precisely to develop business relations on other products. Have a nice day.

27-01-2020 : “Quote of the day ”

“The management of money is changing continuously, so much so that it bears little resemblance to the same field only a generation ago.” Gilbert Kaplan

24-01-2020 : “Question asked on the vernimmen.com website ”

The presentation of the consolidated financial statements under IFRS by full consolidation modifies the structure of assets and liabilities, in particular shareholders' equity (SE) which is increased by the SE of the subsidiary company. However, when a company is acquired, the SE of the parent company remains unchanged in the consolidated accounts whereas the SE of the acquired company should have influenced them. How is this justified? It is normal, if the acquisition is financed without issuing equity but by new debt or by drawing on the buyer's cash balance, that the buyer's book equity does not change as a result of the acquisition financed in this way. Otherwise, a new way would have been found to create equity from scratch: nice but unrealistic. In fact, what we must see and not lose sight of is that if the first step in the process of full consolidation is to add the equity of the subsidiary acquired to that of the parent company, the second step is to subtract the purchase price of the shares of the new subsidiary from the equity of the parent company, in order to make them disappear from the consolidated balance sheet. When the acquisition price and the book equity of the new subsidiary coincide, the group's equity is not modified. The same applies when there is a difference that is resolved by goodwill; on this last point, see chapter 6 of Vernimmen. Have a nice day.

23-01-2020 : “Quote of the day ”

“Egos, pay packets and jobs never shrink - it's the first law of investment banking” Anonymous

22-01-2020 : “Questions from one of our students ”

What is the point of calculating ROCE before or after tax? Calculating after tax is useful to be able to compare the ROCE with the WACC (weighted average cost of capital), which takes into account taxes, in order to assess value creation. Calculating before tax allows you to compare the pre-tax ROCE with that of other companies in the same industry, but in countries with different tax rates. In addition, US groups often use pre-tax ROCE in their reporting because it impresses more than naturally lower after-tax ROCE. Have a nice day

21-01-2020 : “Quote of the day ”

“Money is like muck. Not good except it be spread” Francis Bacon

20-01-2020 : “BlackRock and the energy transition ”

It is not simple for anyone, including the world's largest asset manager, BlackRock (assets under management of $7,200bn, of which $429bn arrived in 2019), which announced via its CEO in its annual letter published last week: "Companies, investors, and governments must prepare for a significant reallocation of capital", due of course to climate change. It should be remembered that to date passive management (60% of BlackRock's new assets under management in 2019) does not discriminate between companies that are or are not ESG compliant as long as they are included in the main indices that passive management duplicates, and that ESG indices are not yet widely used, yet BlackRock is the world's largest passive manager. Moreover, it takes time for the good ideas of BlackRock's CEO to spread throughout the company. For example, a CAC 40 financial director confided to us that he had a face-to-face meeting with BlackRock's sustainability manager, before a second meeting with BlackRock analysts specialized of his sector. When the analysts entered the room, they asked which of the two was the CFO, demonstrating they didn't know their own sustainability manager... which they had to attach limited importance to. Have a nice day.

17-01-2020 : “Quote of the day ”

“Better to have loaned and lost than never to have loaned at all.” Leon Fraser

17-01-2020 : “Quote of the day ”

“Better to have loaned and lost than never to have loaned at all.” Leon Fraser

16-01-2020 : “Question from a reader ”

When a company pays dividends to its shareholders, does its entreprise value decrease? If the share price falls by the amount of the dividend paid, then does the value of the shareholders' equity also fall? However, it seems to me that the entreprise value of a company is independent of the way it is financed. Is the entreprise value impacted and if so, what mechanism occurs to balance the values? If the payment of a dividend lowers the value of the shareholders' equity by the same amount, it has no impact on the entreprise value. In fact, the payment of a dividend drawn from the company's cash flow, or financed by new debt, increases the amount of net bank and financial debt by the same amount. Consequently, the entreprise value remains stable. Another way of looking at it is quite simply to consider the entreprise value, not as the sum of the value of the shareholders' equity and the net bank and financial debt, but as the value of the company's operating assets (the value of the fixed assets plus the value of the working capital). Thus it is clear that there is no reason for the value of the operating assets to fall following the payment of a dividend that does not affect the working capital or fixed assets in any way. Have a nice day.

15-01-2020 : “Quote of the day ”

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” John Maynard Keynes

14-01-2020 : “Question asked by a participant of ICCF@Columbia Business School ”

"I have a question about the interpretation of a company's margin levels: in terms of percentage, are there unsatisfactory margin levels, and others satisfactory?" In itself, the level of operating margin is an interesting criterion, but is not the most relevant. Indeed, a low operating profit margin as a % of turnover may be poor in a capital-intensive sector (e. g. steel) because it will necessarily lead to a low ROCE given the importance of operating assets in this sector; and excellent for a travel agency where operating assets are structurally low and where it will necessarily lead to good or excellent ROCE. For information, a ROCE corresponding to the cost of capital is currently in Europe of the order of 7-8%, slightly less for lower risk sectors (5-6%) and more (about 10%) for those with high economic beta (deleveraged beta). In addition, and for financial culture, in a period of high economic activity, the best European groups have operating margins of around 12 - 15% on average and in all sectors combined. In the low phase, from 7 to 9%. Have a nice day.

13-01-2020 : “Quote of the day ”

“No science in the world is more elevated, more necessary and more useful than economics.” Carl Linnaeus

10-01-2020 : “The impact of ESG criteria on share prices ”

Echoing the round table that we organised a few weeks ago ("Does it pay financially to be virtuous in ESG?", the report of which appears in the November 2019 issue of the vernimmen.com newsletter), Bank of America has estimated the loss in value borne by 24 S&P 500 groups that have revealed an ESG problem over the last five years: accounting scandals, sexual harassment, data theft, etc. at $534 billion. That is to say $22 billion per company in the 12 months following the disclosure of the problem. The study shows that while some investors buy these stocks after they have fallen sharply, investors who follow ESG principles boycott them for periods that can exceed 5 years. Don’t say you weren’t told! Have a nice day.

09-01-2020 : “Quote of the day ”

“Price is what you pay, value is what you get.” Warren Buffet

08-01-2020 : “Question asked on the vernimmen.com website ”

"Could you tell me what kind of discount rate do we use to compute a NPV? Is it the cost of equity or the cost of capital?" The choice of a discount rate to be used in calculating a net present value depends on the nature of the cash flows you will discount: free cash flow or dividends. To the extent that you want to discount free cash flows, the discount rate used is necessarily the cost of capital (weighted average cost of capital) and not the cost of equity. Indeed, free cash flows, which accrue to the community of shareholders and lenders, cannot be discounted to the cost of equity, which only concerns shareholders. They can only be discounted at the weighted average cost of capital, which is the discount rate common to the community of shareholders and lenders. If you now compute the net present value of a dividend stream to determine the value of a share using a direct approach, the discount rate to use is the cost of equity because the stream you discount (dividends) accrues to shareholders and only to them. Have a good day.

07-01-2020 : “Quote of the day ”

“Trust is like a bank account. You cannot continue to draw on it without making deposits.” The Financial Times

03-01-2020 : “The impact of ESG criteria on share prices ”

Echoing the round table that we organised a few weeks ago ("Does it pay financially to be virtuous in ESG?", the report of which appears in the November 2019 issue of the vernimmen.com newsletter), Bank of America has estimated the loss in value borne by 24 S&P 500 groups that have revealed an ESG problem over the last five years: accounting scandals, sexual harassment, data theft, etc. at $534 billion. That is to say $22 billion per company in the 12 months following the disclosure of the problem. The study shows that while some investors buy these stocks after they have fallen sharply, investors who follow ESG principles boycott them for periods that can exceed 5 years. Don’t say you weren’t told! Have a nice day.

02-01-2020 : “Question from a student ”

"What is the effect of depreciation on financial performance?" This depends on whether you are using accounting or financial indicators. With accounting indicators, such as return on capital employed (ROCE) and return on equity (ROE), depreciation by reducing results reduces returns. With financial indicators, such as net present value or internal rate of return, depreciation improves these indicators because of the tax deductibility of depreciation charges, which reduces the tax payable and increase free cash-flows. Have a good day.

01-01-2020 : “Quote of the day ”

“Hedge funds remain anonymous and faceless, descending on our businesses like a swarm of locusts, devouring all in sight, and then flying off to prey on other enterprises.” Franz Müntefering

31-12-2019 : “Question from a participant ICCF@Columbia Business School ”

"Could you tell me what kind of discount rate do we use to compute a NPV? Is it the cost of equity or the cost of capital?" The choice of a discount rate to be used in calculating a net present value depends on the nature of the cash flows you will discount: free cash flow or dividends. To the extent that you want to discount free cash flows, the discount rate used is necessarily the cost of capital (weighted average cost of capital) and not the cost of equity. Indeed, free cash flows, which accrue to the community of shareholders and lenders, cannot be discounted to the cost of equity, which only concerns shareholders. They can only be discounted at the weighted average cost of capital, which is the discount rate common to the community of shareholders and lenders. If you now compute the net present value of a dividend stream to determine the value of a share using a direct approach, the discount rate to use is the cost of equity because the stream you discount (dividends) accrues to shareholders and only to them. Have a good day.

30-12-2019 : “Quote of the day ”

“The management of money is one of the oldest of the arts and one of the newest of the professions.” Gilbert Kaplan

27-12-2019 : “Question from a participant ICCF@Columbia Business School ”

In the cash flow fade technique, I understand well why ROCE and the cost of capital must converge. But I do not understand why free cash flow expressed in euros must decrease. Indeed, I understand that free cash flow, expressed as a percentage of operating assets, must decline. But as operating assets increase in the meantime, free cash-flows expressed in euros should not necessarily decrease, should they? What do you think of that? There are a number of ways to converge economic profitability with the cost of capital, by reducing free cash flow and increasing operating assets more or less rapidly. But it is important to note that these two parameters are closely linked. Indeed, when you increase operating assets, more than expected to make ROCE converge with the cost of capital, by increasing working capital or additional capex, you reduce your expected free cash flow by the same amount, since new capex and changes in working capital are a drain on it. Have a good day

26-12-2019 : “Quote of the day ”

“Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury.” Deuteronomy

24-12-2019 : “Question asked on the Vernimmen.com website ”

"I have a question about the interpretation of a company's margin levels: in terms of percentage, are there unsatisfactory margin levels, and others satisfactory?" In itself, the level of operating margin is an interesting criterion, but is not the most relevant. Indeed, a low operating profit margin as a % of turnover may be poor in a capital-intensive sector (e. g. steel) because it will necessarily lead to a low ROCE given the importance of operating assets in this sector; and excellent for a travel agency where operating assets are structurally low and where it will necessarily lead to good or excellent ROCE. For information, a ROCE corresponding to the cost of capital is currently in Europe of the order of 7-8%, slightly less for lower risk sectors (5-6%) and more (about 10%) for those with high economic beta (deleveraged beta). In addition, and for financial culture, in a period of high economic activity, the best European groups have operating margins of around 12 - 15% on average and in all sectors combined. In the low phase, from 7 to 9%. Have a nice day.

23-12-2019 : “Quote of the day ”

“Triple-B CRE CDO notes fall somewhere between financial toxic waste and a practical joke.” Anonymous

20-12-2019 : “Quote of the day ”

“Triple-B CRE CDO notes fall somewhere between financial toxic waste and a practical joke.” Anonymous

20-12-2019 : “Question from a participant ICCF@Columbia Business School ”

“How to calculate the right of ordinary shares of a company when there are preferred shares (representing the know-how of each partner that are non-transferable) with a statutory profit distribution key: 70% of the result for the preferred shares and the remaining 30% of the net income distributed according to the percentage of the capital held (net income distributed each year at 100% because the company is tax transparent)?” If, in addition to the right to 70% of the net income, the preferred shares are also entitled to a liquidation bonus of 70% in the event of cessation of activity, then the preferred shares receive 70% of the value, the remaining 30% goes to the ordinary shares. In this case, the entreprise value and the equity value are not affected, only the allocation to each category is then taken into account, according to this 70-30 allocation key. Have a good day

19-12-2019 : “Quote of the day ”

“Facts are stubborn things, but statistics are more pliable.” Mark Twain

18-12-2019 : “Question from a student ”

“What methods can be used to value a restaurant or an hotel or a local grocery store?” As they are small entities, they are very often valued according to shopkeeper rules, without contempt, i.e. on the basis of X times a week's turnover. There are indeed tables and recommendations from the tax authorities in this area based on thousands of sales observations. For these small businesses, forget about discounting free cash flow, there is no business plan and the published result rarely corresponds to an economic reality because often the operator is partly remunerated by expenses that he or she should bear personally but that are charged to the business. For example, the gas tank in the grocery store's wife's car is charged to the grocery store with the gas tank in the van used to make deliveries... Therefore, turnover is often a more reliable indicator of the result than the result itself! Hence the basis of a multiple of turnover to value these very small companies with often identical margin rates, because they all support approximately the same cost structure. Have a good day

17-12-2019 : “Quote of the day ”

“Should I fail to make money, I shall seek to make a virtue out of it.” Jules Renard

16-12-2019 : “Quote of the day ”

“The ethic underlying capitalism is that whoever creates wealth earns money, and whoever creates a lot of wealth, earns a lot of money.” Nicolas Sarkozy

13-12-2019 : “Question from a student ”

What methods can be used to value a restaurant or an hotel or a local grocery store? As they are small entities, they are very often valued according to shopkeeper rules, without contempt, i.e. on the basis of X times a week's turnover. There are indeed tables and recommendations from the tax authorities in this area based on thousands of sales observations. For these small businesses, forget about discounting free cash flow, there is no business plan and the published result rarely corresponds to an economic reality because often the operator is partly remunerated by expenses that he or she should bear personally but that are charged to the business. For example, the gas tank in the grocery store's wife's car is charged to the grocery store with the gas tank in the van used to make deliveries... Therefore, turnover is often a more reliable indicator of the result than the result itself! Hence the basis of a multiple of turnover to value these very small companies with often identical margin rates, because they all support approximately the same cost structure. Have a good day

12-12-2019 : “Quote of the day ”

“Recipe for sleepless nights: invest blindly in a hedge fund.” The Financial Times

11-12-2019 : “Question from a reader ”

How to calculate the right of ordinary shares of a company when there are preferred shares (representing the know-how of each partner that are non-transferable) with a statutory profit distribution key: 70% of the result for the preferred shares and the remaining 30% of the net income distributed according to the percentage of the capital held (net income distributed each year at 100% because the company is tax transparent)? If, in addition to the right to 70% of the net income, the preferred shares are also entitled to a liquidation bonus of 70% in the event of cessation of activity, then the preferred shares receive 70% of the value, the remaining 30% goes to the ordinary shares. In this case, the entreprise value and the equity value are not affected, only the allocation to each category is then taken into account, according to this 70-30 allocation key. Have a good day

10-12-2019 : “Quote of the day ”

“If you don't have a few bad debts then you're not in business.” Paul Volcker

09-12-2019 : “Response to last Friday's brainstorming ”

First of all, let us remind you of the problem: A company controlled by an 80% shareholder and with a 20% free float issues new shares for 11% of its capital that are entirely subscribed by the free float. However, the share of the latter does not increase to 20 + 11% = 31%, but to only 28%? Why? The 11% of new shares issued, calculated on the basis of the current capital, does not constitute 11% of the new capital after the capital increase, but only 11/111 = 10% of the new capital. Here is a first explanation. The second is that the current shareholders, before taking into account their subscriptions, are diluted by 11/111 = 10%. Thus, those who had 20% dropped to 18% before rising by 10% thanks to their subscription to the capital increase. Hence the 28%. Have a good day

06-12-2019 : “Weekend Brainstorming ”

A company controlled by an 80% shareholder and with a free float of 20% issues new shares for 11% of its capital which are fully subscribed by the free float. However, the share of the latter does not increase to 20 + 11% = 31%, but to only 28%. Why? As usual, we will give the answer on Monday. Until then, good thinking and a good weekend.

03-12-2019 : “Quote of the day ”

“Performances from the past do not prejudge future performances.” Anonymous

28-11-2019 : “Quote of the day ”

“Liquidity is there until it is not - that is the reality of modern markets.”
Jim O'Neil

27-11-2019 : “Auction or private negotiation ? ”

A few weeks ago, the listed investment company Wendel announced that it had taken control of Crisis Prevention Institute, a US company, for 23.3 times its EBITDA. This is obviously not cheap, but a double-digit growth company, resistant to the crisis and with high margins (EBITDA is $39m for a turnover of $86m) does not come cheap nowadays. This acquisition was made by mutual agreement, without a private auction process, which shows once again that the price obtained does not necessarily depend on the chosen negotiation process and that private negotiation also makes it possible not to sell off a company! In fact, in the minds of many, private auctions are synonymous with value maximization, much like Christie's with the Salvatore Mundi painting of Vinci. The scientific analysis has shown that this first impression is false and that the price obtained for the sale of a company does not depend on the sales process, as the example of Wendel illustrates again. For the scientific reference, see The Vernimmen.com Newsletter of November 2007, n° 28. Our 38 years of cumulative experience in mergers and acquisitions does not tell us a different story. On the other hand, if you want to demonstrate to third parties (a shareholder, a board of directors, a regulator, etc.) that you have made every effort to obtain the highest price for a subsidiary, the choice of private auction will of course be the easiest to defend, even if it is not based on reality. Have a nice day.

26-11-2019 : “Quote of the day ”

“Enter the London stock exchange, ... There the Jew, the Mohammedan, and the Christian deal with each other as if they were of the same religion, and give the name of infidel only to those who go bankrupt.”
Voltaire, French writer from the 18th century

25-11-2019 : “Question from a participant in ICCF@Columbia Business School ”

In the context of a company valuation, in the event of the existence of tax loss carryforwards that may generate tax savings in the future, is it preferable to value these tax savings using the cost of equity or rather the (weighted average) cost of capital as the discount rate? In most cases, tax loss carryforwards are implicitly measured in a discounted free cash flow (DCF) in which, instead of taking the theoretical tax rate applied to operating income, this calculation is made taking into account the existence of tax loss carryforwards until they have been exhausted. Therefore, they are implicitly valued on the basis of a discount rate that corresponds to the cost of capital since it is the one used in a DCF calculation. If we now want to evaluate them in isolation, logic would suggest that we take the cost of equity as the discount rate. As a matter of fact, tax loss carryforwards are only valuable if the company generates sufficient pre-tax income. As pre-tax income is after financial expenses, it is more likely to be subject to the shareholder risk than to the risk of operating assets. Hence the logic in this case of discounting at the cost of equity capital, which seems more rigorous, but which seems to be less often practiced. Have a nice day

22-11-2019 : “Quote of the day ”

“Don’t congratulate us when we buy a company, congratulate us when we sell it. Because any fool can overpay and buy a company.”
Henry Kravis, founder of the investment asset manager KKR

21-11-2019 : “Question from one of our readers ”

Assume that the cost of capital of a company is 10%. If it has a 15% project but still wants to evaluate whether buying back shares wouldn't be more interesting, how does it calculate the profitability of a share buyback to decide what it does with its cash? How is the profitability of these share buybacks assessed? The rate of return on a share buyback corresponds to the company's cost of equity. Indeed, this is the discount rate that equals the present value of all future dividends estimated to the value of the share today. Indeed, by buying back shares, it is as if the company were investing in its own shares in the same way as a new shareholder. However, this figure is not very useful, contrary to appearances. Indeed, you cannot compare it with the rate of return on your cash or that of a company investment because the risk levels of these investments are not the same, a condition that must be respected in order to be able to compare rates of return between them. In your example, if the company can make an investment that pays 15% when its cost of capital is 10%, you should not hesitate to make it, regardless of whether or not it also does a share buyback. As for the decision whether or not to buy back shares, it will depend fundamentally on the excess cash available to the company, its prospects of being able to use it in attractive investments in the coming years, and finally its perception of the significant undervaluation of the market value of its share (the stock market price for a listed company) in relation to its estimate of the intrinsic value of its share. More details in chapter 36 of the Vernimmen.

20-11-2019 : “Quote of the day ”

“Hedge funds are to the asset management industry what talkies have been to the silent movie in the film industry.”
Patrick Fauchier, founder of an hedge fund

19-11-2019 : “Question from a student ”

Is it logical to use only one single cost of capital to discount the cashflows of an investment over a long period of time? No, it's not very logical but it's very practical! We can look in a number of scenarios when the risk of the company's operating assets changes over time. For example, a company that would have the concession to build an underground tunnel under the Strait of Gibraltar, which is at high risk as long as the tunnel is not built, and once the tunnel is built the risk becomes very low since the tunnel becomes a rent. That said, the additional precision that is provided is often derisory compared to the use of a single rate that is like an average, and compared to the intrinsic uncertainty that weighs on futures cashflows, often much greater than the precision that would be provided by the use of several capital costs over time in this type of situation. Also very rarely implemented. Have a good day.

18-11-2019 : “Quote of the day ”

“The rich have a responsibility to use their money wisely.”
The Financial Times

15-11-2019 : “Share buyback tender offer and capital increase of Free ”

You may have been surprised by the announcement of Iliad, better known under its brand Free, of a €1.4 billion public offer to buyback shares in Iliad financed by a capital increase of the same amount, both transactions being carried out at the same price, significantly higher than Iliad's share price at the time of the announcement on Tuesday: €120 versus €95. The capital increase is fully underwritten by the founder and main shareholder, Xavier Niel, who will not participate in the share buyback tender offer and whose percentage could therefore increase from 52% to 72%. It is indeed strange to proceed at the same time with the creation of new shares and the destruction of the same amount of shares at the same price. Maybe you yourself said it wasn't serious. In fact, it is probably the only tool available, given stock market laws, for a majority shareholder who wants to significantly strengthen his control over a listed company without delisting it, since a takeover bid, even a simplified one, must cover the entire share capital. As for buying shares on the market, given its size (20% of the capital and 40% of the free float), it would risk causing prices to soar, especially since its initiator would have to report its daily purchases of securities. If you are a Free shareholder and you are wondering whether you should participate in the share buyback tender offer, the answer is in Chapter 37 of the Vernimmen. Have a nice day.

14-11-2019 : “Quote of the day ”

“Capitalism's biggest political enemies are not the firebrand trade unionists spewing vitriol against the system but the executives in pin-striped suits who extol the virtues of competitive markets with every breath while attempting to extinguish them with every action.”
Raghuram G. Rajan and Luigi Zingales, finance professors

12-11-2019 : “Quote of the day ”

“What the market does is to reduce greatly the range of issues that must be decided on through political means, and thereby to minimize the extent to which government need participate directly in the game.”
Milton Friedman

11-11-2019 : “Answer to the weekend brainstorming problem. ”

First of all, let's remind the problem: you pay 1000 to an IT service provider who provides you with a software in an SaaS mode for 3 years In accounting terms, under IFRS, is it an intangible asset that you will depreciate over 3 years, a right of use that you will depreciate over 3 years as an operating lease (IFRS 16), or a prepaid expense? Well, it is not an asset (because under IFRS you are not the only one who can use this software), nor a right of use (because you cannot decide when to update this software or when to reconfigure it), so it is a prepaid expense, and therefore potentially an element of the working capital. In any case, this is what the IFRS Interpretation Committee, the former IFRIC, decided. And if you find it doesn't make much sense that it's not treated as a lease, that's not the point. You will understand better when you know that in this 14-member committee, there is only one representative of the users of the accounts, a former fund manager in Japan, a country that has not adopted IFRS. Have a nice day.

08-11-2019 : “Weekend Brainstorming ”

You pay 1000 to an IT service provider who provides you with a software in an SaaS mode for 3 years In accounting terms, under IFRS, is it an intangible asset that you will depreciate over 3 years, a right of use that you will depreciate over 3 years as an operating lease (IFRS 16), or a prepaid expense? The answer will be Monday. Until then, have a good weekend.

08-11-2019 : “Quote of the day ”

“Pay peanuts, get monkeys, pay stock-options, get gamblers!”
Eric Briys

07-11-2019 : “Make a capital increase to lower your cost of capital? ”

Those of you who read us regularly know that we have always thought that the cost of capital of a company was not determined by its financial structure. In particular, we have always opposed leveraged share buybacks to allegedly lower the cost of capital, which mainly allow their promoters, investment bankers, to sell two products in one (share buybacks and the credit or bond issued) in defiance of intellectual honesty.

Since the tax advantage of the debt (tax deductibility of the interest from the tax base) wrongly put forward to support this argument disappears under the triple effect of very low interest rates, historically low corporate tax rates, and an almost general limitation on deductibility capped at a percentage of EBITDA, we were hearing less of the argument these days. For more details, see Chapter 31 of the Vernimmen.

For the first time, we have just seen the exact opposite argument used: that of the capital increase, in this case the €200 million increase by La Perla, which would make it possible to reduce the cost of capital, under the pen of the arranger banker for this operation. What a Copernican revolution! But no more than indebtedness made it possible to reduce the cost of capital, the capital increase cannot either, since the cost of capital depends only on the market risk of operating assets.

We will not fail to smile about it. On that note, have a good day.

06-11-2019 : “Quote of the day ”

“Prosperity is the result of matching brains with capital and holding both sides accountable.”
Reuven Brenner

05-11-2019 : “Question asked on the vernimmen.com website. ”

Can I use to discount the free cash flows of an investment the interest rate I pay on the loan I have contracted to finance this investment? No, you should not as the relevant discount rate for a DCF of an investment is the WACC of that investment and not the interest rate of the loan you can get to finance this investment. The reason? You get this loan because you have a certain level of equity which gives confidence to your lenders that you will be able to repay in time your debt, and that equity must be properly remunerated which is not the case if you use the interest rate of the loan as the WACC of this investment. Have a nice day.

04-11-2019 : “Quote of the day ”

“The publicly held corporation, the main engine of economic progress in the United States for a century, has outlived its usefulness in many sectors of the economy and is being eclipsed.”
Michael Jensen

31-10-2019 : “Quote of the day ”

“All you have on Wall Street is your reputation. If you lose that, you are toast.” Andy Kessler

29-10-2019 : “Quote of the day ”

“Liberalism is the only doctrine likely to fulfill the hopes and promises of the largest number of people in the most equal manner.” Nicolas Tenzer

28-10-2019 : “Question from one of our students ”

Concerning the analysis of working capital ratios (Customers, Suppliers, Inventories), if we want to monitor internally, should we use a 12-month moving average or is there another method? Internally, we obviously have much more data and elements than an external observer. You can track the information for the past month by multiplying your ratio of working capital to the last month's revenues, not by 365 but simply by 30. So you are more responsive than if you were using a 365-day moving average. That said, there will naturally be noises, linked to specific and contingent operations that an average over a longer period of time would have made it possible to eliminate/hide, but that is the whole point from an operational management control perspective to uncover abnormal items. Have a nice day

25-10-2019 : “Quote of the day ”

“The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the “rules of the game” and as an umpire to interpret and enforce the rules decided on.” Milton Friedman

24-10-2019 : “Question from a reader. ”

What are the impacts of regulatory non-compliance (e.g., with the GDPR) on the valuation of companies? The impact is certain, see for example the payment of BNP Paribas' $9 billion fine in the United States, which reduced the bank's market capitalization by at least as much. But it is very difficult to integrate into a valuation because it is a specific risk and not a market risk. At most, it can be said that some sectors particularly exposed to this risk are valued with lower multiples, such as a discount that investors would apply to hedge against this risk in a somewhat flat-rate way, see banks over the past 10 years, and perhaps Google + Facebook now, given their behaviour poorly appreciated by antitrust authorities. Have a nice day

23-10-2019 : “Quote of the day ”

“Getting rich will almost certainly require extraordinary hard work: there is no real luck involved.” Felix Dennis, a British multimillionaire

22-10-2019 : “Question from an ICCF@Columbia Business School participant. ”

Considering investment as an immediate deprivation of liquidity pending a greater liquidity in the future, I would like please more explanations on how working capital is an investment. In this case, can a receivable (a working capital element) generate more liquidity than its carrying amount? This is easier to understand with an example. You buy 100 of raw materials in month 1 and pay cash. You process these raw materials in month 2 with 60 of wages that you pay cash, and you sell your widgets in month 3 for 180 that are paid to you in month 4. You therefore had to invest 100 in the first month, investment increased to 160 in the second month and you receive 180 in the 4th month. The working capital therefore corresponds in this example to a renunciation of immediate liquidity (of up to 160) in favour of higher and subsequent liquidity (180). What prevented you from seeing this situation was the too fine a level of your analysis, at the level of the components of the working capital and not at the overall level of the working capital. Have a good day

21-10-2019 : “Quote of the day ”

“Believing that specialists in financial arrangements have suddenly become infallible, amounts to doubting the law of universal gravitation.” Wilbur Ross

18-10-2019 : “Question from a Vernimmen reader. ”

For which type of companies is direct valuation (P/E ratio and discounting of dividends) no worse than indirect valuation (determination of the enterprise value first by using multiples of operating income or of EBITDA or discounting of free cash flows, then subtracting the value of net debt)? For a company that has no significant net bank and financial debts and pays almost all of its profits in dividends and/or share buybacks, such as BIC for example. These cases are still quite rare. The absence of significant net debt avoids the distortion of the multiples that debt causes. A payout ratio close to 100% means that dividends and free cash flows are very close, which avoids, in the direct approach of discounting dividends, mispricing reinvestment since it is (almost) zero. For more details, see Chapter 37 of the Vernimmen. Have a nice day.

17-10-2019 : “Quote of the day ”

“If all of our work goes towards amassing material goods, we end up building our own prison. We lock ourselves up, alone with our dead currency that buys nothing worth living for.” Antoine de Saint-Exupéry

16-10-2019 : “ Question from a participant ICCF@Columbia Business School ”

Concerning the analysis of working capital ratios (Customers, Suppliers, Inventories), if we want to monitor internally, should we use a 12-month moving average or is there another method? Internally, we obviously have much more data and elements than an external observer. You can track the information for the past month by multiplying your ratio of working capital to the last month's revenues, not by 365 but simply by 30. So, you are more responsive than if you were using a 365-day moving average. That said, there will naturally be noises, linked to specific and contingent operations that an average over a longer period of time would have made it possible to eliminate/hide, but that is the whole point from an operational management control perspective to uncover abnormal items. Have a nice day

15-10-2019 : “Quote of the day ”

“Becoming a billionaire has never been so easy.” Forbes Magazine

14-10-2019 : “Investment funds and the stock exchange. ”

Investment funds have a reputation, scientifically demonstrated by financial researchers, of not leaving any money on the table, in other words, of valuing the shares of the companies they list at the highest level they can and that investors accept. The latter cannot then play the game of participating in the introduction and reselling a few hours/days later by pocketing the introduction discount, previously estimated at between 5 and 10%. The IPO of Veralia, an Apollo's participation, 10 days ago is an illustration of this. For an introductory price of €27, at the bottom of the announced range (€26.5 - €29.5), the price after a slight and brief rise (maximum €28.6), stabilized after 6 trading days on Friday evening at €27.16. In contrast, in Scandinavia, the investment fund management company EQT appears to have been much more lax/generous/conscious of the long term. Introduced on 23 September at the top of its range of 62 to 68 SEK, at 67 SEK, its price soared by 25% on the first day and ended at 90 SEK on Friday evening, representing a performance of 34%. This is a (very) good news for the original public shareholders, as it is always a good basis for further capital increases in order to provide this investment fund management company (€40 billion in LBOs, infrastructures, and debts) with new equity capital to invest as a significant initial shareholder (cornerstone) in the funds it regularly raises. This may explain this. But this initial public offering, long after those of the large Americans (KKR, Apollo, Carlyle, Blackstone), paradoxically illustrates the disaffection for the stock markets and the continuous rise in unlisted investments, since it will give EQT more resources to delist more companies, even if nothing is definitive in this area, as shown by the example of Veralia. However, it can be said that Veralia only went public because the private equity market probably valued it less well. Have a nice day

11-10-2019 : “Quote of the day ”

“A speculator is someone who takes risks of which he is aware. An investor is someone who takes risks of which he is unaware.” John Maynard Keynes

10-10-2019 : “Never despair of the IASB ”

As part of its long-term project, Better Communication in Financial Reporting, the IASB is expected to release a preliminary document for public comment in the last quarter of 2019. The IASB plans to reintroduce in the notes to the financial statements the exceptional items for the year that it removed from the income statement in 2002. It would be better to reintroduce them in the income statement, but this is already an improvement on the current situation, where they are banned, which encourages companies to introduce agregates that include current income and non-current items, without ensuring that the distinction between the two is rigorous... accounting. In the same area, the current gap in IFRS, which does not provide for any mandatory elements in an income statement other than sales and net income, would be filled. Which is a little short, though. While companies would remain free to present their income statement by function or nature, those presenting them by function should nevertheless present in the annex a breakdown of their expenditure by nature, which normally gives more information on the structure of the income statement. Smile and have a good day.

09-10-2019 : “Quote of the day ”

“Philanthropy drives innovation and provides the flexibility to experiment and take risks where government can’t or won’t.” Michel Bloomberg

08-10-2019 : “Question from one of our students in HEC Paris ”

Why do some groups, particularly listed ones, have a financial interest in the current context in increasing their payment terms, even if it means paying a little more for the goods and services they acquire? Let's take an example. A group which buys every month for 100 of staples asks its supplier to pay them with a delay increased by one month. It thus reduces its working capital by 100 and improves its equity value by 100 as its net financial debt is reduced by 100. Assume its accepts to pay them 0.2% more for their staples to offset the increased payment terms. Over a year its cost base has increased by 100 x 12 x 0.2% = 2.4. Assume its EBIT multiple is 15. The negative impact on its value is 2.4 x 15 = 36. Way below the gross increase in value which is 100, hence a net impact of 100 - 36 = 64. For suppliers, getting 0.2 per month for an increase working capital of 100 is tantamount to an interest rate of 2.43% which is bigger than their likely cost of debt. Obviously in value term, they are loosing : 15 x 2.43 = 36 which is less than 100 (you cannot create value out of thin air), but if they are not listed or if they are cash rich, they do not really care/understand and may even like it if they are cash rich (difficult nowadays to find short term investment opportunities yielding 2,4 % a year. Have a nice day.

07-10-2019 : “Quote of the day ”

“If we do not share our wealth, we risk getting burnt.” Didier Pineau-Valencienne

04-10-2019 : “Question from a student ”

In the case of a valuation by comparison using an indirect approach by calculating EBITDA or EBIT multiples, the market capitalization is taken as equity in the calculation of the entreprise value. In this case, what about reserves, retained earnings, net income for the year? Through market capitalization, investors value the company's entreprise value less its net bank and financial debts, i.e. its equity in its entirety, regardless of whether it corresponds to share capital, or to legal or optional reserves, or to retained earnings. This accounting breakdown is of no financial importance, because whatever the accounting name, it is equity. Have a nice day

03-10-2019 : “Quote of the day ”

“Give until it hurts ... But keep at least a few hundred million dollars on hand, you never know. “

02-10-2019 : “Question from a participant ICCF@Columbia Business School ”

In the intrinsic method of valuing companies, and with a direct approach, does the discounted valuation of dividend flows not undervalue a company that makes a large profit but distributes very few dividends? The company may not be valued well, either in excess or by default, because experience shows that making the link, as required in this method, between the retention rate of results (1 - payout ratio) and the dividend growth rate in the future, without any more elements, is rather arbitrary and above all undocumented. This is why indirect approaches have replaced direct approaches, based not on a wet finger, but on a business plan that can be tested and challenged. Have a good day

30-09-2019 : “Solution of the weekend brainstorming session ”

Let us first recall the problem : Will you be able to calculate the IRR of this investment, which results in an initial positive cash flow of 4 (receipt of a subsidy), then negative of - 7 the following year (due to operating losses and investments) and finally positive of 4 the last year (resale of fixed assets and working capital)? We can think of the operation of a bus line to connect a charming village lost in the Highlands to a major city. If the time period is only 3 years, it is to simplify your calculations. And if not, the IRR of this second investment? An initial disbursement of 1 (negative cash flow), then a positive flow of 7.2 the following year and finally a disbursement of 7.2 in the last year (for example, clean-up work). Again, if the duration is only 3 years, it is to simplify your calculations. In fact, this first investment has no IRR. Mathematically the equation 4 - 7/(1+IRR) + 4/(1+IRR)^2 = 0 does not admit a solution in the real world. You must have had the Excel IRR function crash on this occasion. And the second investment admits two IRRs: 20% and 500%. And you also had the Excel IRR function crash on that occasion! You are well advanced if your minimum required rate is 22%! To get out of this impasse and be able to make choices, then use the net present value criterion. Good start to the week

27-09-2019 : “Weekend Brainstorming ”

Will you be able to calculate the IRR of this investment, which results in an initial positive cash flow of 4 (receipt of a subsidy), then negative of - 7 the following year (due to operating losses and investments) and finally positive of 4 the last year (resale of fixed assets and working capital)? We can think of the operation of a bus line to connect a charming village lost in the Highlands to a major city. If the time period is only 3 years, it is to simplify your calculations. And if not, the IRR of this second investment? An initial disbursement of 1 (negative cash flow), then a positive flow of 7.2 the following year and finally a disbursement of 7.2 in the last year (for example, clean-up work). Again, if the duration is only 3 years, it is to simplify your calculations. See you on Monday for the results. Good calculations, and good weekend.

26-09-2019 : “Successful placement of an indexed bond with sustainable objectives. ”

Last week, the Italian electrician Enel raised $1.5 billion at 5 years with a coupon of 2.65%, or 5 basis points (0.05%) below its reference curve. In the event that Enel is unable to increase the share of renewable energy from 45.9% to 55% by 2021, the coupon would be increased by 25 basis points from 2022 to 2024, representing an additional cost of $11.25 million for Enel, which is beginning to be a significant penalty. The savings achieved are much more modest, since it is estimated that, given the current liquidity of the listed debt market, Enel could have issued a traditional bond at a rate corresponding to that of its benchmark curve, i.e. 2.70%, the gain over 5 years is only €3.75 million. Investors are still not making significant financial efforts to promote the ecological transition. Have a good day

25-09-2019 : “Quote of the day ”

“Societies that are driven by trade and an unchecked desire for wealth are steered by the conformist tyranny of the majority. “
Raymond Aron

24-09-2019 : “Question from one of our students ”

Is there a standard plan for financial engineering work, as there is in financial analysis: Wealth generation requires investments that must be financed and be sufficiently profitable? Not particularly because each case is truly unique. But before any financial engineering study is carried out, a financial analysis and evaluation of the company should be carried out to understand the current situation and possibly detect the problems that financial engineering will then help to solve. Have a nice day

23-09-2019 : “Quote of the day ”

“The world is threatened by an unrelenting conformity of an anonymous totalitarianism and impossible paradigm in which the dream of unlimited personal enrichment triumphs over all.”
Jean Peyrelevade

20-09-2019 : “The composition of stock market indices over the past 35 years ”

A few days ago Marks and Spencer's exited from the London Stock Exchange's flagship index, the FT 100, and since its inception in 1984, only just over a quarter of the original constituents are still members of this club. Two thirds were acquired by other groups (Cadbury Schweppes, Blue Circle, Scottish & Newcastle, General Accident, Ladbrokes, GEC, etc.), which confirms that on the London stock exchange everything is potentially for sale as long as the price is there. Only one group went bankrupt. On this occasion, a look back on the CAC 40, the flagship index of the Paris Stock Exchange, does not show a very different evolution. Created in 1988, only 15 of the 40 original components are still present. 2 exited from it by marginalization and then went bankrupt (Pechelbronn, Sequana's ancestor, and Crédit Foncier), 16 were acquired (Lafarge, Paribas, Alcaltel, Darty, Club Med, etc.), 4 became too small to remain there (Hachette, Chargeurs, CGIP and Casino) and 3 were heavily restructured (Compagnie Générale des Eaux, Compagnie Générale d'Electricité and Thomson CSF). Brexit or not Brexit, a common lesson for groups: Adapt or die. Have a nice day.

20-09-2019 : “The composition of stock market indices over the past 35 years ”

The composition of stock market indices over the past 35 years A few days ago, Marks & Spencer exited from the London Stock Exchange's flagship index, the FT 100, and since its inception in 1984, only just over a quarter of the original constituents are still members of this club. Two thirds were acquired by other groups (Cadbury Schweppes, Blue Circle, Scottish & Newcastle, General Accident, Ladbrokes, GEC, etc.), which confirms that on the London stock exchange everything is potentially for sale as long as the price is there. Only one group went bankrupt. On this occasion, a look back on the CAC 40, the flagship index of the Paris Stock Exchange, does not show a very different evolution. Created in 1988, only 15 of the 40 original components are still present. 2 exited from it by marginalization and then went bankrupt (Pechelbronn, Sequana's ancestor, and Crédit Foncier), 16 were acquired (Lafarge, Paribas, Alcaltel, Darty, Club Med, etc.), 4 became too small to remain there (Hachette, Chargeurs, CGIP and Casino) and 3 were heavily restructured (Compagnie Générale des Eaux, Compagnie Générale d'Electricité and Thomson CSF). Brexit or not Brexit, a common lesson for groups: adapt or die. Have a nice day.

19-09-2019 : “Quote of the day ”

“Merchants are more than useful to the state, and the importance they accord to profits (...) is responsible for a large part of the public wealth. It is for this reason that we should allow them their love of these profits which they strive to make. “
Jean-Baptiste Colbert

18-09-2019 : “Question from a Vernimmen reader ”

In financial analysis, should a fleet of rental cars be treated as current assets because the cars are sold or bought back by the manufacturer after an average of 9 months, or as fixed assets? While Avis records its car fleets as fixed assets in its accounts and Europcar as current assets, in an capital-employed analysis of the balance sheet, car fleets are part of fixed assets and not part of the working capital. Indeed, the elements of the working capital are transitional and only appear once within the working capital: a customer receivable appears, remains for a few weeks, then is settled and disappears as a result, even if it is replaced by another, perhaps from the same customer, but for a different amount and maturity. A rental car, even if it remains only 9 months on average within the company before being sold or taken over by its manufacturer, will be used several times by different customers, giving rise to different invoicing. From a functional point of view, there is nothing different here than a bread oven, for example, which regularly makes bread batches that are sold daily to customers. Even if you have decided to sell it after 9 months, it will remain an asset from a functional or economic point of view. Similarly, if you have, as in a limited number of sectors, trade receivables due in more than one year, you classify them as working capital because they are trade receivables; or a dividend payable that you will attach to equity and not to short-term financial liabilities. Now if your concern is to study the company's liquidity, you will use a solvency-and-liquidity analysis of the balance sheet that classifies assets by liquidity, and therefore these car fleets into current assets; and liabilities by maturity and therefore the dividend to be paid among short-term debts. For more details, read chapter 4 of Vernimmen again.

17-09-2019 : “Quote of the day ”

“If I were to go through my memories to find the most lasting, if I were to tally up the hours that mattered the most, I am certain that they would be the ones that could not have been bought with all of the money in the world. “
Antoine de Saint-Exupéry

16-09-2019 : “Solution of the weekend brainstorming session ”

Let us already recall the problem EBITDA for the first half of the year was 9.3% of sales. EBITDA for the second half of the year was -9.3%. Yet the annual EBITDA is 1.3% of the annual turnover. How is that possible? It is sufficient that the base to which the % EBITDA applies is not the same in the first half as in the second half. For example, 100 in the first half, i.e. an EBITDA of 9.3 and 75 in the second half, or an EBITDA of -9.3% x 75 = -7 and (9.3 -7)/(100 +75) = 1.3%.. Have a good day.

13-09-2019 : “Weekend Brainstorming ”

An easy bustle we think to pick up this good habit after the summer holidays. EBITDA for the first half of the year was 9.3% of sales. EBITDA for the second half of the year was -9.3%. Yet the annual EBITDA is 1.3% of the annual turnover. How is that possible? Good thinking and see you Monday for the answer.

12-09-2019 : “Quote of the day ”

“The arbitrary divide that is in the market now between traditional strategies and hedge fund strategies, is absolutely arbitrary.”
Blake Grossman

11-09-2019 : “Quote of the day ”

“Our lives are worth more than their profits.”
Revolutionary Communist League

10-09-2019 : “Question asked during a recruitment interview for trainees. What is the impact of a credit sale of 100 on the 3 main financial statements? ”

On the income statement, there was an increase in sales by the amount of sales (VAT excluded), a decrease in inventories of finished goods for an amount equal to the cost of production of the object thus sold and an increase in the profit before tax for the amount of the difference between the sales and the production cost. The corporate income tax increases by the corporate income tax generated by this sale and the net result by the amount of the net result generated by this sale. On the balance sheet, the receivables increase by the amount of the sale inclusive of VAT, inventories of finished products decrease by the production cost of the object sold and on the liability and equity side, the equity increases by the amount of the net result generated by this sale. Lastly, debts to the state increases by the VAT collected on this sale as well as the corporate income tax generated by this sale. On the cash flow statement, the net income or the cash flow from operations are increased by the net income generated by the sale. The change in working capital is increased by the same amount (sales including VAT - cost of production which reduces inventories - VAT collected - corporate tax payable), so that the impact on the cash flow from operations is nil; which is logical as the customer has not yet paid, the impact on the cash of the company of this sale on credit is nil. Have a nice day!

09-09-2019 : “Quote of the day ”

“The art of being a good director lies in asking the right questions.”
Rémy Sautter

06-09-2019 : “Question from a Vernimmen user. ”

Can we basically discount identified, future operational synergies with WACC? Yes, you can use the WACC you find in the annual reports or compute to discount operational synergies. But beware, here the problem is not the WACC but the profile of synergies over time. Most people tend to assume they will stay stable over time, which is a fantasy as competitive pressures will force you to progressively give them back to customers (to fight back competitors which are likely to have also merged between themselves too as mergers go by waves in sectors), to employees, suppliers, etc. Look for example at the car industry as an illustration. Numerous mergers took place since 1910 allowing you and I to be able to buy a car thanks to a massive decrease in relative and absolute prices due to synergies created by mergers in this high fixed costs industry. Take care.

05-09-2019 : “Quote of the day ”

“Money that is nowhere must in fact be located somewhere.”
Sir Dennis Robertson

04-09-2019 : “Question from a reader ”

Is it relevant to value a telephone operator with a sum-of-the-parts method? In general, no, because licences do not have a value per se as they are not transferable, but must be returned free of charge to the authority which initially granted them in the event of a direct or even indirect transfer (depending on the country). Discounting of free cash flows and the use of multiples of comparable companies is the most common and appropriate approach. Have a nice day.

03-09-2019 : “Quote of the day ”

“I would rather bet on instinct, than a random DCF Model.”
A Finance VP in a manufacturing company

02-09-2019 : “Question from a student from ICCF@Columbia Business School ”

I want to make a valuation as of June 30, 2019. Is the first free cashflow to be considered the free cashflow of the second half of 2019? Hello, it depends on the date of the last known net debt. If you have it as at 30 June 2019, you can take as your first free cashflow the one for the second half of 2019 (which you will discount with an index of 0.25 if the flows are more or less regular each month). If the last known net debt is as at 31 December 2018, then you must take the free cashflow for the whole of 2019, which you will discount with an index of 0 if the flows are evenly distributed over the year and since we are in mid-2019. Have a nice day

30-08-2019 : “Quote of the day ”

“Never have I met a self-made rich man or woman whose family or relationships were not plagued by the burden of creation a fortune, even a small fortune.”
Felix Dennis, a British multimillionaire

29-08-2019 : “Beware of EBITDAs currently published ”

Like the one of Club Med, which posted an 88% increase in the first half of 2019 (to €180m), but of which 85% (out of 88%) was due to the entry into force of the new IFRS 16 standard on operating leases. Pay attention not only to the evolution of EBITDA, but also to its meaning, which is strongly affected by this new standard, of which we have had the opportunity to express all the evil of which we think (Why make it simple when you can make it complicated?). What made EBITDA popular is the fact that it is a leading indicator of its operating cash flow that the company will receive due to its activity. Indeed, it is the difference between all operating income and expenses that will sooner or later result in a cash inflow or outflow. This is no longer the case after IFRS 16, since part of the EBITDA (€82 million in the case of Club Med, out of €180 million) corresponds to a fraction of the operating rents already paid by Club Med to the owners of the properties it leases, and therefore not available for investments or to repay debts. For the time being, companies publish, like Club Med, the EBITDA for the first half of the year before and after IFRS 16 in order to ensure comparability of the financial statements. Let us hope that this will continue to be the case in the future so that readers of the accounts can find their way around. And to think that the IASB has sold its reform by saying that it would improve financial reporting... Optimists will think that the IASB will eventually do as Technip and FMC or Altria and Philip Morris who have just announced undoing what they did a few years ago. Have a good day

28-08-2019 : “Quote of the day ”

“In theory, there is no difference between theory and practice. But in practice, there is. “
Manfred Eigen

27-08-2019 : “Question from a reader ”

If corporate income tax is a tax charge, should we also consider that sundry taxes are also a tax charge or are they an operating charge? Unlike corporate income tax, sundry taxes are considered as operating expenses because they are rarely calculated on the basis of income but rather on upstream items such as value added, turnover and fixed assets. Have a good day.

23-08-2019 : “Question asked on the Vernimmen.com website ”

In the cash flow statement, should dividends be taken from the results of the previous financial year but paid in the current financial year, or should the amount of dividends decided in the AGM but paid in the following financial year be taken? In principle, in a cash flow statement, cash flows are taken into account when they are received or disbursed and not when they are generated. Thus, in the 2018 cash flow table, we will see the dividend paid in 2018, i.e. the dividend linked to the 2017 net income and not the dividend linked to 2018 net income, which will appear in the 2019 cash flow table. If necessary, review Chapter 5 of the Vernimmen. Have a nice day.

21-08-2019 : “Question from a reader ”

Regarding the calculation of the return on equity, can you tell me: - Which result should be used in the numerator (the consolidated result or the group share of the consolidated result)? - What amount of equity capital at the denominator (group share equity or total equity)? There is a principle of double coherence The first consistency is between the numerator and the denominator. Either they are both group share or they are both global. But we cannot have net income group share/overall equity because it would be like comparing pears and apples. The second consistency is related to the use made of the return on equity. In most cases, ROE is calculated to compare it with ROCE. Since ROCE is necessarily global, without distinguishing the share of minority interests in the group‘s operating result, the return on equity is then necessarily the return on total shareholders' equity Have a good day

19-08-2019 : “Public accounting, private accounting ”

Hello,

At the beginning of August, the United Kingdom announced a contraction of its GDP by 0.2% in the second quarter of the year, after an expansion of 0.5% in the first quarter of 2019, by blaming Brexit for these developments: British companies produced a lot in the first quarter to build up precautionary stocks in anticipation of an EU exit on 29 March; and as this was postponed by a few months, in the second quarter British companies produced much less to reduce precautionary stocks, hence the contraction in the second quarter.

In private accounting, where very little is reported on production but almost exclusively on sales and results, the second quarter would have been a good second quarter with sales and results unlike the first quarter, because producing for storage does not generate results or record sales.

But public accounting is more interested in the activity (to do) and private accounting for sale. In between are stocks that are normally only time lags, as the recent example of the United Kingdom reminds us. In the third quarter, a good GDP figure is expected, with UK companies restocking precautionary stocks in preparation for 31 October, before a fourth quarter that is expected to be worse due to destocking. But it is true that we are in the land of stop and go.

Have a good day.

30-07-2019 : “Quote of the day ”

“Yes, we have heard of shareholder value. But we put customers first, then workers, business partners, suppliers and dealers, and then shareholders. “ Ferdinand Piech, chairman of the board of directors of Porsche

29-07-2019 : “Quote of the day ”

“The idea that at all costs, the CEO's compensation should be linked to the share price, so that he will give his best for the company, is obscene.” Jean-Cyril Spinetta

26-07-2019 : “Quote of the day ”

“Our prosperity will be driven by work rather than leisure, by the market rather than the State, and by Europe rather than the nation.” Michel Pébereau

25-07-2019 : “Question asked on the Vernimmen.com website ”

What would be the method to be adopted for the valuation of a company wholly owned by a State for sale to a private investor, knowing that the objective of this company is not the maximisation of shareholder value, but social welfare? We do not believe that there is an ad hoc valuation method for this type of company. This society values itself like others, with cash-flows and results that can be affected, positively or negatively, by its social objective. As you sell its control, use transaction multiples, not trading multiples; and ask yourself the question in a discounted free cash flow model of possible synergies with the acquirer(s). For more details, see Chapter 31 of the Vernimmen. Have a nice day.

24-07-2019 : “Quote of the day ”

“The CFO should be half accountant and half strategist and, to an increasing degree, an efficient communicator in both roles.” Siegfried Luther, Bertelsmann's CFO

22-07-2019 : “Quote of the day ”

“There are two superpowers in the world today in my opinion. There's the United States and there's Moodys Bond Rating Services. The United States can destroy you by dropping bombs, and Moody's can destroy you by dowgrading your bonds. And believe me, it's not clear sometimes who's more powerful.” Thomas Friedman

19-07-2019 : “Question from a follower of the Vernimmen.com Facebook page ”

While the European equity index, with dividends reinvested, has risen by 19.4% since the beginning of the year, the real estate company index has risen by only 13.7%. Is this not a sign that these are undervalued? No, not at all. In a bull market, it is normal for property company prices to rise at a slower rate because of their lower beta than the one of the market. The unlevered beta of real estate companies is 0.42 (as your Vernimmen reminds you in Chapter 29), compared to 0.79 for the entire market. However, the level of debt of these companies, which is certainly higher than that of the market as a whole, is not such that it can more than compensate for this low unlevered beta and make them more volatile than the market. Have a nice day.

18-07-2019 : “quote of the day ”

“Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means.” The Nobel Committee

17-07-2019 : “Where we discover that the historical origins of Vernimmen go back to 1209 and what they have in common with a famous song among students ”

Film designed and directed by HEC students for the 2019 diplomation ceremony. https://www.youtube.com/watch?v=pkC441EtROs Enjoy the moving!

16-07-2019 : “Quote of the day ”

“The idea that at all costs, the CEO's compensation should be linked to the share price, so that he will give his best for the company, is obscene.” Jean-Cyril Spinetta

16-07-2019 : “ Imperial Brands will pay fewer dividends than expected and invest more in future products ”

The twelfth largest dividend payer in the United Kingdom, cigarette manufacturer Imperial Brands (Winston, Gauloise) has just announced that its dividend will no longer increase by 10% per year as it has been doing since 11 years now in order to be able to finance additional investments in its e-cigarette division, which seems to have a brighter future than traditional cigarettes. The stock market price did not collapse, it rose on the day of the announcement and rose by more than 3% over the week. A new illustration that investors are first and foremost looking for value-creating investments, rather than just dividends. Have a nice day.

15-07-2019 : “Answer to the weekend brainstorming problem. ”

Let us first recall the problem: Thanks to your hard work, and also to the reading of the Vernimmen you must confess, you have identified a company that seems very promising to you with inexpensive shares. You buy 10 of its shares for 50 € each. Three years later, the price is 600 € and you consider that the perspectives that the company traces are still poorly reflected in its price. So you decide to buy an additional 100 shares for €600 each. One year later, the price reaches 1000 € and you decide to sell all the shares at that price. Which of the 2 purchases, the first or second purchase, was the most interesting from a financial point of view for you? You have made a great investment by buying 10 shares at 50 €, which 4 years later are worth 1000 €. Your IRR is 111%. On the second purchase, your IRR is much lower (67% in one year) while being very correct! But it is nevertheless the most interesting one from a financial point of view for you. It is the one that has enriched you the most: €40,000 compared to €9,500 for the first. Here we find the idea that net present value is a better indicator than IRR for comparing two investments. Having a very high rate of return on a small amount of money makes you feel good. It is certainly an intellectual satisfaction, but it will not change your life. It is better to have a smaller IRR on a much larger amount. Have a nice day

12-07-2019 : “Brainstorming problem for the weekend. ”

Thanks to your hard work, and also to the reading of the Vernimmen you must confess, you have identified a company that seems very promising to you with inexpensive shares. You buy 10 of its shares for 50 € each. Three years later, the price is 600 € and you consider that the perspectives that the company traces are still poorly reflected in its price. So, you decide to buy an additional 100 shares for €600 each. One year later, the price reaches 1000 € and you decide to sell all the shares at that price. Which of the 2 purchases, the first or second purchase, was the most interesting from a financial point of view for you? Good thinking and good weekend

11-07-2019 : “quote of the day ”

“Behind every great fortune is a crime.” Honoré de Balzac

10-07-2019 : “Why has the sharp drop in interest rates in Europe pushed house prices to record highs, unlike European equities, which have risen much less? ”

While interest rates financing real estate fell sharply, as did the 10-year government bonds (on which bank real estate financing is more or less based), from almost 5% in 2008 to 0% today, the cost of capital for companies fell much less: 9.1% to 7.4% because the equity market risk premium rose sharply in the meantime: 3-4% before the 2008 crisis and 7.3% currently reflecting the higher perceived risk on equities since 2008. For more details, see the historical equity market risk premium graphs in Chapter 19 of the Vernimmen and the cost of capital graphs in Chapter 26. Have a nice day

09-07-2019 : “Quote of the day ”

“Our old ally experience tells us that it is better to sell and pay your taxes than not to sell and then later regret it.” Benjamin Graham

08-07-2019 : “Answer to Friday's brainstorming. ”

First, let's recall the problem: If the question "one bird in the hand is worth two in the bush (in a year's time): what is the discount rate used by common sense in this saying?” should not be a problem for you, will you be able to find the monthly interest rate with capitalized interest after one month equivalent to this actuarial rate? Answer Monday, by then, have a good weekend! The answer to the first question is 100% (= (2-1)/1). The answer to the second question is 6%, not 8.3% (which is only the proportional rate, but not an equivalent rate), because (1+ 6%)^12 = 2 which is the ratio between the future sum (2) and the current sum (1). If necessary, chapter 17 of the Vernimmen is there to refresh your memory. Have a nice day.

05-07-2019 : “Brainstorming problem for the weekend. ”

If the question "one bird in the hand is worth two in the bush (in a year's time): what is the discount rate used by common sense in this saying?” should not be a problem for you, will you be able to find the monthly interest rate with capitalized interest at the end of each month equivalent to this actuarial rate? Answer Monday, by then, have a good weekend!

04-07-2019 : “Quote of the day ”

“Services provided by financial intermediaries are essential for triggering, facilitating and driving technological innovations and economic development. “ Joseph Schumpeter

02-07-2019 : “Quote of the day ”

“Those who cannot remember the past are condemned to repeat it.” Georges Santayana

01-07-2019 : “Question from a reader ”

Are deferred tax assets to be taken into account in calculating operating working capital? Deferred tax assets resulting from pure accounting entries are not to be taken into account in calculating operating working capital. They are not items requiring a financing, as they only result from some accounting standards. Have a nice day

28-06-2019 : “Quote of the day ”

“In the world of financial markets, courage becomes the ultimate virtue, once an adequate understanding and good judgment, backed up by the facts, are available.” Benjamin Graham

27-06-2019 : “Question from a reader ”

How can a company that sells its services only on a subscription basis have both trade receivables and deferred income on its balance sheet? To fully understand this situation, let us take an example. On December 1st, the company invoices 120 to a customer for an annual subscription that will run from December 1 to November 30 of the following year. It grants him two months of payment terms, so payment is expected on February, 1st. The company has a December 31th year-end. When the invoice is registered, it appears 120 on the trade receivables and 120 on sale, but since the customer has only consumed one month out of 12 of his annual subscription, the turnover can only be 10 and not 120. At the end of the year, the adjustment is made by reducing the turnover to 10 and the difference of 110 is recorded as deferred income on the liabilities side of the balance sheet. As a result, as at 31 December, there are 120 in trade receivables because the invoice is still not paid since it expires on 1 February, 110 in deferred income and 10 in net income (assuming that there are no expenses to simplify). And this means that economically at year end the customer owes you 120 - 110 = 10 which corresponds to his consumption of the annual subscription over one month. There is therefore a coexistence of trade receivables and deferred income on the balance sheet. Have a nice day.

26-06-2019 : “Quote of the day ”

“Perhaps investors – and unfortunately not just the uninitiated – should be reminded that on the stock market, over enthusiasm generally leads to disaster.” Benjamin Graham

25-06-2019 : “Why does working capital not make sense in a commercial bank? ”

Because a bank keeping its customers' accounts immediately deducts from them the sums they owe it (so there is no free payment facilities as there is for a company granting it to its customers), suppliers are negligible quantity (no purchase of materials or merchandise), at most wages to be paid a few days before the end of the month and associated social charges, there is no VAT on most banking transactions, and finally inventories in a bank are non-existent. Have a nice day!

24-06-2019 : “Answer to the weekend brainstorming problem ”

Let us first remind you of the question: Which large country has average payment terms exceeding those of Greece (90 days) and Italy (86 days)? Well, this is China with 92 days where one in four companies is paid four months after delivery (Source Euler Hermes). Have a nice day.

21-06-2019 : “Brainstorming problem for the weekend ”

Which large country has average payment terms exceeding those of Greece (90 days) and Italy (86 days)? Have a good reflection and see you Monday for the answer!
Have a nice day

20-06-2019 : “Quote of the day ”

“If you are unwilling to fail, sometimes publicly, and even catastrophically, you stand very little chance of ever getting rich.” Felix Dennis, a British multimillionaire

19-06-2019 : “Question asked during a recruitment interview for trainees. What is the impact of a credit sale of 100 on the 3 main financial statements? ”

On the income statement, there was an increase in sales by the amount of sales (VAT excluded), a decrease in inventories of finished goods for an amount equal to the cost of production of the object thus sold and an increase in the profit before tax for the amount of the difference between the sales and the production cost. The corporate income tax increases by the corporate income tax generated by this sale and the net result by the amount of the net result generated by this sale. On the balance sheet, the receivables increase by the amount of the sale inclusive of VAT, inventories of finished products decrease by the production cost of the object sold and on the liability and equity side, the equity increases by the amount of the net result generated by this sale. Lastly, debts to the state increases by the VAT collected on this sale as well as the corporate income tax generated by this sale. On the cash flow statement, the net income or the cash flow from operations are increased by the net income generated by the sale. The change in working capital is increased by the same amount (sales including VAT - cost of production which reduces inventories - VAT collected - corporate tax payable), so that the impact on the cash flow from operations is nil; which is logical as the customer has not yet paid, the impact on the cash of the company of this sale on credit is nil. Have a nice day!

18-06-2019 : “Quote of the day ”

“You can end up losing when you lend, but never when you give.” The BNP Paribas Foundation

17-06-2019 : “Question from one of our follower: If there are so many advantages with tap issues, why is it not used all the time frequent issuers are interested in tap issues? ”

As a reminder a tap issue is a new issue of a bond with the same characteristic than another bond issued a while ago, sold at the market price and which enlarges the size of the initial issue. When you are not a frequent issuer, you may only issue a bond every 2-4 years because your financing needs are not that high. Having issued 3 years ago a 5-year bond, either you tap your initial issue but the maturity of the new bond will be 5 - 3 = 2 years which is pretty short and may create a future liquidity problem in your balance sheet if you finance long term capex with the proceeds; or you issue a new bond for 5 or 7 years for example. Most unfrequent issuer will choose the latter option and will not tap their initial bond. For frequent issuers like governments, large corporates, etc. that issue bonds every quarter or semester, this is less of a problem, at least for the first years after the issue of a long term bond. They can do tap issues several times in a row, but after a while, they will stop for this liquidity problem as the maturity of the initial bond is fixed and cannot be changed. Have a nice day

14-06-2019 : “quote of the day ”

“If you're not failing every now and again, it's a sign you're not doing anything very innovative.” Woody Allen

12-06-2019 : “Quote of the day ”

“God gave me my money ..... I believe it is my duty to make money and still more money and to use the money I make for the good of my fellowman.” John D. Rockefeller

11-06-2019 : “Question from a reader ”

How would you recommend allocating depreciation charges in an income statement by function It is technically impossible to assign the depreciation charge to the various functions from which it was extracted. The information is not provided by the company, which has no obligation in this area. Only the total amount of the depreciation charge is given in the notes and in the cash flow statement. Any allocation you may make without access to the company's accounting records is likely to be arbitrary. Have a nice day

10-06-2019 : “Quote of the day ”

“Even a megaton of governance is no substitute for invention, entrepreneurial skill, originality, and sheer managerial competence and integrity.” Jonathan Charkham

07-06-2019 : “Question from a student from ICCF@Columbia Business School ”

The unlevered beta of a young fast-growing restaurant chain computed from stock market prices and its debt ratio of is 0.90.
The average of the unlevered betas of restaurant chains is 0.70.
Is there a start-up effect? Or should we use the industry's beta? As you can see in Chapter 18 section 5 of the Vernimmen, one of the determinants of beta is the degree of youth of a company. Indeed, a young company usually has a much higher growth rate than the more mature companies in its sector. It is not illogical if it has a higher beta. Indeed, because of its youth, most of the cash-flows it will generate are distant in time, and in any case more distant than those of more mature companies. This company is therefore much more sensitive to any variation in the market and the rate of return required by investors. To take an analogy with bonds, its duration and modified duration are higher. This is the definition of beta, which is the relative sensitivity of a company to the market. Another manifestation of this beta differential is the greenfield premium which is discussed in Chapter 29 of the Vernimmen. In conclusion, it is therefore only logical that in a given sector, a young company should have a higher beta than the sectorial beta Have a nice day.

06-06-2019 : “Quote of the day ”

“Rich men have it in their power to busy themselves in organizing benefactions from which the masses of their fellows will derive lasting advantage, and thus dignify their own lives.” Andrew Carnegie

05-06-2019 : “Question asked on the vernimmen.com website ”

In calculating the working capital, should we take trade receivables gross or net by deducting depreciation? Taking them net is indeed the practice of professionals. We recommend to use figures net of depreciation (inventories, trade receivables), as this makes it possible to establish the change more quickly on the basis of balance sheet data, the gross amounts of which are not always disclosed, even in the notes.
One might rightly think that it would be better to reconstruct the right average payment time for customers to reason on a gross rather than a net basis. As trade receivables losses generally represent at most 2-3% of sales, the calculation adjustment effort is really not worth it. You have to know how to balance your efforts! Have a nice day.

04-06-2019 : “Quote of the day ”

“Rich men have it in their power to busy themselves in organizing benefactions from which the masses of their fellows will derive lasting advantage, and thus dignify their own lives.” Andrew Carnegie

03-06-2019 : “Answer to lasts Friday brainstorming problem ”

First let’s us recall the brainstorming problem You have an investment project to carry out in the Maldives and you want to get into debt for 7 years in local currency. You have received two proposals: The third bank in the Maldives Islands offers you a loan of 10 million over 7 years at 7% provided you make a deposit of 5 million over the same period, with interest at 3%. An investment fund offers you a loan of 5 million over 7 years at an interest rate of 12%. What is your choice? Why? Does the bank deposit of the first solution qualify as cash under IFRS? And in finance, are you justified in including it in the calculation of net debt? The first proposal costs you 700,000 - 150,000= 550,000 per year compared to 600,000 for the second. But that's not enough reason to accept this first offer, because you know that in finance you can't separate risk from return, and return from risk. The first solution involves a credit risk of 5 million on a bank whose solvency is probably difficult to assess for a corporate financier, especially since the Maldives is probably not Switzerland! It is better to pay 50,000 more each year than to take that risk. A deposit with a term of more than 3 months cannot qualify under IFRS as a liquid asset. It will be a long term financial asset. In valuation, it will qualify as a reduction of financial debt. In financial analysis, we are more in favour of leaving it as a non-operating financial asset. Have a pleasant day.

31-05-2019 : “Brainstorming for the weekend ”

You have an investment project to carry out in the Maldives and you want to get into debt for 7 years in local currency. You have received two proposals: The third largest bank in the Maldives Islands offers you a loan of 10 million over 7 years at 7% provided you make a deposit of 5 million over the same period, with interest at 3%. An investment fund offers you a loan of 5 million over 7 years at an interest rate of 12%. What is your choice? Why? Does the bank deposit of the first solution qualify as cash under IFRS? And in finance, are you justified in including it in the calculation of net debt? Think it over and let’s meet here on Monday for the solution.

30-05-2019 : “Quote of the day ”

“The corporate spirit offers man the possibility of satisfying his creative drive, his thirst for power, and his gambling instincts, all at the same time. “ David Rockefeller

29-05-2019 : “The FCA Renault merger ”

FCA Renault merger

If it is achieved (we are talking about a closing in autumn 2020, in almost 18 months' time), the new group would align, without taking into account Nissan and Mitsubishi, 8.5 million vehicles sold per year with the Fiat, Chrysler, Renault, Alfa Romeo, Jeep, Dacia, Lancia, RAM, Lada, Abarth, and Samsung Motors brands. Based on current prices, its market capitalization would be €33 billion, only 40% higher than that of Ferrari (€24 billion), which sells 10,000 cars per year (sic), and half that of Hermès. Impressive, isn't it? It is true that the 2019 P/E ratio of FCA and Renault, which are in cyclical segments, is 4, compared with 38 for Ferrari and 46 for Hermès.

With operating margins of 24%, Ferrari is perceived as a growing luxury brand and valued as such (Renault and FCA have a 5% operating margin, Hermès 35%).
Ferrari was demerged from FCA in 2016, which is making possible today for FCA and Renault to announce a marriage of equals, at least in terms of market parity.

Have a nice day.

28-05-2019 : “Quote of the day ”

“Even a megaton of governance is no substitute for invention, entrepreneurial skill, originality, and sheer managerial competence and integrity.” Jonathan Charkham

27-05-2019 : “Answer to the quizz of the week-end. ”

Let's first remind you of the quizz: How many British billionaires are among
the top 100 billionaires in the world who appear in Forbes' ranking? To help
you, you may find useful our post of May 14th.

And now same question for Switzerland. And here again to help you, know that
there is a Czech, an Austrian, a Swede, two Italians, two Spaniards, six
Frenchmen/women and nine Germans among the top 100 billionaires. If after
that you don't find the answer!

In fact, there is only one British billionaire (the Hinduja brothers, number
65 with $16.9bn) in the top 100 in the world, and no Swiss citizen!

Have a nice day

24-05-2019 : “Brainstorming for the weekend ”

How many British billionaires are among the top 100 billionaires in the
world who appear in Forbes' ranking? To help you, you may find useful our
post of May 14th.

And now same question for Switzerland. And here again to help you, know that
there is a Czech, an Austrian, a Swede, two Italians, two Spaniards, six
Frenchmen/women and nine Germans among the top 100 billionaires. If after
that you don't find the answer!
Have a nice weekend

23-05-2019 : “Quote of the day ”

“The economist, like everyone else, must concern himself with the ultimate aims of man.” Alfred Marshall

21-05-2019 : “Quote of the day ”

“These people aren't really rich: their net worth might be as little as $5 million to $10 million.” A bank manager in Riyadh

20-05-2019 : “Shares can have a negative value! ”

This is always a source of surprise for our students, but it can sometimes happen that the seller is obliged to pay the buyer for the buyer to agree to buy its shares. In other words, this results in a negative selling price for the shares of the company sold. We had another example last week when the retail group Auchan sold its Italian subsidiary (€3.6bn in sales with 14,600 employees), which has been losing money since 2011, for a negative price representing, according to the statements of the Auchan CEO, 2.5 years of losses for its Italian subsidiary. Technically, the seller recapitalizes the company to be sold through a capital increase which, in this example, brings the cash net of all financial and bank debt to 2.5 times the losses. Then the seller sells the shares to the buyer for one euro. The buyer then finds in the acquired company the financial means to finance part of the turn-around. By recapitalizing the loss-making subsidiary, the seller makes an investment with a short payback period (2.5 years for Auchan). This type of outcome is often preferred to a liquidation that could cost it less, but would not be without consequences for its image and would be in contradiction with socially responsible behaviour, especially if the group is otherwise profitable. It goes without saying that this is only possible when the company to be sold is an unlisted company, as in the case of Auchan's Italian subsidiary. Have a nice day

17-05-2019 : “Quote of the day ”

“Wealth is not without its advantages and the case to the contrary, although it has often been made, has never proved widely persuasive.” John Galbraith

15-05-2019 : “Quote of the day ”

“The economic science is very useful as it provides jobs for economists. “ John Galbraith

14-05-2019 : “Poor British billionaires ”

The Sunday Times has just published its list of British billionaires, which starts this year with the Hindujan brothers, active in banking, energy and IT (€25 billion), then the Reuben brothers (€21.5 billion in real estate) and Jim Ratcliffe (€21 billion in chemicals). If they were French, they would be respectively number 7, 9 and 10 behind the Pinault family (number 6 with Gucci, Saint-Laurent, Christies, and Latour) and Dassault (number 8). It is curious, while France and the United Kingdom are quite close in size and GDP, to see such a disparity. It can be explained by the almost confiscatory British tax system of the 1970s (with a marginal tax rate of 98%), the Brexit which has reduced the pound value by 13%, and the importance of finance in the United Kingdom which, with constant GDP, leaves less room for the rest of the economy. However, since a financier does not create value but shares it as we write in the first chapter of the Vernimmen, it is more difficult to find billionaires there than in... luxury for example, the sector of 5 of the first 6 billionaires in France. Have a nice day

13-05-2019 : “Quote of the day ”

“The stock exchange is a path that leads to vanity, while private equity is a path that leads to greed.” Anonymous

10-05-2019 : “Crypto-currencies ”

These days, we have again read a rather hollow article on Bitcoin. Many self-proclaimed specialists indicate where they see the price of Bitcoin in a year: $3,000 for some, $10,000 for others. They put forward no justification, which is not surprising: without an underlying economy (as for a currency) or a company (as for a stock or a bond), the price of bitcoin has a largely autonomous life, resulting from a limited number of bitcoins that can be issued.... Although the concept of blockchain is interesting (even if its economic efficiency remains to be proven given its energy costs), we are much more cautious about the utility of crypto-currencies. At this stage, these look more like a trick to hide sometimes dubious financial transactions than a real breakthrough.

Have a nice day

09-05-2019 : “Quote of the day ”

“Standard - setters sometimes use the term "fair value" in a way that does not necessarily translate into understandable financial reporting.” Ernst & Young

08-05-2019 : “Question from a reader ”

Is the internal rate of return (IRR) an actuarial rate? Yes, because an actuarial rate (actuarial rates are the only rates that are useful for finance people, the others being transformed into actuarial rates), is a rate where interest payments and principal repayments occur on investment anniversary dates. An IRR that would not be an actuarial rate, for example because it would be calculated on the basis of monthly cashflows, must be converted into an annual basis, i.e. actuarial. For more details, see Chapter 17 of the Vernimmen Have a nice day

07-05-2019 : “Knowing how to keep your nerves ”

Like any human being, Donal Trump has flaws and qualities. Among the latter, he is a very good negotiator. And a very good negotiator in the final phase of negotiations often increases the pressure. In the Sino-American trade talks that are reportedly close to success, he did so on Sunday evening by threatening to impose new customs duties on Chinese imports into the United States. As a result, stock prices fell by 3 to 6% on Monday in China, and by 1 to 2% in Europe and the United States. This is not what will improve the popularity of stock exchanges among shareholders of unlisted companies considering a stock exchange listing. Have a good day and keep your cool.

06-05-2019 : “Solution of the weekend brainstorming ”

Let us first recall the problem: A corporate treasurer plans to borrow $10 million in 3 months for a period of 180 days. She wants to hedge against a possible increase in interest rates by buying a rate option (European option) to hedge a 6-month loan in 3 months. The agreement is that the value of the interest rate option is equal to the premium times the amount of the loan considered times the ratio of the life of the option over 12 months, i.e. here: 10 x 0.125% x 3/12 = €3,125 Have a nice day!

03-05-2019 : “Brainstorming for the weekend ”

A corporate treasurer plans to borrow €10 million in 3 months for a period of 180 days. She wants to hedge against a possible increase in interest rates by buying an interest rate option (European option) to hedge this future loan. Exercise rate: 3.75%. Premium: 0.125%. What is the price of the option? Answer Monday. Until then, good calculations and have a nice week-end!

02-05-2019 : “Answer to the Tuesdays quizz ”

Let us first remind you the question: If the valuation obtained via a discounted free cash flow model (DCF) is a pre-money valuation (i.e. before taking into account the capital increase), is the one obtained with a discounted dividend flow model (DDM) automatically post-money? Indeed, the value obtained by discounting dividends (DDM) is a post-money value of equity since the dividends that are discounted are those of the company's business plan that assumes the realization of the investment (as for a DCF) AND the realization of the financing. This results in a post money value. Have a nice day

01-05-2019 : “Quote of the day ”

All problems are not financial, but sooner or later, they all become financial. Pierre Mendès-France

30-04-2019 : “So as not to get bored on May 1st ”

If the valuation obtained via a discounted free cash flow model (DCF) is a pre-money valuation (i.e. before taking into account the capital increase), is the one obtained with a discounted dividend flow model (DDM) automatically post-money? Have a nice day.

29-04-2019 : “Quote of the day ”

“When finance comes up against poverty, and raises questions, it then becomes richer.” Daniel Lubeth

26-04-2019 : “Why is the change in raw material inventory recorded in expenses? ”

Changes in raw materials inventories are always recorded as expenses in the by-nature income statement in order to show, in addition to purchases of raw materials, the consumption of raw materials for the year, which is the relevant aggregate to identify expenses relating to the year. For more details, see Chapter 3 of the Vernimmen. Have a nice day

25-04-2019 : “Quote of the day ”

“A company that only makes money is a poor company indeed. “ Henry Ford

24-04-2019 : “How is the beta of an unlisted SME in the West African region calculated? ”

Hello, we try to find companies in the same sector that are listed and calculate their equity beta by linear regression of their prices against those of the stock index. Then the impact of their financial structure on their equity beta is neutralized to obtain the unlevered beta of these comparable companies. Then you calculate the average or median of these figures to get an estimate of the unlevered beta of the company you are trying to value. To obtain the equity beta, you only have to take into account the impact of the financial structure of the company you are seeking to value on its unlevered beta you have just determined. The methodology is explained in Chapter 29 of the Vernimmen Have a nice day

19-04-2019 : “Quote of the day ”

“Use the wealth you acquire, and avoid being called a miser. Of what use are all of your goods if you continue to behave as if you were poor?” Seneca

17-04-2019 : “Quote of the day ”

“A firm must make a profit or it will fail. However, if one seeks to run a firm solely for profit, it too will fail, as it will have no raison d'être.” Henry Ford

16-04-2019 : “Quote of the day ”

“The responsibility of the corporate executive is to make as much money as possible for shareholders.” Milton Friedman

15-04-2019 : “Myopia ”

It seems that Vigéo Eiris is being sold to Moody's today. If this information were confirmed, it would be a sad and even distressing news. Vigéo Eiris is an independent international research and ESG (Environment, Social and Governance) agency for investors and private, public and community organizations. It was founded by the former head of a trade union, Nicole Notat, who very early understood the importance that the ESG thematic would take. 3 years ago it merged with the London-based Eiris agency. Vigéo Eiris is 91% owned by almost all major French asset managers (Amundi, AXA, BNP Paribas, CDC, CNP, Lazard, Natixis, etc.). It achieved a turnover of €9.7m in 2017, up 25%, with a loss reduced from €5.2m to €3.4m. Moody's posted sales of $4,442m in 2018, up 5% and net income of $1,309m. Nothing comparable of course. Is financing for a few years a European ESG rating agency up to a few millions euros a year really out of reach of the main French institutional investors who collectively manage several trillions of euros? Are there no alternatives to selling Vigeo Eiris to a company closely identified with a country that has left the Paris Agreement on climate and whose ratings of vehicles invested in sub-prime loans have been key to spread the 2008 financial crisis all over the world? If Moody's carries out this acquisition, it is of course because that agency has not developed an ESG expertise. As this market is taking off, Moody's wants to catch up with an acquisition. But let's not kid ourselves. Vigeo Eiris will be absorbed, crushed within Moody's, if not immediately, after a few years; and its some 150 employees will weigh little against the 12,000 employees of Moody's. It is a new normative power, whose importance will grow, that would leave the bosom of Europe to join a country whose slogan became America First. We nevertheless wish you a happy day.

14-04-2019 : “Question from a reader ”

How in a calculation of IRR or NPV to manage the difference of years of cash flow when one seeks to compare acquiring tools (duration of use of 20 years) and renting (over 10 years)? We do not think the problem is a problem of IRR or net present value. This is how we would reason. The problem is your interest in using a portion of your cash, or your debt capacity, to acquire tools that you could very well rent, thus preserving your part of your cash or your debt capacity. You could then use it to make financially and strategically interesting investments. We suggest that you calculate the implicit interest rate of the lease by matching the purchase price of the equipment on the one hand and the net present value of the after-tax rents you would have to pay on the other hand over the life of the tools. The discount rate used to match these two terms is the cost of financing the tools. Once you've determined it, think about whether it makes sense. If so, take the lease that allows you both to preserve your debt capacity and some of your cash, but also gives you the operational flexibility at the end of the rental period of 10 years, to be able to opt for newer equipment for the remainder of the 20-year life of these tools. If not, buy the tools. Have a nice day.

11-04-2019 : “Quote of the day ”

“Grandparents amass wealth, children increase it, and grandchildren squander it.” Proverb

10-04-2019 : “Does a dividend payment decrease the P/E ratio? ”

Yes, but in a very marginal way since most often at this time the dividends are worth about 3% of the value of the shares. Therefore, the decrease in the P/E ratio following the payment of the dividend is only an average of 3%. This decrease is logical, since after the payment of a dividend that deprives the company of part of its cash, an asset with very low risk, its shares become marginally riskier which justifies a marginally lower P/E ratio. Have a nice day

09-04-2019 : “Quote of the day ”

“It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.” Ludwig von Mises

08-04-2019 : “Quote of the day ”

“The stock market represents a fantasy world of easy money and is very fertile terrain for received ideas.” Thierry Malandain

01-04-2019 : “Question from a reader ”

Should the parent company require a different return on the equity of the subsidiary depending on the financing scenario (shareholder loan versus a conventional loan from a bank)? It should require a higher rate of return on the equity of the subsidiary when it is financed by a bank loan than when it is financed by a shareholder loan (of itself) since the parent company is not schizophrenic, and that it will not put in default its subsidiary, whereas a bank lender could do it. So, the equity of the subsidiary is riskier when it is financed by a debt loan compared to a financing with a shareholder loan. And this is quite logical because in the case of a financing by shareholder loan, the equity of the subsidiary cost less than in the case of bank financing, with a shareholder loan that costs more than a bank loan; but on the other hand, with a bank financing, the equity of the subsidiary costs more than in the case of a loan by shareholder loan, with a bank debt that costs less than a shareholder loan. So the weighted average cost of these sources (equity and shareholder loan or bank loan) is the same, and it is the cost of capital of the company that does not depend on how one finances the business.‹

29-03-2019 : “Quote of the day ”

…and lend, expecting nothing in return. Saint Luke

28-03-2019 : “Question asked in recruitment interview for an internship in private equity ”

Why is the cost of debt lower than the cost of capital? The cost of debt is always lower than the cost of equity because lenders take less risk than shareholders. Since the cost of capital is the weighted average of the cost of debt and the cost of equity, the cost of debt is therefore necessarily lower than the cost of capital. Have a nice day

27-03-2019 : “Quote of the day ”

If you have a complicated story, you’re not really welcomed so much in the public market. Josh Harris

26-03-2019 : “Question from a student from ICCF@Columbia Business School ”

Does the subsidiary's equity risk vary depending on whether it is financed by a shareholder loan instead of a conventional loan? Yes, because a normal lender can initiate legal proceedings against the subsidiary if this procedure allows him or her to recover all or part of his/her loan whose repayment would be threatened. It is difficult to see a parent company doing this on its subsidiary. This is why the cost of a shareholder loan should be higher than that of a bank loan of the same duration. Have a nice day

25-03-2019 : “Quote of the day ”

Without understanding how finance works, you cannot make the best decisions for your and your family’s lives. Sarah Gordon

22-03-2019 : “Question from a follower of the Vernimmen.com Facebook page ”

What information, and how often, can ask an investor in a start-up?” You can ask the founders once a month some key figures according to their sector of activity which are indications of volume of activity such as: Number of sales Turnover Gross margin Number of customers visited / contacted / service subscribers Number of products produced or number of users of the service, or number of people who visited the site, who bought, average shopping cart, number of providers for a web-based sales site Numbers of employees Cash at bank Monthly cash burn These are figures whose marginal cost of production for the founders must be zero because they must follow them for themselves. Otherwise, it is very worrying about their ability to run their business! Once per quarter or semester, you must be able to obtain an income statement / balance sheet / cash flow statement, even if it is simplified. Have a nice day.

21-03-2019 : “Quote of the day ”

Personally, I’d prefer my money to be working for me rather than for me to be working for money. Thomas Brach

20-03-2019 : “Question asked on the vernimmen.com website ”

What should the rate that a parent company charge to its subsidiary for a shareholder loan it would grant to it over a medium-term period?” A shareholder loan should be allocated at a rate of interest similar to that which a bank would grant over the same period and the same duration plus a certain margin. This additional margin compensates for the fact that unlike a conventional lender who, in case of difficulty of the subsidiary, may not hesitate to force a bankruptcy to recover his due, a mother company will not do that with its subsidiary. In a way, the shareholder loan is de facto subordinated to the repayment of the loans to the other borrowers who will often ask that this be registered in one way or another. Have a nice day

19-03-2019 : “quote of the day ”

“Laziness travels so slowly that poverty soon overtakes him.” Benjamin Franklin

18-03-2019 : “Solution to this week end brain teaser ”

Let's first remember the problem: At what price do you sell in 10 years the Mondass share, which pays a constant annual dividend of €1 to obtain a rate of return of 6.67% knowing that the current price of the Mondas share is €15? This exercise can be solved by doing only mental calculation. €15, ie the purchase price since the annual dividend of €1 gives a yield of 6.67% (1/15). To obtain the requested profitability, there is no need for a capital gain on the purchase price. Have a nice day.

17-03-2019 : “Brain teaser for the weekend ”

At what price do you sell in 10 years the Mondass share, which pays a constant annual dividend of €1 to obtain a rate of return of 6.67% knowing that the current price of the Mondas share is €15? This exercise can be solved by doing only mental calculation. Have a nice day.

15-03-2019 : “quote of the day ”

“Man comes into the world with empty hands and leaves the world with empty hands.” The Talmud

15-03-2019 : “quote of the day ”

“Man comes into the world with empty hands and leaves the world with empty hands.” The Talmud

14-03-2019 : “Question from a reader ”

In a growing business, should work capital increases be financed with debt or equity? The first reflex is to resort to factoring, that is to say to a debt backed by your receivables, especially if your customers have a better financial surface than yours. If this is not enough to cover your working capital financing needs, it is because your inventories are important. If they have a value in a secondary market (raw materials, aging Champagne, etc.), a bank financing collateralised on them or a securitization if you are big enough should be a realistic option. In other cases, and if your business generates positive free cash flow, a global financing (related to the business and not to its assets) may be considered if you have not yet reached the limits of an acceptable debt. Otherwise, you will have the equity. Have a nice day

14-03-2019 : “quote of the day ”

“Man comes into the world with empty hands and leaves the world with empty hands.” The Talmud

12-03-2019 : “quote of the day ”

“He who loves money will not be satisfied with money.” Ecclesiastes

12-03-2019 : “Quote of the day ”

“The accountant does not much like adding machines. He thinks that accountants should show initiative. He’s wrong. An accounting system that requires initiative is a poorly designed system. We have more to fear from imagination or fanciful ideas in an accountant than anything else.” Octave Barenton

11-03-2019 : “quote of the day ”

“The greatest sin is to give in to one’s covetous desires, the greatest fault is not to know when to be content, and the greatest unhappiness comes from a constant yearning to acquire.” Lao Tseu

08-03-2019 : “Quote of the day ”

“The posterity of a family of shopkeepers or bankers can only be ensured if its members resist the temptation to spend their money, which is the shortest road to ruin.” Francis Baring

06-03-2019 : “Quote of the day ”

History demonstrates that participants in financial markets are susceptible to waves of optimism. Excessive optimism sows the seeds of its own reversal in the form of imbalances that tend to grow over time. Alan Greenspan

04-03-2019 : “Quote of the day ”

“If fortune smiles on you, guard against pride, and if your luck turns, then guard against dejection.” Periander

01-03-2019 : “Question from a reader ”

Why does the fact that share value derived from 2020 multiple is lower than the value derived using 2019 multiples show that its results are growing more slowly than those of comparable companies? Imagine that there is only one comparable to simplify the calculations and that its EPS doubles every year: 10 in 2019, 20 in 2020, 40 in 2021, 80 in 2022. As the price of this comparable is 1000 for example, P/E ratios are 1000/10 = 100 for the 2019 P/E, 1000/20 = 50 for the 2020 P/E, 1000/40 = 25 for the 2021 P/E and 1000/80 = 12.5 for the 2022 P/E. Take the case where the EPS of the company you want to evaluate goes from 10 in 2019 to 12 in 2020, then to 14.4 in 2021, then to 17.3 in 2022, which is a slower rate of growth than the comparable, only 20% per year. If you apply the P/E ratios computed above to the EPS of the company, you get for its value: 10 x 100 = 1000 with the 2019 P/E, then 12 x 50 = 600 with the 2020 P/E, then 14,4 x 25 = 360 with the 2021 P/E, and then 17,3 x 12,5 = 216 with the P/E 2022. Because the company to be valued grows less quickly than its comparable, the farther P/E you take, the lower the value of the share. This is normal because the EPS of your share is growing less quickly than its comparable, so it lags behind it and this delay increases as time goes on, much like a mediocre runner takes more in addition to running late behind an Olympic champion. You will see that the opposite is true if you now assume that the growth rate of EPS is higher than that of its comparable, take for example an annual tripling: 10, 30, 90, 270 to simplify calculations. All in all, this simply means that your comparable is not as good a comparable as it should be if the use of P/E ratios computed on different years gives values very different each from the other one. Have a pleasant day.

28-02-2019 : “Quote of the day ”

“Pride goeth before destruction, and a haughty spirit before a fall.” Proverbs 16:18

27-02-2019 : “Question from a reader ”

“What can I deduct from the fact that the P/E ratios computed with the current share price and EPS for 2029, then 2020, and 2021, are decreasing?” This is simply because EPSs are expected to grow and nothing else. Indeed, since each time the price that is used to compute the P/E ratio is identical, if the P/E ratio decreases as and when one takes EPSs more and more distant, it simply means that these EPSs are higher and therefore that there is growth in these EPSs. Have a nice day.

27-02-2019 : “Question from a reader ”

“What can I deduct from the fact that the P/E ratios computed with the current share price and EPS for 2019, then 2020, and 2021, are decreasing?” This is simply because EPSs are expected to grow and nothing else. Indeed, since each time the price that is used to compute the P/E ratio is identical, if the P/E ratio decreases as and when one takes EPSs more and more distant, it simply means that these EPSs are higher and therefore that there is growth in these EPSs. Have a nice day.

26-02-2019 : “Quote of the day ”

“Next to God in terms of power is a bankcrupty judge”. Tim Leuliette

25-02-2019 : “Answers to last Fridays Brain Teasers. ”

First problem: A family has two children, including a boy. What is the probability that the second child is a girl? If the family has two children, it is because it has had a boy and a girl, or a boy and a boy, or a girl and a boy, or a girl and a girl. The latter case is eliminated because we know that one of the children is a boy. There remain 3 cases, and as the birth of a girl or a boy are equiprobable, there are two cases out of three in which the second child is a girl, thus the probability of 67%. Second problem: What is the probability that a woman will have four children who are all boys? Since the probability of having a boy is 50%, the correct answer is 50% x 50% x 50% x50% = 6.25% Last problem: A woman had 4 children, all boys. She is expecting a fifth child. What is the probability that the baby is a girl? Since the birth of a boy or girl is not determined by the sex of previous children (independent probabilities), the probability of having a daughter is still 50%, even if 4 boys were born before. Have a nice day.

22-02-2019 : “3 small Weekend Brain Teasers. ”

Here's the first one: A family has two children, including a boy. What is the probability that the second child is a girl? Here is the second: What is the probability that a woman will have four children who are all boys?
And here is the last one: A woman had 4 children, all boys. She is expecting a fifth child. What is the probability that the next baby is a girl?
If need be, you will neglect the fact that 105 boys are born for 100 girls and will assume to simplify the calculations that as many girls as boys are born.
Answer next Monday.
Have a nice weekend.

21-02-2019 : “Question asked on the vernimmen.com website ”

What can be deduced from the fact that a firm that does not earn its cost of capital is nevertheless valued for an entreprise value greater than the amount of its operating assets? We can then deduce two things, the most likely of which is the second: 1 / this is an overvalued company, 2 / that the market believes that in the not-too-distant future, this company will be able to earn more than its cost of capital and that, consequently, it values its operating assets for more than their book value. Then it's up to you to assess whether it seems likely the company will soon earn more than its cost of capital, otherwise you fall back into the case 1. Have a pleasant day

20-02-2019 : “Quote of the day ”

“Shareholders are both stupid and presumptuous. Stupid to hand their money over to somebody else without retaining any sort of effective control over how it’s used. Presumptuous to expect a dividend in return for their stupidity.” Anonymous

19-02-2019 : “Question from a reader. ”

I do not understand why the IRR requires to reinvest the coupons collected before the maturity of the investment at the rate of IRR? Take the example of a bond with a face value of 1000, yielding 8% per annum and repaid at face value after 4 years. By definition of the IRR, we have: 1000 = 80 x (1 + IRR)^(-1) + 80 x (1+ IRR)^(-2) + 80 x (1 + IRR)^(-3) + 1080 x (1 + IRR)^(-4). Multiply each of the terms in the equation by (1 + IRR)^4. We then have: 1000 x (1 + IRR)^4 = 80 x (1 + IRR)^3 + 80 x (1+ IRR)^2 + 80 x (1 + IRR) + 1080 The terms on the right are now those of a reinvestment of intermediate flows at the rate of the IRR. This is necessary to get your IRR of 8%. Otherwise, if you reinvest intermediate flows at 0% for example, then you have 1320 of flows after 4 years, which gives you an IRR of 1000 x (1 + IRR)^4 = 1320, hence a IRR of 7.29% and not 8% For more information, I refer you to chapter 17 of Vernimmen 2019 which details these points and whose summary is available on the website vernimmen.com. Have a nice day.

18-02-2019 : “Answer to last Fridays Brain Teaser. ”

Let's first remember you of the problem: What is the beta, or its order of magnitude, of an investment consisting in betting on even numbers on the roulette in a casino, making you double your stake in the event that the ball lands on an even number, and lose everything in the case where it lands on zero or an odd number? If you remember that beta measures the relative volatility of an asset relative to the volatility of the market as a whole, you will have easily found that the beta of that asset is. . . 0 because it is absolutely not correlated to market fluctuations. This asset is a pure specific risk. And if you need to review your knowledge of beta, it's Chapter 18 of the Vernimmen. Have a pleasant day.

15-02-2019 : “A brainstorming problem for the weekend ”

What is the beta, or its order of magnitude, of an investment consisting in betting on even numbers on the roulette in a casino, making you double your stake in the event that the ball lands on an even square, and lose everything in the case where it lands on zero or an odd number? Answer next Monday. Have a nice weekend.

14-02-2019 : “Quote of the day ”

“If the business does well, the stock eventually follows. “ Warren Buffett

13-02-2019 : “L'Oréal's 2018 results illustrate the first law of the break-even point ”

Which says, for those who would have forgotten, that the further the company is from its breakeven point, the closer the growth rate of operating profit and the growth rate of turnover are.
Thus L'Oréal has just announced a 2018 growth of its turnover at constant exchange rate of 8.0% and an increase in its operating profit of 9.2%.
If L'Oréal does not naturally communicate on its level of breakeven point, the level of 2018 operating margin at 18.3% of its sales, its highest historical level, shows that the group is very far from its breakeven point! Hat low.
And for those of you who would like to review their 3 laws of the break-even point, it is in chapter 10 of Vernimmen.
Have a pleasant day.

12-02-2019 : “Quote of the day ”

“There's very little money to be made recommending our strategy [buy-and-hold]. Your broker would starve to death. Recommending something to be held for 30 years is a level of self-sacrifice you'll rarely see in a monastery, let alone a brokerage house.” Warren Buffett

11-02-2019 : “Scrip dividends: some stop, others resume ”

Last week, Total announced that its last quarterly dividend in respect of 2018 would be paid in full in cash, without the option to opt for a payment in Total shares (scrip dividend); and that future quarterly dividends paid on the 2019 results would be in cash only. At the same time, Société Générale announced that it would propose to its shareholders the option for payment of the 2018 dividend in Société Générale shares, as had been the case for the 2008, 2009 and 2012 dividends. If Total stops the dividend paid in shares, it is because the rise in oil prices allows it to pay its dividend entirely in cash, without increasing its net debt beyond its objective, nor impact its investments. The scrip dividend was a tool for Total to maintain its dividend per share when the price of oil no longer allowed it to generate enough free cash flow to pay it in full in cash (Shell did the same). As the largest shareholders of Total are pension funds looking for dividends to face the payment of pensions, the scrip dividend was a smart answer to a conundrum: how to maintain the dividend flat when the free cash flow was no longer large enough and you do not want to go into debt above a certain level. Société Générale is facing a different issue. With a CET1 solvency ratio of 10.9%, well above the regulatory constraints, but below the comparable ones (BNP Paribas is at 11.8%) and quite far from its 2020 target (12%), Société Générale reiterates the practice of a dividend payable in shares at the option of shareholders, and indicates that its solvency ratio will increase to 11.2% if half of its shareholders make this choice. We would have been the chief financial officer of Société Générale, we would have argued for a dividend only payable in shares to reach the target of 12% with one year in advance, and put aside these negative comments on an insufficient solvency ratio that are surely not doing any good to the share price and the mood of the employees. Have a nice day

08-02-2019 : “Quote of the day ”

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.” Warren Buffett

07-02-2019 : “Question asked on the Vernimmen.com website ”

How to calculate the equity value of a company by discounting free cash flows when this requires the determination of the cost of capital which itself depends on the value of its equity? ? ? In terms of valuation, the use of the indirect method for determining the WACC (weighted average of the costs of equity and the cost of the debt, weighted by the values of debt and equity) is not easy. As a matter of fact, the determination the value of equity uses the cost of capital; and, as you have noticed, the computation of the cost of capital requires the value of the equity which one seeks precisely to estimate! Three possibilities exist to solve this conundrum: ▪ Reasoning with a target financial structure for the WACC, ie a given Vd / Veq ratio, but in this case, care must be taken to take for cost of equity and for cost of net debt costs which correspond to this target financial structure, not the current costs. This is unfortunately a mistake frequently made; ▪ Put the equation of the value of equity with Vcp, an unknown in the equation of determination of its own value, the cost of capital is not known but depends on the value of equity. A loop calculation is then necessary, which spreadsheets make possible. After several iterations, there is convergence towards a single value of equity; ▪ abandoning the indirect method and retaining only the direct method, the cost of capital is then the sum of the risk-free rate plus the risk premium times the unlevered beta, which we recommend. It avoids the frequent mistake of taking on debt and equity costs that do not match the target financial structure, and the situation where the loop calculation is heavy. For more details, see Chapter 29 of the Vernimmen.

06-02-2019 : “Quote of the day ”

“Takeovers, like bankruptcy, represent one of Nature's methods of eliminating deadwood.” Paul Samuelson

05-02-2019 : “Question from a reader. ”

Some calculate working capital ratios with 360 days and others with 365 days. What to do? We used in the old days 360 to simplify the calculations (because 360 is divisible by many numbers, contrary to 365). But with the arrival of pocket calculators, then Excel, one calculates more often with 365, which is the number of days in the year. Some did not update their practice. But this is not very important, because the gap between 360 and 365 is very small (less than 2%) and a difference of one or two days in a working capital does not make a significant difference. Have a nice day.

04-02-2019 : “Quote of the day ”

“Just because the price goes up doesn't mean you're right. Just because it goes down doesn't mean you're wrong. Stock prices often move in opposite directions from the fundamentals but long term the direction and sustainability of profits will prevail.” Peter Lynch

01-02-2019 : “ Question asked on the Vernimmen.com website ”

What is the difference between the terms discount rate versus expected rate of return? The discount rate and the required rate of return are two synonymous terms because a required rate of return (which is requested and desired) is always used to discount cash flows occurring on different dates. For more details, see chapter 16 and 17 of the VERNIMMEN. Have a nice day

31-01-2019 : “How can a group make £ 20.3 billion in sales and a net profit of £ 37.7 billion? ”

No it's not a typo. You read correctly, profits almost double the turnover! And it was not by selling a major subsidiary that the fifth largest British market capitalization achieved this feat. It's in . . . buying ...! (and following IFRS standards). To better understand this aberration, read the latest Vernimmen.com Newsletter which must be in your mailbox if you are a subscriber, or otherwise on http://www.vernimmen.com/Read/Vernimmen_letter.php Its main article is devoted to the mishaps of IFRS. And if you had wondered if Heineken was right not to buy shares, it's also in this issue. The answer is a 2 or 3-letter word (you will not say we do not help you). Have a nice day.

30-01-2019 : “Quote of the day ”

“If you remember nothing else about p/e ratios, remember to avoid stocks with excessively high ones. A company with a high p/e must have incredible earnings growth to justify its high price.” Peter Lynch

29-01-2019 : “Quote of the day ”

When you combine ignorance with leverage you get some pretty interesting results. Warren Buffett

28-01-2019 : “Question asked on the Vernimmen.com website ”

Total pays a portion of its dividends in shares as scrip dividend, but also repurchases shares to "neutralize the dilution induced by its dividends paid in shares". Why, therefore, did not pay a dividend entirely in cash rather than create new shares and then buy them back? Is it just a question of cash management? This is a good point because it seems contradictory indeed. Let's say that Total sets the terms of its quarterly dividend policy once a year on the occasion of its annual meeting of shareholders. After proposing the payment of its quarterly dividend in shares with a discount to the share price to save cash outflows in a context of low oil prices (which reduced its cash flow), Total then removed the discount when the price of oil began to rise (thus encouraging less shareholders to opt for the payment of the dividend in shares). A few months ago, Total decided to completely neutralize the new shares issued for the dividend in shares by making share buybacks for the same amount. The next logical step is to stop the payment of the quarterly dividend as scrip dividend at the next May AGM as long as the oil price does not dive again. This curious situation will then have been only transitory.

25-01-2019 : “Quote of the day ”

Investing without research is like playing stud poker and never looking at the cards. Peter Lynch

24-01-2019 : “Question from a reader. ”

Some calculate working capital ratios with 360 days and others with 365 days. What to do? We used in the old days 360 to simplify the calculations (because 360 is divisible by many numbers, contrary to 365). But with the arrival of pocket calculators, then Excel, one calculates more often with 365, which is the number of days in the year. Some did not update their practice. But this is not very important, because the gap between 360 and 365 is very small (less than 2%) and a difference of one or two days in a working capital does not make a significant difference. Have a nice day.

23-01-2019 : “Quote of the day ”

I am not an entrepreneur who builds businesses. I am an investor who judges them. My function in the financial markets is that of a critic and my critical judgements are expressed by my decisions to buy and sell. George Soros

22-01-2019 : “Question from a reader. ”

Computing a DCF, is it possible to establish the terminal value at the end of the business plan with a multiple? Of course, technically it is possible to do it, but in the calculation of the terminal value, it is unnatural to take a multiple, which can only be arbitrary, because who knows in 5 years’ time what will be the EBIT multiple for a company? And it is methodologically unfounded because mixing the two, multiple and intrinsic method, you are then unable to draw all the richness that can be extracted from the comparison of a DCF properly conducted with a relative evaluation. It's quite often done in the USA, but Americans are not models in everything. For more details, see Chapter 31 of Vernimmen. Have a nice day.

21-01-2019 : “Quote of the day ”

The one thing that hurts more than having to pay income tax is not having to pay income tax. Thomas Duwar

18-01-2019 : “Question from a reader ”

I would like to understand the difference in distribution policy in Germany and France, with a higher percentage of distribution in France: should we see an effect of the fiscally "repressive" tax policy in France in terms of dividend taxation before the introduction of the flat tax of 30%? I also note that from 2022, the total amount of taxation of dividends should be balanced between France at about 46/47% of the distributed profit (25% and 30% of IS and "flat tax" of 25 % in Germany and 30% in France). Without having made studies on the subject, we intuitively think that the difference in the composition of the economic fabric in France and Germany explains this difference in distribution policy. In France, we currently have great machines to generate free cash flow and therefore to buy shares or pay dividends that are luxury groups LVMH, L'Oreal, Kering, Hermes, and 3 banks. Instead, in Germany, there are high-performing chemical or automotive groups, which have to make much heavier investments, thus reducing their free cash flow and ability to pay dividends or buy back shares. Have a nice day.

17-01-2019 : “Quote of the day ”

All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies. Warren Buffett

16-01-2019 : “Question from a reader ”

Does an acquisition of a business always result in the recording of goodwill on the balance sheet? Goodwill can be positive or negative. The only case where there is none is when it is nil, ie when you have paid as acquisition price, exactly the value of revalued assets net of revalued liabilities. This is a statistically very rare case, less than 1% of cases. Of course, if the consolidation thresholds are not reached (more than 250 people, more than € 48 million in sales and assets in excess of € 24 million in France), there will be no goodwill if there is no consolidation. Have a nice day.

15-01-2019 : “Quote of the day ”

Although it's easy to forget sometimes, a share of a stock is not a lottery ticket. It's part ownership of a business. Peter Lynch

14-01-2019 : “Question from a reader ”

I am working on a strategic due diligence on the purchase of a small bank. The discounting of the net results allows me to have a valuation between 60 and 70 (same range when I apply another valuation method: P/E ratio or liquidation value). But the bank's balance sheet already contains 300 of regulatory capital needed to operate the loan portfolio. How to take into account these regulatory capital in the value of the bank? It is likely that the bank you are valuing has a very low return on equity, which is why you value it for only a quarter of its regulatory equity. This happens every day especially in Europe, think of Deutsche Bank which quotes a quarter of its equity or some Italian banks. Redo anyway your calculations in case an error has crept. Then you will deal with the seller if he thinks it is better to sell for a quarter of the equity than to liquidate the assets and recover the regulatory capital, which is time consuming, is not without risk and is not exciting to do. Have a nice day

11-01-2019 : “Quote of the day ”

The stock market has predicted nine out of the last five recessions. Paul Samuelson

10-01-2019 : “Question asked on the Vernimmen.com website ”

Mutandis, which is a limited partnership (LP), has been listed on the Casablanca Stock Exchange for a few weeks. The shareholders of a LP have no power over the management and cannot benefit from a possible takeover bid. For both of these reasons, is it necessary to apply a discount to any LP compared to a conventional company? In fact the reality is more complicated. What we observe is that there is no discount when the LP is working well, delivers the expected rate of return over the medium term, that its governance is no cause for problems. See for example Michelin and Hermes. On the other hand, if the LP has problems with profitability, governance that can not be solved because the managers are protected by the statute of the LP, then there is a discount compared to the comparable company unprotected by a LP status. See for example Lagardère. Finally, it is quite pragmatic: investors do not apply an a priori haircut; they only apply it when there is a problem whose resolution is blocked by the LP status. Have a pleasant day.

09-01-2019 : “Quote of the day ”

Having a financial adviser enables the investor to carry a psychological call option. If the investment decision turns out well, the investor takes the credit, and if it turns out badly, the regret can be lowered by blaming the adviser. Hersh Shefrin

08-01-2019 : “Question from a Vernimmen user ”

Why is inflation not a corrective factor of free cash flows for a DCF valuation? To the extent that the cost of capital is equal to a risk-free rate plus a risk premium, and the risk-free rate is a market interest rate, it includes a premium for expected inflation. Therefore, there is no need to deflate free cash flow for inflation. If you do it, i.e. if you take free cash flow in real terms, then you would have to also, by homogeneity, take a cost of capital deflated by inflation, by dividing (1 + your cost of capital) by (1 + Anticipated Inflation Rate) and then withdrawing 1. If you calculate the cost of capital by an indirect approach by computing it as the weighted average of cost of equity and of cost of the debt, things would not be different because you would also use market data that includes an inflation expectation. Have a nice day.

07-01-2019 : “Quote of the day ”

It is unanimously and without qualification assumed that when anyone gets into debt, the fault is entirely and always that of the lender and not the borrower. Bernard Levin

04-01-2019 : “Question from a student from ICCF@Columbia Business School ”

What motivates an investor to invest in newly listed companies? An investor might want to access a new business sector that is still poorly represented on the stock market and is seen as very buoyant (see fintech); if the company is very big and will joint a stock market index, position itself to continue to duplicate as closely as possible the performance of the index for a passive investor (see Alibaba); sometimes take advantage of a discounted price in a bad market (see Google at its IPO) or benefit from a discount IPO when there is one. Have a nice day

03-01-2019 : “Quote of the day ”

A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons. Warren Buffett

28-12-2018 : “Question from a reader ”

Could you tell me if the long-term growth rate may be nil or negative in the discounted cash flow formula? There is no reason why it can not be negative in some sectors or for some companies, because if world growth is 4%, some companies grow at 20% or 30%, others necessarily have much lower growth rates, including negative ones. For example, at the moment, the magazine press in Europe: decrease of the diffusion and fall of the advertising receipts. Have a pleasant day

26-12-2018 : “You have not found a copy of the Vernimmen close to the Christmas tree yesterday? ”

Well, the one who bought it for you kept it after having read a few pages of the first chapter. But there are still some at https://www.amazon.co.uk/gp/product/1119424488/ref=as_li_tl?ie=UTF8&tag=vernimmecorpo-21&camp=1634&creative=6738&linkCode=as2&creativeASIN=1119424488&linkId=5b7b1ebbf25e91d6a0a82a609c0479a9 Have a nice day.

21-12-2018 : “Question from a student from ICCF@Columbia Business School ”

What is the difference between the net present value and the present value? Let's take an example. Someone promises to pay you 110 in a year if you pay him 100 today. With an interest rate of 10%, the present value of this promise is 110 / (1 + 10%) = 100. The NET present value of this promise is equal to the present value of its future cash flows, 100, MINUS the the price you pay today for this promise, 100, here 0. This net present value simply means that this investment (paying 100 today to receive 110 in one year) will bring you exactly the required rate of return, that is 10%. You will not make a bad deal or a good deal, you will simply do a decent deal. If you now want a rate of return of 5%, the promise to receive 100 in a year is worth for you, at 5%, 110 / 1.05 = 104.8. It's its present value. If you can buy this promise as previously for 100, its net present value is 104.8 - 100 = 4.8. This positive net present value shows that you will make a good deal for you because you pay 4.8 less than you could, to make an investment that earns you the rate of return you want, 5% in this example. You will therefore enrich yourself of 4.8. This is also what the net present value measures, your enrichment if everything goes as planned. For more details, see Chapter 16 of the Vernimmen. Have a pleasant day.

20-12-2018 : “Daily quote ”

I am intensely relaxed about people becoming filthy rich, as long as they paid their taxes.
Peter Mandelson

19-12-2018 : “Question from a reader ”

Should we take financial fixed assets in the computation of operating assets? In the face of financial fixed assets, it is necessary to sort out those which are used for the activity (for example a deposit for a rent of stores, or a non-consolidated participation in its distributor in Saudi Arabia) and those which are non-operating assets (such as L'Oréal's 9% stake in Sanofi) The former is included in the operating asset, not the latter, for the calculation of the ROCE or for the calculation of the entreprise value. But normally, except perhaps for certain large groups, the second case is quite rare. Non-operating financial fixed assets are then to be taken in reduction of the bank and financial debt. Have a nice day

18-12-2018 : “Daily quote ”

Nobody on Wall Street knows how to predict the financial markets.
Bernard Madoff

17-12-2018 : “Question asked on the Vernimmen.com website ”

Why in a construction company stocks are low and how to track the work-in-progress line that is important? For a construction company, inventories are often low because it is supplied daily by its dealer in building materials, and it is the one which carries the bulk of inventories in this sector. It is necessary to monitor over time the evolution of the item Work in progress in relation to the item Customer advances; and when Work in Progress grows faster than or exceeds the Customer Advances line, beware. This is either a sign of poor management, because in this sector customers are asked to pay as work progresses and well-managed companies always charge customers a little in advance of the completion of the work. Or the sign of a fraud if losses on a construction work are hidden by an overstatement of Work in progress, which do not forget, are nothing from an accounting point of view but costs that have been taken out of the P&L account to be written into an asset on the balance sheet, which improves the result in the P&L. Have a nice day.

13-12-2018 : “Question from a reader ”

In an income statement by function can we say that the costs of sales correspond to the sum of all variable costs? No, unfortunately, since costs of sales (CGOS) also include fixed costs such as the amortization expense of production machinery. In addition, all variable costs are not in the COGS since the bonuses paid to salesmen are part of the selling and marketing costs whereas they are variable costs since related to the sales. For more details, see Chapter 3 of Vernimmen. Have a nice day.

11-12-2018 : “Index funds with management costs of 0%? ”

This was launched during the summer by Fidelity, known for its active management and not its passive management skills, to limit its losses of assets under management moving to index funds and ETFs. The success of this first product on the market with management fees of 0% is undeniable: its US equity fund and its non-US equity fund have raised so far more than $2bn in 6 months, a quarter of which for the international fund and 3/4 for the US equity fund, illustrating the domestic bias of investors. It's definitely two loss-leaders products for Fidelity. It is necessary to open an account at Fidelity to be able to subscribe, which allows the asset manager to offer other products more remunerative for it to its new customers, or de-incentives the current ones from moving to the competition. In addition to the volume effect necessary to reduce the costs invoiced to zero, Fidelity relies on indices that it has developed, which avoids having to pay commissions to the owners of indices like Dow Jones or MSCI; and practices securities lending on the shares held by these funds. Securities lending allows Fidelity to receive fees from short-sellers who needs to borrow shares to short-sell them. In a nutshell, it allows other investors to bet down securities prices held by Fidelity on behalf of its customers. . . This is the price to pay for having zero fees. As we say in the United States, there is no free lunch. Have a pleasant day.

10-12-2018 : “Inversion of the curve of interest rates, or have fun to scare? ”

The stock market turmoil of recent days would be due according to some to the reversal of the yield curve in the US, an indicator of a recession to come in 2020.
We will first go to the fact that "the stock market has predicted 9 out of the last 5 recessions" (Paul Samuelson).
We will then move on to the fact that when we look at the current US interest rate curve, we really have a lot of trouble seeing an inversion (see the graph published in the November issue of Vernimmen.comnewsletter n ° 116 or the chart from Six Swiss Exchange). We see for our part a normal curve, that is to say, oriented upwards with increasing maturity. Admittedly, the US 5-year rate has fallen below the 3-year rate, but you have to take a magnifying glass to see it. The difference went from 0.08% in early October to -0.02% yesterday. In short, a pivot of 0.1% while the rate at 5 years yesterday was 2.76%.
Starting from the idea that the current interest rate at 2 years for example is equal to the square root of the product of (1 + the rate at one year) by (1+ the rate anticipated at one year in one year); a normal curve can be explained by an anticipation of rising interest rates in the future (the expected one-year rate for a year is higher than the current one-year rate) because the economic outlay is improving, it is anticipated that central banks will raise their interest rates accordingly to avoid overheating.
Alternatively, the so-called normal steepening of the yield curve can be explained by the presence of increasing risk premiums with the maturity of investments to take into account an investment risk that is naturally stronger in the medium and long term than in the short term.
Conversely, when the slope of the yield curve is reversed, it is because investors expect on the contrary a decline in interest rates to fight in the future against growth becoming anemic, zero or negative, hence an indication of a future recession.
To see a real inverted rate curve, look on the £ or € at the first half of 2008, chapter 19 of your Vernimmen.
Have a nice day.

07-12-2018 : “Question from one of our students ”

What is the difference between the net present value and the present value? Someone promises to pay you 110 in a year if you pay him 100 today. With an interest rate of 10%, the present value of this promise is 110 / (1 + 10%) = 100. The net present value of this promise is equal to the present value of its future cash flows, 100 minus the price you pay today to acquire that promise, 100, here 0. This net present value simply means that this investment (paying 100 today to receive 110 in a year) will bring you exactly the required rate of return, or 10%. You will not do a bad deal or a great deal, you will simply do a fair deal. If you now want a rate of return of 5%, the promise to receive in one year 100 is worth for you at 5% 110 / 1.05 = 104.8. It's its present value. If you can buy this investment as previously for 100, its net present value is 104.8 - 100 = 4.8. This positive net present value shows that you will make a good deal because you pay 4.8 less than you could, to make an investment that earns you the rate of return you want, 5% in this example. You will therefore get richer by 4.8. This is also what the net present value measures, your enrichment if everything goes as planned. For more, see Chapter 16 of the Vernimmen. Have a nice day.

06-12-2018 : “Daily quote ”

Technology companies should be valued at a discount to the shares of companies like Disney and Coca-Cola, which have long term earnings. Bill Gates

05-12-2018 : “Question asked on the Vernimmen.com website ”

Why does diversification increase profitability for a same level of risk? You have a title that earns you 12% for a risk level of 7% for example (standard deviation of its returns). You have other titles that individually yield 14% with a standard deviation of 8%. More profitable, therefore more risky. Logic. If you put in a portfolio these last securities, you will have a profitability of 14%, but considering the effect diversification and because the profitability of these titles are not perfectly correlated, you will have, if you combine your wallet well, a risk level not of 8%, but of 7%. Thus you have increased profitability (14% against 12%) for the same level of risk (7%), choosing riskier securities thus bringing you more profitability but whose risk supplement is eliminated by diversification. Have a nice day

04-12-2018 : “Question from one of our students ”

I do not understand why, after the subscription right is separated from the share in a right issue, the share value is equal to the share value minus the value of the subscription right? Because there can be no miracle in finance! A right of subscription (RS) has value because it allows to subscribe for a price of €100 for example a new share which at the same time is worth €150 and this during 2-3 weeks. Since a RS has value, by detaching it from the share, it reduces the value thereof. So if you had for example 1000 shares worth 150 € and you issue 100 new shares for a price of €100 each, the value of equity, post capital increase, will increase to: 1000 x 150 + 100 x 100 = €160 000 and the number of shares will increase to 1000 + 100 = 1100; hence a value per share, post capital increase, of €160,000 / 100 = €145.45 and no longer €150. The missing €4.55 is the value of the RS. Indeed, it comes from the formula of determining the value of the RS, RS = (150 - 100) / (1 + 10) = 50/11 = €4,55. If it was different, there is would have arbitrations that would restore balance. For more details see chapter 25 of the Vernimmen. Have a nice day

03-12-2018 : “Quote of the day ”

Any trader contracting with another with a view to trade, must, if he wishes to enjoy profits, show that he is willing to assume a share of the dangers and the costs which affect all sales and purchases. Robert de Courçon

30-11-2018 : “Question from a reader ”

Why are there two ways of calculating return on equity? There are two ways of calculating because there is the calculation that corresponds to the definition of return on equity (Net income / book equity) and the one that explains the building of return on equity from return on capital employed (ROCE) plus a leverage effect (which itself is based on an accounting tautology: total assets = total liabilities + equity). Using the two methods of calculation is interesting, if only to verify that one did not make calculation errors and to understand the source of a return on equity: ROCE or a financial construction due to the leverage effect. The second calculation is complex to implement when there are exceptional items that have been taken away to obtain a recurring return on equity, or when there are shares of results accounted for using the equity method, because the accounting tautology recalled above does not admit the dead end on these two items if one wants to find the same result regardless of the method of calculation. For more details see Chapter 13 of Vernimmen. Have a nice day.

29-11-2018 : “Quote of the day ”

Finance has unsolved problems. Thank God for that! Unfortunately, though, so far it looks as though we will have to solve them ourselves. Steve Ross

28-11-2018 : “Question from a reader. ”

Why are there two ways of calculating return on equity? There are two calculations because there is the calculation that corresponds to the definition of return on equity (Net income / book equity) and the one that explains the formation of return on equity from return on capital employed (ROCE) plus a leverage effect. (which itself is based on an accounting tautology: total assets = total liabilities + equity). The two methods of calculation are of interest, if only to verify that one did not make calculation errors and to understand the source of a return on equity: ROCE or a financial construction due to the leverage effect. The second calculation is complex to implement when there are exceptional items that have been taken away to obtain a recurring return on equity, or when there are shares of results accounted for using the equity method, because the accounting tautology recalled above does not admit the impasse on these two items if one wants to find the same result regardless of the method of calculation. For more details see Chapter 13 of Vernimmen. Have a nice day.

27-11-2018 : “Quote of the day ”

I don't think that you can ever give shareholders too many treats. Albert Frère

26-11-2018 : “Question from a student from ICCF@Columbia Business School ”

Does a share-buyback carried out through a tender offer necessarily entail a compulsory cancellation of the shares bought back? It depends on legal and tax issues. In the USA for example no, as a company can hold a large chunk of its shares with not legal limit whereas in France, a company cannot hold more than 10% of its own shares as treasury stocks and is forced to cancel those above this threshold. And a tender offer is rarely done for less than 10% of the share capital. For more details, see Chapter 37 of Vernimmen. Have a nice day.

23-11-2018 : “Towards an evolution of notification thresholds for M & A transactions? ”

Generally speaking, the thresholds beyond which acquisitions must be notified to the antitrust authorities for approval are expressed in terms of turnover: €5bn at the European level, $84.4m in the USA, €150m in France, etc. As an exception, Spain has a threshold in terms of cumulative market shares (25%).
Germany has just added a threshold expressed in equity value (and not in entreprise value) of €500m and Austria has done the same (€300m). In 2016, Europe decided not to change its position. France is currently reflecting on the subject after having launched two public consultations on this topic.
The reason is obvious: some companies can be highly valued without making a significant turnover that puts them below the concentration thresholds: in the digital sector of course, but also in pharmaceutical research, automotive parts, etc.
Another trend is to subject to the control of antitrust authorities not only the change of control, but also the acquisition of significant minority stakes. For example, in Germany, for equity investments giving more than 25% of the capital of a company.
Have a nice day.

22-11-2018 : “Whats a debt wall? ”

A debt wall occurs when finance directors don’t do their jobs properly. When they have allowed large amounts of their firms’ debt to mature in one or two years, when they have failed to act early to spread repayment over several years and they then find themselves up against a wall (there’s no other word for it) and having to rely on the good will of their lenders and the performance of the debt market. The firm does not generate sufficient cash flows and does not have enough liquidity to pay the next instalment on its debt. More on this topic in the November issue of The Vernimmen.com newsletter which has just been sent to its subscribers and which is now available on Vernimmen.com. Have a nice day

21-11-2018 : “Quote of the day ”

In political economy, we strayed from our true path every time we sought to rely on mathematical calculations. Jean-Baptiste Say

20-11-2018 : “Do you want to better understand how accounting principles can impact on financial management regarding cash management or covering exchange risk? ”

We devote an article to this topic in the November issue of The Vernimmen.com newsletter which has just been sent to its subscribers and which is now available on Vernimmen.com. Have a nice day

19-11-2018 : “Quote of the day ”

I don't think money is particularly good for people. I think it probably spoils as many lives as it enhances. It is really the root of evil, isn't it? John Caudwell, a billionaire

16-11-2018 : “Quote of the day ”

Monopolies are terrible things ... until you have one. Rupert Murdoch.

15-11-2018 : “Question from a reader ”

I often hear the term Revolving Credit, but I don’t know what it means. Could you shed some light on this matter, as it causes me problems when I’m trying to solve financial problems. A revolving loan is a line of credit which can be used in successive, renewable draw-downs. For example, you can use a credit card to buy an oven in a department store, not pay for it immediately, but pay it off in full when you get the money, and then make a second drawdown to buy a washing machine that you’ll pay for later. This credit obviously is not free. Companies usually make spot draw-downs over periods varying from between one and 12 months. There are also medium term drawdowns that can be used in successive draw-downs. For more, cheek out chapter 21 of the Vernimmen. Have a nice day

14-11-2018 : “Quote of the day ”

If you take money out of your left pocket and put it in your right pocket, you are not richer. Merton Miller

13-11-2018 : “Question from a follower of the Vernimmen.com Facebook page ”

What is the notion of normative? In finance, normative means recurrent, in the normal course of business, without any exceptional events. A normative margin is the sort of margin a company can expect to make on a regular basis. A normative profit is the profit from which the exceptional items have been deducted.
Have a nice day.

12-11-2018 : “Quote of the day ”

Sales are vanity, profits are security, and cash is reality. Jean-Pierre Lac

09-11-2018 : “Maersk and Danske Bank ”

Denmark is home to the largest group of container ships in the world, Maersk, founded by the family of the same name, which is also the largest company in this small country of just 6 million inhabitants. Since 1928, the Maersk family has been the largest shareholder (21%) of what has become Denmark's largest bank, Danske Bank. Not stupid indeed to carry out a wealth diversification whereas Maersk is in a very cyclical sector, nor to have a foot in a bank which knows you well to help finance heavy investments, a container carrier being worth a little more than a scooter. The Estonian subsidiary of Danske Bank, visibly poorly controlled by its parent company, would have in nine years whitewashed several tens of billions of euros (some even speak of €200bn) from countries of the former USSR. The revelation of this scandal led Danske Bank shareholders to separate from its managing director in September, and most recently from the bank's president. The representative of the Maersk family said: "We are a large shareholder and we have obligations and it’s only fair there are expectations on us. " Centuries away, we can echo Hamlet that in the Kingdom of Denmark, everything is not rotten, as long as there are shareholders aware of their responsibilities. Have a nice day

08-11-2018 : “Quote of the day ”

Never touch a business you don’t know. Hachinobei Mitsui

07-11-2018 : “Question from a reader ”

Why in calculating free cash flow, do you not take the corporation income tax that is listed on the income statement? The corporation income tax is calculated on the operating result because if one took the corporation income tax that is actually paid from the profit before tax, it would include the impact of the financial structure through the financial charges of the debt that are part of the result before taxes. And this would contradict one of the principles of determining free cash flow, which is that free cash flow is independent of the financial structure. For more details, see chapter 31 of the Vernimmen. In the calculation of the cost of capital, the theoretical corporation income tax thus calculated is reconciled with the corporation income tax actually recorded (this is Chapter 29 of the Vernimmen). Have a nice day.

06-11-2018 : “Quote of the day ”

There is nothing permanent, except change. Heraclitus

05-11-2018 : “Question from a Vernimmen user ”

Some practitioners apply a DCF valuation model for different scenarios
(typically bad, average and good) and then to assign weights to the values,
they use the probability allocated to each corresponding scenario.
Therefore, the (expected) value of the company becomes the sum of those
weighted values.
If we consider that the cost of capital already incorporates the variability
(i.e. the stochastic nature) of a company's future cash flows, I feel that
using the two approaches together is not consistent. Moreover, using
scenarios that are company-specific means they are taking specific risks
into account for valuation purpose. Is this consistent with the diversified
investor paradigm?

This method has no theoretical groundings: it is an empirical tool and
nothing more.
If the 3 scenarios are bad, average and good, and if, as is often the case,
bad and good scenarios are obtained by reducing/increasing the average
scenario by around the same percentage, the resulting average of the 3
scenarios is very close to the average scenario, consequently bringing no
additional value to you. However, it does convey the impression that you
seriously studied the various risks the company is exposed to, which is
realistically nothing less than a joke.
The only value this might add is in the event that some threshold effects
were used and different upward and downward sensitivities were added.
What would be clearly wrong would be to discount the average of the 3
scenarios at the risk free rate and not at the WACC, by reasoning that the 3
scenarios capture all future possibilities, thus making the average of the 3
less risky. This is completely wrong but we have observed this being done
several times.
With all this being said, the average scenario is realistically just another
scenario, which may or may not be slightly more likely than each of the 3
initial scenarios, but which cannot reduce nor eliminate the risk. As such
it is not in contradiction with the diversified investor paradigm.

Have a nice day.

01-11-2018 : “Big Blue acquires Red Hat ”

October 29 IBM announced a $34bn acquisition, its largest ever, fully paid in cash.
Before this acquisition IBM capitalized $116bn, since it capitalizes $107bn, a decrease of 7.5%.
It is true that with an acquisition premium of 63%, a purchase price representing 11.4 times the last known turnover, and 70 times the operating result of Red Hat, IBM did not buy on the cheap!
IBM was the epitome of the US multinational and the first group in the world by its market capitalization in the years sixties and seventies. After a successful transformation from computer manufacturing to IT services in the eighties, IBM has been suffering a lot since 2011 with a steady decline in revenue ($79bn in 2017 versus $107bn in 2011).
Presenting this acquisition as "This is all about growth" is a bit presumptuous, as, even if Red Hat's sales continue to grow at 20% per annum and that of the current IBM is stabilized, the sales gap between the two groups is such ($2.9bn and $79bn) that the growth rate of the new group will be only 0.7% the first year. Not enough to write to his aunt.
Moreover, the financial communication is quite dishonest, emphasizing: "Acquisition will be free cash flow and gross margin accretive within 12 months, accelerate revenue growth and support a solid and growing dividend". This does not require any management talent since Red Hat has higher gross margins than IBM and positive free cash flow, so the growth of these two aggregates, once IBM and Red Hat are combined, is as certain as 2 and 2 are 4.
If IBM has tried to combat the decline in its revenues since 2011 by regularly making acquisitions (for a few $bn per year), this acquisition is much larger and will push its net debt to EBITDA ratio to 4.7 times against 2.8 times in 2017.
If the Red Hat shareholders blushed to the announcement of the acquisition with a 49% increase in their share price, the shareholders of Big Blue seem rather to have a blue fear by losing in two days 2/3 of the control premium paid by IBM. One can understand them.
Have a nice day.

31-10-2018 : “Quote of the day ”

The man who makes it the habit of his life to go to bed at nine o’ clock, usually gets rich and is always reliable. Of course, going to bed does not make him rich - I merely mean that such a man will in all probability be up early in the morning and do a big day’s work... It’s all a matter of habit, and good habits in America make any man rich. Wealth is a result of habit.
John Jacob Astor

30-10-2018 : “The value of Uber ”

Although it appears that the most recent transaction recorded to date
concerning Uber is Toyota's acquisition of $500m of new shares in August
2018, thus valuing the global start-up at $72bn; it also seems that Goldman
Sachs and Morgan Stanley recently and quite publicly published valuations of
$120bn in anticipation of an IPO that could occur in early 2019 and for
which they have been hired as advisors.
Three comments:
1. It is extremely difficult to value Uber, a global company that
quickly burns through substantial amounts of cash, and whose economic model
is likely to change dramatically with the advent of autonomous and connected
cars. It is in instances such as these that the words of an entrepreneur who
left school at the age of 14 to build a European group show their innate
wisdom: “the best valuation expert is the one who writes the check” (Guy
Verrecchia, founding president of UGC).
2. US banks never hesitate to post high valuations if it helps to
obtain an IPO mandate, which in this case should take place a few months
later. One must keep in mind that many things can happen in a few months’
time. Those of you who have seen the movie "Pentagon Papers" probably
remember Katharine Graham / Meryl Streep's uncomfortable face when she
discovers that the price of the Washington Post's IPO will be a few dollars
less than what Lazard had lavishly promised.
3. At worst, regardless the outcome, should the IPO eventually be
carried out at, for example, $90bn, then it is an opportunity to portray it
as a good deal for investors since people were quoting valuations of $120bn
a few months prior.
Who told you that finance is not also about marketing?

Have a nice day

29-10-2018 : “Quote of the day ”

In most businesses, the watchword is "The customer is always right". Accountants, however, are charged with telling the customer when he’s wrong.
Arthur Levitt

26-10-2018 : “Benetton ”

The death of Gilberto Benetton on Monday gave rise to publications of notes recalling the epic of the 4 brothers and sister Benetton who, starting from nothing in 1965, built a textile empire in the 1980s. And who especially knew how to take a strategic shift in the 1990s, investing cash flows from the textile business in catering concessions (Autogrill), airports (Rome and Nice), and highways (Atlantia) where they constituted the world leader in the sector with the takeover of Abertis. Today, Benetton's textile makes less than 15% of the group's sales. It is surprising that industrialists who have revolutionized their sector in their time converted themselves into concession operators, somehow into rentiers. The key to this evolution is perhaps to look for, as often in family businesses, on the side of the succession of the 4 founders. None of their 13 children wanted to take over the previous generation, and in these conditions invest in concessions is probably not the worst idea that can be for the next generation. Hat low MM. and Mrs. Benetton. Have a pleasant day.

25-10-2018 : “Quote of the day ”

Never go to sleep at night until your debits equal your credits.
Luca Pacioli

24-10-2018 : “More than 700 participants for the 7th class of ICCF @ HEC Paris ”

Another record broken for this training course launched in 2015, which through 5 months of regular work allows one to master or review the fundamentals of corporate finance: financial analysis, valuation of companies, investment and financing choices. Here is a picture from a masterclass in Paris last week with some of the participants of this totally digital training program. For non-French speakers, my colleagues at Columbia Business School have developed an English version using the same format : ICCF@CBS. Have a nice day

23-10-2018 : “Quote of the day ”

It's because gold is a currency that it is precious, not the other way round. Michel Foucault

22-10-2018 : “Question from one of our readers ”

What is the difference between the profitability required by investors and the theoretical equilibrium profitability of the CAPM, and how are they each calculated? The profitability required by investors is a general term that can intersect with the profitability required by shareholders, i.e. the cost of equity of the company; the profitability required by the company's lenders, that is, the cost of the debt; or the profitability required by all the investors who finance the business, that is, the cost of capital. These three required rates of return can be measured by the CAPM, see chapter 31 of the Vernimmen on the cost of capital and its calculation by the direct method, even if the CAPM is far more frequently used to calculate the rate of return required by the shareholders. Have a nice day

11-10-2018 : “Quote of the day ”

No matter how skillful the trading scheme, over the long-haul abnormal returns are sustained only through abnormal exposure to risk.
Alan Greenspan

10-10-2018 : “Question of a reader ”

Could you explain how to calculate the logarithmic returns of a share portfolio and provide an example? Assume you have the following share prices: 100 ; 105 ; 110 ; 105 ; 120 ; 125. You transform them by taking their log: 4.605; 4.654 ; 4.700; 4.654; 4.787; 4.828. And then you calculate the returns by the differences of these figures: 4.654 – 4.605 = 0.05, ie 5%; then 4.700 – 4.654 = 0.046; - 0.046; 0.133; 0.041. Then if you wish, you can calculate the average, the standard difference for this series of returns. Have a nice day

09-10-2018 : “Quote of the day ”

Acquaintance: a person whom we know well enough to borrow from, but not well enough to lend to.
Ambrose Bierce

08-10-2018 : “The active / passive fund management match ”

Morningstar, in a study on 9,400 active or passive European funds and managing € 2900 billion from June 2008 to June 2018, shows that active managers beat passive competitors in only two out of 49 fund categories in 10 years. Is not a surprise for those of you who believe in the efficiency of the markets in the sense that the Nobel Prize winner Eugène Fama gave (see Chapter 15 of the Vernimmen), or the power of collective intelligence in the processing of a very large number of data.

The inclusion of passive funds rather than the indexes to which they refer makes it possible to take into account their costs, even if they are modest, and therefore to compare the returns net of fees for investors.

On the other hand, the study did not eliminate from its very large sample the false active funds that claim to be active in order to be able to charge high management fees but which, in reality, simply hold a portfolio similar to that of their index, but for some overweights or underweights. Market authorities have recently been hunting them and it is hoped that they will be effective in eliminating this form of white-collar crime.

Have a pleasant day

05-10-2018 : “Quote of the day ”

When there are no more buyers, all we're left with is sellers.
Sam Zell

04-10-2018 : “What would be the right ROCE for the main electricity producer in Niger? ”

We would say that a post-tax ROCE of around 12% would seem to be correct because it would correspond to its cost of capital. We have calculated the cost of capital in the following way. For EDF, the main French producer of electricity, the cost of capital is around 6% with long-term government bonds yielding 0.75%. As in Niger, long-term government bonds in CFA francs yield about 6.5%, we added the differential of about 6% to the cost of capital of EDF. Hence 12%. By offsetting the inflation differential between the two countries of 5% (inflation in Niger) - 1.5% (inflation in France) = 3.5%, this gives a rate of 8.5%, ie 2.5% more than EDF, to consider a political risk that is not this of Europe and which level does not seem shocking to us. Have a nice day

03-10-2018 : “Quote of the day ”

If you think education is expensive, try ignorance!
Anonymous

02-10-2018 : “Question of one of our readers ”

The ROCE (operating income / operating assets) may improve over a given period simply because of the depreciation that reduces the fixed assets. Therefore, and in order to eliminate the impact of depreciation, would it make sense to calculate the ROCE as EBITDA/ (Gross fixed assets + working capital)? Keep in mind that while the depreciation expense reduces the denominator of ROCE by reducing net fixed assets, it also reduces its numerator the EBIT. So, the impact of depreciation is not unambiguous. Reasoning in gross fixed assets only seems to make sense in the few sectors where the depreciation charge has no financial reality because it does not correspond to a loss of value. They are few in number, for example the hotel industry, rather high-end, or the portfolios of cinema films. For more details, see chapter 13 of Vernimmen. Have a nice day

01-10-2018 : “Quote of the day ”

Provide a short description of a long-term investment. A short-term investment gone wrong!
Anonymous

28-09-2018 : “Question from reader ”

It seems intuitive that the cost of capital for very fast-growing companies is naturally higher than that of a comparable but more established firm given the additional risk that very strong growth forecasts present. How should one take this risk into account? Initially, I tended to adjust (= multiply) the equity market risk premium by the ratio between the expected growth of the project and that of a benchmark of companies in the same sector. Does this method have any value from a theoretical point of view? We agree with you that a fast-growing company will have a higher capital cost for the reasons you mention. This being said, there is no theoretical basis to multiply the equity market risk premium by the ratio of growth rates. The method you’re using is empirical and mathematical fiddling, but fiddling still the same! The parameter that is impacted by a higher growth rate is the beta of the company as we explain in chapter 18 of the Vernimmen. It is therefore this parameter which must be different from that of a mature company. Similarly, when looking at what cost of capital to expect from a greenfield project as opposed to a mature project in the same sector (ie. oil exploration, or the construction of an EPR reactor versus the purchase of a conventional nuclear power plant), we found a higher cost of capital for the greenfield business of around 2% (see Chapter 29 of the Vernimmen). We would be surprised if in your case the difference were significantly higher. Have a nice day.

26-09-2018 : “Do you know Ester? ”

This is the European Short-Term Rate that will replace the Eonia from 2020. Calculated by the ECB from the rates of unsecured overnight loans contracted in euros by European banks, it will result from the weighted average of the volumes of the rates observed after elimination of the 25% of the volumes granted at the highest rates and the 25% lowest.

It is therefore much less likely to suffer from the lamentable manipulations observed a few years ago by dishonest banks which made false statements to influence the calculation of the index or hide their real short-term cost of funding. ESTER is in fact calculated on transactions registered with the ECB and not on simple statements made by banks.

Have a pleasant day.

24-09-2018 : “The Vernimmen.com Newsletter of September ”

Why has the average return on a large portfolio of Chinese shares been so poor since the early 2000s (3.7%)? The answer is in the Vernimmen.com Newsletter issue of September available on the vernimmen.com website if you have not received it as one of its subscriber. Poor profitability of listed Chinese groups (35 % of them do not earn their cost of capital) is one answer. Also an article about SPACs in Europe versus the USA. Have a nice day.

21-09-2018 : “Question from a reader ”

For multi-year projects such as hydroelectric dams, is the project's IRR to be calculated from the year of beginning of construction or when the dam starts to produce electricity, considering capitalization of the capex up to the year of initial production? An IRR is computed by definition by considering all relevant cash flows as they occur, not capitalizing some at a certain rate. This method would not lead to an IRR as defined and would raise the problem of the capitalization rate. If you would take the cost of the debt that was used to finance the building, you would forget the cost of equity that was used as, at least implicitly, in obtaining the loans. If you would take the cost of capital, this is already better. But what you would get as a solution to your equation would not be an IRR but a Jack-of-all-trade rate, average between the true IRR that you will not know and the cost of capital. For more details, see chapter 17 of the Vernimmen.

20-09-2018 : “Quote of the day ”

In the short-term, the market is a voting machine .... But long-term, the market is a weighing machine... Benjamin Graham

19-09-2018 : “Question from a follower of the Vernimmen.com Facebook page ”

If an asset that was 100% financed by debt is sold below its carrying value, does that impact equity? If an asset is sold at a price lower than its carrying amount in the balance sheet, regardless of how it was financed, the company automatically realizes a capital loss, which reduces the equity via the result that is weaker as a result. For more, have a look on Chapter 3 of the Vernimmen. Have a nice day

18-09-2018 : “Quote of the day ”

Most people would rather die than think; in fact, they do so. Bertrand Russel

17-09-2018 : “What is cash back? ”

It is a technique that allows an individual to withdraw small amounts of cash at the same time that he or she pays for his or her purchases by a credit card in a shop. The shop-owner/clerk then gives him, at the same time as the purchases, this sum to his client who is withdrawn from his bank account and transferred to the merchant's bank account. This is an emergency technique, especially useful in rural areas with few ATMs. It is a new definition in the Vernimmen glossary that you can find on the vernimmen.com website, with hundreds of other financial terms. Have a nice day

14-09-2018 : “Quote of the day ”

Many economic theories are rendered false because they are based on the assumption that man is a reasonable being. Auguste Detoeuf

13-09-2018 : “Question from a reader ”

Is a very high EPS in € the sign of a share to buy? While doing a quiz of the vernimmen.com site, I came across a question from a company with a P/E ratio of 4 and I thought that a low EPS meant a very high earnings per share, and therefore a profitability just as high. But the answer says the opposite, speaks of high risks. Why is my reasoning wrong? It's a classic mistake that you will not do again once you finish reading this post. A very high EPS does not mean anything. Only the growth rate of EPS counts, not its absolute level. Indeed the level of an EPS depends on the choice made by the company of the number of shares. If a group chooses to have a capital made of 1,000 shares and the value of its equity is €10,000,000, each share will be worth €10,000; and if its net profit is €700,000, its EPS will be €700. But this same group could very well have decided to have a number of shares of 100,000; in which case its EPS would have been €7 and the share value €100. In both cases, the P/E ratio is the same at 14.3. In other words, a share worth €10,000 can be as expensive in terms of P/E ratio as another one that is worth €100, or cheaper or more expensive. This is the same idea as for the currencies: the yen is not weak vis-a-vis the euro simply because it takes several yens to buy a euro; and the pound is not strong against the euro because it takes more than one euro to buy a pound. Have a nice day

12-09-2018 : “Quote of the day ”

Cash is king Anonymous

11-09-2018 : “Question from a reader ”

In calculating free cash flow, when should the corporation tax be deducted: After the operating result or after adding back the depreciation allowance? It does not matter the order of the factors because A + B - C + D = A - C + B + D. On the other hand, it is important to calculate the theoretical tax on the operating result, and not on the EBITDA or the profit before tax. More details if necessary in chapter 31 of the Vernimmen.

07-09-2018 : “Question from a follower of the Vernimmen.com Facebook page ”

If an asset that was 100% financed by debt is sold below its carrying value, does that impact equity? If an asset is sold at a price lower than its carrying amount in the balance sheet, regardless of how it was financed, the company automatically realizes a capital loss, which reduces the equity via the result that is weaker as a result. For more, have a look on Chapter 3 of the Vernimmen. Have a nice day

06-09-2018 : “Quote of the day ”

Never sell unless there are two buyers. Eugene Kleiner

05-09-2018 : “M&A rankings: truth or cheating? ”

The Agefi ranking for M&A deals on the French market for the first half of 2018, published before the summer break, shows that 13 banks (sic) advised Unibail-Rodamco or Westfield in their merger which, with nearly € 21 billion, was the biggest transaction of this semester in France. And these 13 banks occupy the top 13 spots in the ranking given the size of this transaction compared to other transactions recorded. Since it is not true that 13 banks advised both parties (fortunately for the parties who otherwise would have had to charter buses to go to negotiation meetings!), some banks had to issue opinions of fairness (at unbeatable prices, or even for free) or to grant loans to obtain credit for this operation. As this hypocrisy does not date from today, the best ranking is probably that made on the invoiced fees and not on declared transaction volumes. Have a nice day

04-09-2018 : “Quote of the day ”

It is extremely difficult to deflate a balloon quietly with a pin John Kenneth Galbraith (on the 1929 crash)

03-09-2018 : “Solution to the weekend brainstorming problem ”

First a remainder of the problem A friend and an investor asks you about the valuation of a company close to bankruptcy offering prospects for recovery. He is quite embarrassed because between the projections and the situation at this moment, we go from darkness to light !!!!!! How can he proceed to make conclusions that are intellectually honest and meaningful economically and financially? The study carried out by a firm that was handed to him leaves him perplexed: Amount of the book equity: €5000, equity value obtained by discounting cash flows: €12m. He tells you that for him, this approach is an absurdity (to remain courteous and polite). Now the solution
Here are two ideas you could suggest to your friend: 1 / you value the company for the carrying amount of its book equity and give the current shareholders warrants with a nominal exercise price that are exercisable if the company holds the business plan that justifies the value of the discounted free cash flow of € 12 million. 2 / You value the company by discounting free cash flows but you take a discount rate of a venture capital type (40 or 50%) the first years which only falls to 10-15% once that the company is saved from its predicament. For example, the flow of year 5 is disconted as F5 / (1.4 ^ 2x1.1 ^ 3), if it takes two years to turn around the business. Have a nice day.

31-08-2018 : “Brainstorming for the week-end ”

A friend and an investor asks you about the valuation of a company close to bankruptcy offering prospects for recovery. He is quite embarrassed because between the projections and the situation at this moment, we go from darkness to light !!!!!! How can he proceed to make conclusions that are intellectually honest and meaningful economically and financially? The study carried out by a firm that was handed to him leaves him perplexed: Amount of the book equity: €5000, equity value obtained by discounting cash flows: €12m. He confides that for him, this approach is an absurdity (to remain courteous and polite). Have a nice weekend.

30-08-2018 : “Quote of the day ”

The market is a large movie theatre with a small door. Nassim Nicholas Taleb

28-08-2018 : “Quote of the day ”

Nothing is more practical than a good theory. Albert Einstein

27-08-2018 : “Answer to last Friday's brainteaser ”

First recall the problem: You observe the following data for an industrial company in the field of BtoB: Sales: € 9 million Operating result: € 0.9 million Net result: € 0.6m Equity: € 6m Net banking and financial debt: € 0m Fixed assets: € 3 million Stocks: € 1,5 million Customers: € 0.1 million Suppliers: € 0.9 million What can you deduce about how it is financed? What is striking is the weakness of the customer, line on the balance sheet: one hundred thousand euros for ten million sales, i.e. 3 days of sales outstanding. Impossible, except if the company has securitized or factored the customers' bills and that they are not consolidated back in the balance sheet. In fact, this company, apparently without net banking and financial debts, has financial debts that can be estimated, taking an average payment of 50 days and a 20% VAT, to about € 1.5 million. Have a nice day.

24-08-2018 : “Weekend brain teaser ”

You observe the following data for an industrial company in the field of BtoB: Sales: € 9 million Operating result: € 0.9 million Net result: € 0.6m Equity: € 6m Net banking and financial debt: € 0m Fixed assets: € 3 million Stocks: € 1,5 million Customers: € 0.1 million Suppliers: € 0.9 million What can you deduce about how it is financed?

23-08-2018 : “Question from a reader ”

Can a free cash flow discount method be used to value an investment bank? Yes, but with changes compared to what is done for non-financial companies. Free cash flow will be the amount of net income that can be distributed to shareholders while leaving enough equity in the bank for it to respect its prudential constraints imposed by central banks and the so-called Basel III regulations. And the discount rate will be the cost of equity, as the concept of cost of capital does not make sense for a bank.
Have a nice day.

22-08-2018 : “Quote of the day ”

The only thing men get passionate about, besides love, is the question of exchange rates. Benjamin Disraeli

21-08-2018 : “Quarterly results and short-termism ”

Mr. Trump has asked the SEC to think about changing the results of US listed companies from a quarterly basis to a semi-annual one, overturning a 1970 decision to move to quarterly reporting. This would be an alignment with the European position which has eliminated the obligation to publish quarterly results since 2013. If this measure were adopted by the SEC, and then by the companies (because it is not a question of prohibiting the publication of quarterly results, simply of removing the obligation to publish it. In Europe, many listed groups continue to publish quarterly results), we do not think that the short-termism of some investors would be reduced and its negative effects on the companies neutralized. Indeed, what seems unhealthy to us is not the publication of quarterly results in themselves, but the publication on this occasion of guidances regarding the results of the next quarter. Once these indications are given, the company feels obliged to respect them and can then be led to manage its operations with a goal to 3 months to deliver what it promised whatever happens. Visibility at 3 months is not obvious because if a big customer differs its order by a week, or a supplier delivery for any reason, the activity can be disrupted with a short time to catch up. Hence possible adverse effects such as the reduction of an R & D program to reduce expenses of the current quarter in order to reach the guidance. If someone wants to prohibit something, it would seem to us better to forbid the issuance of short-term guidances to help CFOs who do not feel strong enough to make that decision on their own. Let us remind our readers that the publication of quarterly results by large European listed groups dates back to early 1999 when Paribas and Société Générale, being the object of a hostile dual offer by BNP, began to publish results for the first quarter of 1999 because they were excellent and well beyond the expectations of investors. It was an interested way of breaking an asymmetry of information and, above all, failing to escape a takeover by BNP, to have a share price and / or a price of change of control that reflects the present situation and not the one of six months ago. More recently, last week, the Walmart share price jumped 9.3% on the announcement of better-than-expected quarterly results, especially on grocery sales where it is attacked by Amazon. The publication of Macy's quarterly results resulted in a 16% drop in the price. This shows that these results contain information deemed relevant by investors, even for very large groups. In the absence of these publications, for 3 months buyers of Walmart shares and sellers of Macy's shares would have benefited from a windfall effect to the detriment of their counterparties. Have a nice day.

17-07-2018 : “Quote of the day ”

“Minimising a rate means maximising value, and vice versa. “
Pierre Vernimmen

16-07-2018 : “Solution to the problem of last Friday ”

First recall the problem: You need to value a company in the emerging world whose financial statements do not clearly reflect the reality of things since at least 50% of sales are not declared. Which valuation method would you use in this case? The parameters to take into account: - the land and buildings are not valued at market value in the balance sheets but at acquisition price (rather low), - the net results are insignificant due to tax optimization (undeclared sales), - companies are undercapitalized with huge debtors (10 times equity), - inventories seem to properly valued, Answer: This company should be valued using the sum-of-the-parts method adding the assets valued on the basis of their market value and subtracting the debts. Do not forget to obtain from the seller a guarantee against hidden debts (for example by retaining a part of the price during the period during which the tax administration can come to correct you on the sales made and not declared). Indeed, any other method seems ineffective because of the under declaration of sales which removes all the relevance of the elements of the profit and loss account and the cash flow statement. Hace a nice day.

13-07-2018 : “weekend brain teaser ”

You need to value a company in the emerging world whose financial statements do not clearly reflect the reality of things since at least 50% of sales are not declared. Which valuation method would you use in this case? The parameters to take into account: - the land and buildings are not valued at market value in the balance sheets but at acquisition price (rather low), - the net results are insignificant due to tax optimization (undeclared sales), - companies are undercapitalized with huge debtors (10 times equity), - inventories seem to properly valued, Have a nice week end.

12-07-2018 : “Quote of the day ”

“Money is like the crowd that piles into a crowded coffee shop, deserting the coffee shop opposite, not because the service is bad, but because its empty. “
Auguste Detoeuf

10-07-2018 : “Quote of the day ”

“A firm has reached its limit in terms of size when it is as expensive to organise a deal as to do it directly on the market. “
R.H. Coase

09-07-2018 : “Solution to the problem of last Friday ”

First recall the problem: What is the variable which splits the eurostoxx50 groups into two sets, excluding banks, insurance and real estate? Set 1: AB InBev, Ahold, Airbus, Danone, Eon, Inditex, Enel, Iberdrola, Orange, Saffron, SAP, Telefonica, Volkswagen, Unilever, Vinci, Vivendi. Set 2: Adidas, ASML, Air Liquide, BASF, Bayer, BMW, CRH, Daimler, Deutsche Post, Deutsche Telekom, Engie, Eni, Essilor, Fresenius, L'Oreal, LVMH, Nokia, Philips, San Gobain, Sanofi, Schneider , Siemens, Total. Answer: the working capital! The first group includes companies with a negative working capital, the second group with a positive working capital. 16 against 23. Companies with a negative working capital are to be found not only in retail because the working capital is also the expression of the balance of power in the value chain. Better to be a supplier of L'Oréal rather than Airbus if cash is not your strong point! Have a nice day.

06-07-2018 : “Weekend brain teaser ”

What is the variable which splits the eurostoxx50 groups into two sets, excluding banks, insurance and real estate? Set 1: AB InBev, Ahold, Airbus, Danone, Eon, Inditex, Enel, Iberdrola, Orange, Saffron, SAP, Telefonica, Volkswagen, Unilever, Vinci, Vivendi. Set 2: Adidas, ASML, Air Liquide, BASF, Bayer, BMW, CRH, Daimler, Deutsche Post, Deutsche Telekom, Engie, Eni, Essilor, Fresenius, L'Oreal, LVMH, Nokia, Philips, San Gobain, Sanofi, Schneider , Siemens, Total. To help you, read chapters 4 and 11 of the Vernimmen. Have a nice day.

05-07-2018 : “Quote of the day ”

“You don't solve a problem by setting it aside.”
Winston Churchill

04-07-2018 : “ Can you explain to me what is the meaning of a capital reduction by exchange of securities for a holding company? ”

A holding company proposes to its shareholders, or some of them, to exchange shares it holds in the capital of one of its subsidiaries for shares of its own capital which it will then cancel. This is a way to allow its shareholders to find liquidity if the shares of the subsidiary are more liquid (because they are listed for example) than those of the holding company; and / or a way for it to sell the securities of the subsidiary; and / or a way for a shareholder of the holding company, which will not participate in this offer, to increase its stake in the capital of the holding company. Have a nice day

03-07-2018 : “Quote of the day ”

“There is more to life than just money... There is more money! “
Georges Bourdoiseau

03-07-2018 : “Dell, a successful LBO ”

In 2013, Michael Dell and Silver Lake had taken private Dell from the Stock Exchange for $ 25bn, of which its founding president then held 14% (a $ 3.5bn stake). The debt contracted was approximately $ 14 billion. Yesterday, the Dell IPO was announced with a stake for its founder between 47% and 54% for a group value of about $ 70 billion, giving a $ 35 bn fortune to the eponymous founder, i.e. 10 times its 2013 investment. The IRR over 5 years is . . . 58 % per year. Beauty of the leverage effect that works well and allows an entrepreneur to regain control of his group. In France, after several consecutive LBOs and a remarkable job, Frédéric Sanchez and his team managed to take control of Fives, an industrial engineering group, one of France's least known success stories. For a leverage effect that works in the wrong direction, see the restructuring announced last week of Orchestra's financing, a company listed on the stock market, but with a debt level similar to the one of an LBO, which is significantly diluting its founder. Have a nice day.

02-07-2018 : “What is a normative margin? ”

The notion of normative is clear, the level of margin which a company should reach under normal conditions of activity, without exceptional element; but its implementation is difficult because there is a lot of subjectivity in this calculation. This involves studying the margins of competitors and its own over a fairly long period (the entire duration of a cycle for a cyclical industry). Very often there is a certain dose of optimism in this determination which leads to defining normative margins which are more objectives to be achieved in a few years (and which one never reaches) than a normal level of margin, cleared from non-recurring or non-durable items. Have a nice day.

28-06-2018 : “Quote of the day ”

The rich man vanquishes time and time vanquishes the poor man. Irish proverb

27-06-2018 : “Chanel dividend policy ”

And here is an assignment that deserves the best grade! "The mandate entrusted to me by Alain Wertheimer (the shareholder of Chanel) is to have no debt, to prioritize financing investments and maintain the structure of the balance sheet. The policy of dividends is a consequence of these priorities. " Philippe Blondiaux, CFO of Chanel. Les Echos. June 22, 2018 And, in this logic, 2017 dividends were reduced from $591M to $109M, for a 2017 net income of $1.79bn, up 19%. Shareholders do not ask for dividends, they ask first that the company finds investments that earn at least their cost of capital. It is true that it is easier to implement this sensible dividend policy when the company is unlisted or listed but a dominant shareholder who can impose it on certain investors who confuse dividends and value creation. Have a nice day

26-06-2018 : “Quote of the day ”

In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.
Rudiger Dornsbusch

25-06-2018 : “Hermès exceptional dividend ”

Hermès paid an exceptional dividend of € 5 per share, which was voted by its shareholders at the annual meeting of June 5, 2018. On this occasion, the CFO said: "This exceptional dividend is intended to distribute a portion of the large cash available: 3 billion euros.” The chairman of the Supervisory Board added: "The exceptional dividend rewards the loyalty of the shareholders. But the best reward is really the evolution of the share itself.” Of these three sentences, one is inaccurate. Which one? The second. In the same way that if you take out a reward on your child's saving’s account, paying a dividend, even an exceptional one, has never enriched a shareholder because the counterpart of this dividend, as well as any dividends anyway, is a mechanical decline in the value of the share of the same amount, which is logical since the company, by paying a dividend, is deprived of an asset, so its value has declined. The day Hermes paid its exceptional dividend, the price fell in value. Conclusion: You may be chairman of the supervisory board of one of the world's most successful groups and have a loophole in finance. But as finance is not the alpha and the omega of the business world, it does not matter that much. Especially since the insistence of some shareholders to claim dividends shows that reading chapter 36 of Vernimmen would do them good. Have a nice day.

22-06-2018 : “Quote of the day ”

“A source of financing is considered cheap only if its net present value is negative”. Pierre Vernimmen

21-06-2018 : “Another IPO cancelled at the very last minute ”

Delachaux, the rail equipment supplier, which was to be listed on the stock market at the beginning of this week, to allow the LBO fund CVC to sell most of its stake of 49.9%, has announced last Thursday that it gives up its IPO because the Canadian investment fund CDPQ has just acquired the participation of CVC. This is a new illustration of the rise of these new players on the LBO scene that we highlighted in the June issue of the Vernimmen.com newsletter and that upsets the scene of medium-sized LBOs, and that of IPOs. The June issue has just been sent to its subscribers and is also available on the vernimmen.com website. Have a nice day

21-06-2018 : “General Electric is expelled from the Dow Jones Index: Sic transit gloria mundi ”

Founding member in 1896 and continuously since 1907. It is replaced by the chain of pharmacies and drugstores Walgreens Boots Alliance (which shows that it is possible to do better than resist to the Amazon wave in retail). In 2002 and 2005, GE was still the world's largest market capitalization with around $300bn (versus $112bn now and versus a $500bn brief apex) and above all, a universally admired management model. But a conglomerate can only stay on the top if all its divisions remain at the top and the top management is able to make the right choices of division bosses. Necessarily temporary, and GE has taken the path of deconglomerisation, as Siemens, Fiat, Kering, Philips have done, shedding, selling and demerging assets, hence a lower price. We take this opportunity to remind you that the Dow Jones index has a great media recognition but that it is almost not used in the financial industry, serving as a support to index funds for only $29bn against nearly $10000bn for the S & P 500. The reason for this lack of interest of financial people: its weighting, not by market capitalizations or free floats, but by stock prices, much simpler to calculate the index by hand in the good old days, but which does not give a true and fair view of the market gyrations. For more details, see the Vernimmen.com Newsletter #21 of December 2006. Have a nice day. PS: If Apple is a member of the DJ (it pushed out another historical pillar, AT&T), Amazon is not there.

20-06-2018 : “Quote of the day ”

“Man is but the only true wealth.” Jean Bodin

19-06-2018 : “Hermès exceptional dividend ”

Hermès paid an exceptional dividend of € 5 per share, which was voted by its shareholders at the annual meeting of June 5, 2018. On this occasion, the CFO said: "This exceptional dividend is intended to distribute a portion of the large cash available: 3 billion euros.” The Chairman of the Supervisory Board added: "The exceptional dividend rewards the loyalty of the shareholders. But the best reward is really the evolution of the share itself.” Of these three sentences, one is inaccurate. Which one? The second. In the same way that if you take out a reward on your child's saving’s account, paying a dividend, even an exceptional one, has never enriched a shareholder because the counterpart of this dividend, as well as any dividends anyway, is a mechanical decline in the value of the share of the same amount, which is logical since the company, by paying a dividend, is deprived of an asset, so its value has declined. The day Hermes paid its exceptional dividend, the price fell in value. Conclusion: You may be chairman of the supervisory board of one of the world's most successful groups and have a loophole in finance. But as finance is not the alpha and the omega of the business world, it does not matter. Especially since the insistence of some shareholders to claim dividends shows that reading chapter 36 of Vernimmen would do them good. Have a nice day.

18-06-2018 : “Quote of the day ”

“The trees don't reach the sky”
Proverb

15-06-2018 : “Quote of the day ”

“Nothing is self-evident. Nothing just gets given. Everything has to be built up.” Gaston Bachelard

14-06-2018 : “The annual report of WPP ”

Every year we read annual reports, those of the companies of which we are shareholders, those of the companies in which we could become shareholders, those of the companies of which a deal or a situation serves us to write a case for our students; and that of WPP. Why the one of WPP? Because this marketing group inserts each year in its annual report a section of fifteen or so pages that talk about the recent global trends in consumption and the upcoming trends over the next 5-10 years. And marketing is a reflection of our times. Unfortunately, this year it disappeared, probably with the sudden departure of its founding president, Martin Sorrell, who wrote it. This year two striking points: 1 / In the summary of the financial results, 5 aggregates (operating result, profit before tax, current result, net result and EPS) are presented twice, under IFRS and under headline, which does not simplify the reading of the accounts. Worldwide, companies feel the need, to respect the principle of good information, to correct the IFRS standards. As a result, WPP 2017 EPS is up 6.4% in headline and not 31.9% as published under IFRS. The IASB would do well to seriously tackle this issue, which undermines the credibility of its standards. 2 / A summary table that combines the return on equity and the cost of capital. One would expect a comparison between ROE and the cost of equity because the two data are comparable and homogeneous, measuring what is required by shareholders on one side (the cost of equity) and on the other one what is obtained (return on equity). Not with the cost of capital which is comparable to ROCE. WPP is performing well enough (16.9% return on equity with net debt representing twice the EBITDA) to allow it to display consistent figures. Have a nice day.

13-06-2018 : “Quote of the day ”

“We always overlook the fact that working has become a leisure activity.”
Mark Abrams

12-06-2018 : “Hermès joins the CAC40 ”

Impressive success: €60bn of market capitalization, 10% more than AXA, 10% less than BNP Paribas; with only €5.5 billion in turnover and 13,500 employees, but it is true a current operating margin of. . . 35%. And a 2017 P/E ratio of 50 times (when one loves, one does not count!). It should be noted that Hermès replaces the world leader in cement LafargeHolcim in the CAC40. Finally, one of our favorite quotes we ask readers of Chapter 42 of the Vernimmen to comment. To a financial analyst who asked him at the time of the IPO in 1993 what would be his financial strategy, J.-L. Dumas (president of Hermes) replied "Let my grandchildren be proud of me". Mr. Dumas, rest in peace, you grandchildren can be proud of you. Hats off. Have a nice day

11-06-2018 : “Quote of the day ”

“The stock market is not slave to the time told by clocks.” Benoît Mandelbrot

08-06-2018 : “Question from a German reader ”

In the formula of return on capital employed, it is necessary to subtract from the operating result the theoretical tax (say 30 % for Germany). If a company has significant tax loss carryforwards, should a lower rate be retained or is it preferable to calculate a customized rate such as taxes / operating income? It seems more appropriate at this level to think with a normal tax rate, which does not take into account tax losses carried forward because sooner or later they will eventually run out. Moreover, in order to compare with non loss-making companies, it avoids showing any over-returns that are not real one. Companies that have experienced difficulties and which have legally removed entire sections of their equity (the losses are accounted for by a decrease in equity without the shareholders having given up asking for a rate of return on this fraction of their investment), allowing them to publish better rates of return, have enough advantages and it is not fair to add more! Have a nice day

07-06-2018 : “Quote of the day ”

“The fact that it is impossible to predict future prices on the basis of studies of past and present prices is a sign, not of the failure of economic laws, but on the contrary, their triumph, when competition is free.”
Paul Samuelson

06-06-2018 : “Question from a Vernimmen reader ”

Why is book equity including this year net income used in computing return on equity? Knowing that the result of the year does not contribute to its own realization. It's a matter of convention and simplicity. It would be more rigorous to exclude from book equity the result of the year because, as you point out, it did not contribute to his own realization. But it is one more calculation for the ROE which would also induce more complicated additional calculations for the calculation of the ROCE to which the return on equity is often compared. In doing so, the ROE is slightly underestimated, but this is not a serious problem because the error is quite small (in the order of the rate of return itself) and the cost of equity, to which ROE is also compared, is not also absolutely accurate (roughly the same level of uncertainty). This illustrates the fact that in finance too, as in many other fields, the effort (of calculation here) must be measured according to the interest or not in obtaining a precise figure. Have a nice day.

25-05-2018 : “Quote of the day ”

“Harry Roberts and I run an average of 4 miles a day. Harry runs 8.”
Merton Miller

24-05-2018 : “Why do companies feel the need to develop alternative performance indicators to IFRS's? ”

A study by Mazars shows, on a sample of 86 European groups, 7 different names for the operating result (operating result, EBIT, result of operations, etc.) and the use by 39 of 51 industrial groups to adjusted operating profit. Of course, let's not be naive. If companies do it, it is to try to present their results in the best possible light. But it is also to respect the principle of good information as the IASB that produces the IFRS has abdicated its responsibilities in this area. Thus the deletion in the IFRS of the distinction between current and exceptional items, on the pretext that it is a question of judgment (as if the establishment of the accounts did not require any judgment on the part of those who produce them) necessarily drives the readers of accounts interested in this information (unlike the IASB) to seek it in one way or another, and companies to assist them in this task by developing performance indicators that overcome the shortcomings of IFRS. If the alternative performance indicators are presented by the listed companies with pre-eminence over the IFRS indicators, in contradiction with the recommendations of the European securities regulator (ESMA), it is not the companies that are at fault, but fundamentally the IASB which has chosen to devote its energy over the past decade to unhelpful standards (such as the one on leases), rather than dealing with serious issues like this one. And it is not for lack of having been warned on many sides, including ours on several occasions. Over the years, the IASB has, with full knowledge of the facts, taken the risk of delegitimizing accounting. And the risk materializes. Blaming companies to adapt, it is a bit as if, during strikes in public transportation systems, customers would be criticized to develop car-sharing or teleworking ...! Have a nice day.

16-05-2018 : “Quote of the day ”

“Cash is Truth”
Anonymous

15-05-2018 : “Question from a reader ”

WeWork's high yield debt has lost 5% in one week.
If Entreprise Value = Value of Debt + Value of Equity and if Debt Value decreases ...:
- either Entreprise Value decreases too, and the equity value decreases.
- but if Entreprise Value remains stable, does this mean that the equity value is increasing?
There is something that I don’t understand ...

There are only 3 possible reasons for the decrease in the value of a company's debt:

- Either interest rates in the economy jumped sharply.

- Either the shareholders have made decisions which despoil the interests of lenders, such as paying a massive dividend that significantly weakens the solvency of the company.

- Or, and this is by far the most frequent case so much the second is unlikely in our time and in our far-off lands of the Far West of the 19th century: investors have revised downward their expectations of free cash flows generated by the company, for example following a result publication, and they think that the value of the entreprise value has decreased as a result. In this case, the equity value will have fallen even further, since equity is riskier than debt.

Have a nice day

14-05-2018 : “Quote of the day ”

“Time is money “
Popular saying

11-05-2018 : “Fillette à la corbeille fleurie by Picasso ”

“Fillette à la corbeille fleurie” is a painting by Picasso (blue period, but announcing the pink period) that he, penniless and refusing to exhibit in salons, sold in 1905 to American collectors living in Paris Léo and Gertrude Stein for 150 francs of the time. Acquired in 1968 by Peggy and David Rockefeller, it was recently sold for $ 115 million, showing an IRR of 14.4% per annum, over the period of 113 years. Power of compound interests over a long period. Ironically, it was sold by Christie's in the Rockefeller Center in New York, which the family had built in the late 1920s and 1930s for a total of $ 250 million at the time. Approximately twice the current face price of this painting. The Rockefeller family came from France (Rocquefeuille), which they left when the Edict of Nantes was revoked to emigrate to Germany, and then to the United States. They contributed financially to the restoration of the Reims cathedral after WW1, of the castles of Versailles and Fontainebleau, and the construction of the International City in Paris (student housing). David Rockefeller (who died at the age of 101 in 2017), who was the president of Chase Manhattan Bank in the 1970s, helped to lift the Caribbean island of Saint Barthelemy out of extreme poverty by revealing its tourist potential. The reading of his memoirs is extremely interesting. Have a nice day

10-05-2018 : “Quote of the day ”

“You can't have your cake and eat it.”
Popular saying

07-05-2018 : “Question asked during a recruitment interview: ”

What is the cost of capital of the Caisse des dépôts (The French sovereign wealth fund)? Question asked by Edouard Philippe, Prime Minister of France to the candidate Eric Lombard who answered: I do not know. This did not prevent him from getting the job. Like what in this type of situation, the franchise is paying. It is true that the cost of capital of the Caisse des Dépôts is not easy to calculate given the diversity of its businesses: social housing, diversified portfolio of shares, BPI France, controlled subsidiaries in regional planning, infrastructure and public transport with very long-term investments. As any reader of the Vernimmen knows (Chapter 29), there are as many capital costs in a group as different lines of business, plus one for the global cost of capital. Presumably, the Prime Minister was interested in the cost of capital for the very long-term investments of Caisse des Dépôts. For this, we advise him to read The Vernimmen.com Newsletter of May 2018 (which is not yet finalized and not yet published) and which will contain an article on this subject. Finally, we are happy to see that the Prime Minister of a country knows what the cost of capital is! Have a nice day

04-05-2018 : “Question from one of our students ”

What are the due diligence done before an IPO? A company that goes public is surrounded by financial, accounting and legal advice and they do due diligences because it is primarily a regulatory obligation. Then, these diligences on the activity, the company, on its strategic and financial perspectives, on the accounts and on the legal aspects make it possible to draft the documents related to the offer which are made public later (prospectus, press releases ...). These documents engage the responsibility of the company vis-à-vis potential investors. Every detail of these documents is subject to verification and must be true and fair. Due diligence will be finalized with the issuance of legal opinions issued by legal counsel and certifications by banks and auditors. Compared to due diligence conducted during an acquisition, these are much broader, detailed and formal. The interests of market investors are protected in this way to avoid investment decisions based on false or inaccurate information. This practice is even more reinforced in the event of an offer in the United States. Have a nice day.

03-05-2018 : “Quote of the day ”

“The financial manager does not create value, he shares it.” Pierre Vernimmen

27-04-2018 : “Question from a participant of the ICCF @ Columbia Business School ”

How to account for non-operating assets in the DCF( discounted cash flow) method? since their results are not taken into account in the operating flows, while they belong to the company. Hello, They will be taken into account in the bridge from entreprise value to the equity value by reducing the amount of net banking and financial debt. This will inflates the value of equity. This is logical because these assets are real and must be taken into account somewhere, and it is here that they must be taken into account, since the flows / results they generate have not been taken into account as they are not included in the business plan. Have a nice day

26-04-2018 : “Quote of the day ”

Economics is the only field where two people can share the Nobel prize for saying opposing things (Myrdhal and Hayek).
Roberto Alazar

25-04-2018 : “Question from a participant of ICCF @ Columbia Business School ”

Why limit yourself to linear regressions in estimating multiples? Can not we use exponential or logarithmic or other regressions? It is rarely used in practice for two reasons. The first is that everyone does not master the sophisticated mathematical tool that are the exponential or logarithmic regressions. The second because Cum hoc ergo propter hoc (correlation is not reason). In other words, one can have a good correlation without having a clear and understandable rationality between the two factors. Emile Durkheim showed that there was a good correlation between piano sales and suicide rates. Yet it is difficult to understand why these two variables would be related. The correlation that we see mathematically between multiples and growth rates is all the more relevant as it is easy to explain, not mathematically, why this linear correlation. It's almost common sense. The bar in the field of evaluation would be singularly raised if one were to try to explain why a regression is relevant in a logarithmic or exponential format and not a linear format. Have a nice day

24-04-2018 : “Quote of the day ”

You can't compare apples with pears. Popular saying

23-04-2018 : “Question from a Facebook follower ”

Could you please tell us what is the use we can made of knowing that a stock index such as the Dow Jones or the FT100 was up or down by 0.3 %t today ? Sincerely not much. A bit like when you are told in the evening that it was sunny all day. This would be more useful information if it could be reliably given the day before for the next day! More seriously, for many people a rise in share prices is considered as good news and a drop a bad one. Either because they personally have a portfolio of listed shares and if a particular index has risen, they feel wealthier; or because they deduce that a raising stock market is an evidence that the economy is doing well, which is not statistically always proven. That said, the variations over a much longer period than the day are more interesting, because one can have 20 days upward of 0.2%, and a fall of 5% a day, which make that over the course of the month share prices have decreased, contrary to what the sum of daily impressions might suggest. Unfortunately, these are rarely given in general news media. Have a nice day

20-04-2018 : “Question from a Facebook follower ”

Are financial charges fixed or variable? In general, financial expenses are considered as fixed costs, as financial charges do not vary with the activity, at least for the range of activity variations for which the fixed costs remain fixed. If we want to refine, and the information is available, we can consider that the financial costs of debt financing investments (therefore medium / long-term debts) are fixed costs, but that the interests of the debts financing working capital are variable costs, because if the working capital varies as a result of a change in activity, the change in working capital will induce a variation in the short term part of bank or financial debts that finance it, and therefore a variation in interests paid. Have a nice day

19-04-2018 : “Quote of the day ”

“Nothing is ever created, nothing is ever lost, everything just changes.”
Lavoisier

18-04-2018 : “Do you want to refine your resume? ”

Do you want to refine your resume? Get advice from a former investment banker, professor at HEC Paris, at http://www.vernimmen.com/Read/Articles_on_financials.php Have a nice day

17-04-2018 : “Quote of the day ”

“When the figures don't verify the theory, then the figures are wrong.”
Eugene Fama

16-04-2018 : “Question from a reader ”

What are the financial, tax and legal constraints involved in a merger between the company under LBO and its holding company? Financial constraints: if there are minority shareholders in the company under LBO, a merger will dilute the stake of the holding company’s shareholders significantly. This is because the holding company’s debt has made the value of its equity small compared with the equity value of the company under LBO; Legal constraints: in addition to standard merger procedures (EGM, report by special mergers auditor), a merger soon after an LBO may give rise to legal issues in certain European countries for companies which are forbidden to provided guarantees to lenders financing the buyback of its own shares. In an LBO, the LBO holding company has given securities on its stake in the company under LBO and in the event of a quick merger, the debts of the holding company will appear on the balance sheet of the company under LBO. Tax constraints – if the two companies are merged, in some countries the tax authorities might contest the deductibility of the interest expense on loans initially contracted by the holding company on the grounds that the company under LBO has no interest in merging and that the merger was forced on it by its majority shareholder, the holding company. For more information, see chapter 46 of the Vernimmen.

13-04-2018 : “Quote of the day ”

"The only cause of the depression is prosperity." Joseph Schumpeter

12-04-2018 : “Can we say that if ROCE is higher than WACC, then the return on equity is higher than the cost of equity? ”

Yes, there is no doubt about that and it can be seen in the following way: If the ROCE is higher than the WACC, then the entreprise value is higher than the carrying amount of the operating assets. Since the value of the net debt has no reason to be greater than its carrying amount simply because the ROCE is higher than the WACC (since the debt does not participate in the creation of value beyond the interest rate paid), and since the value of equity is equal to the entreprise value less the value of the net debt, the surplus between the entreprise value and the carrying amount of operating assets, benefits only to shareholders and not to debt holders. Therefore, the value of equity is greater than the book value of equity as it is equal to the book value + this surplus. And if the value of equity is greater than its book value, it is that the return on equity is higher than the cost of equity. For more see, chapter 26 of the Vernimmen. Have a nice day.

11-04-2018 : “Quote of the day ”

“Options or you pay your money and you live on tenterhooks!”
Pierre Vernimmen

10-04-2018 : “Question from one of our follower: If there are so many advantages with tap issues, why is it not used all the time frequent issuers are interested in tap issues? ”

As a reminder a tap issue is a new issue of a bond with the same characteristic than another bond issued a while ago, sold at the market price and which enlarges the size of the initial issue. When you are not a frequent issuer, you may only issue a bond every 2-4 years because your financing needs are not that high. Having issued 3 years ago a 5-year bond, either you tap your initial issue but the maturity of the new bond will be 5 - 3 = 2 years which is pretty short and may create a future liquidity problem in your balance sheet if you finance long term capex with the proceeds; or you issue a new bond for 5 or 7 years for example. Most unfrequent issuer will choose the latter option and will not tap their initial bond. For frequent issuers like governments, large corporates, etc. that issue bonds every quarter or semester, this is less of a problem, at least for the first years after the issue of a long term bond. They can do tap issues several times in a row, but after a while, they will stop for this liquidity problem as the maturity of the initial bond is fixed and cannot be changed. Have a nice day

09-04-2018 : “Solution to the problem of last Friday ”

Hello, The problem was: A business generates an annual free cash flow of 200 that does not grow anymore. Its cost of capital is 10%. Its discounted cash flow value is therefore 200/10% = 2,000. But it turns out that this business is made up of two divisions, one of which generates a cash flow of 100 which increases by 5% per year and the other of 100 which decreases by 5% per year. Since both have the same cost of capital of 10%, the first division is worth 100 / (10% - 5%) = 2000 and the second 100 / (10% - - 5%) = 667. So thus analyzed, this company is worth 2,000 + 667 = 2,667. Everything well weighed, is this company worth 2,000 or 2,667? And the answer is: As you have understood, this problem is based on a sophism, that is to say a false reasoning that has the appearance of the true. In this case, it is wrong to say that it is equivalent to having a business that grows by 0% or two divisions of identical size that grow by 5% and -5%, although it is true that 5% - 5% = 0%. Indeed, very quickly the two divisions will no longer generate the same free cash flow due to their divergent growth rate. For example after 5 years, the free cash flow of the first is 128 and that of the second of 77. So it will no longer be possible to say that the growth rate of the group is the average between 5% and -5%, i.e. 0%. This will be the weighted average of 5% and -5%, but with different weights from the initial 50% -50%. Moreover, in the long term, the growth rate of the group will converge towards 5%, since by dint of - 5% per year, the second division will disappear: thus in year 50, its free cash flow will be 8 against 1,147 for the first division. A few years later, then it will remain only the first division that will become alone the group as a whole, and the group will grow by 5% a year. So using the discount of free cash flows method, our group is worth 2,667 and not 2,000. But for that the financial director will need to do work of education by communicating precisely on the performances of the two divisions, even by proceeding to the IPO of the first one, or simply splitting the group into two parts (demerger) to avoid significant underestimation (25% in our example). Have a nice day

06-04-2018 : “Problem for the weekend ”

Hello, A business generates an annual free cash flow of 200 that does not grow anymore. Its cost of capital is 10%. Its discounted cash flow value is therefore 200/10% = 2,000. But it turns out that this business is made up of two divisions, one of which generates a cash flow of 100 which increases by 5% per year and the other of 100 which decreases by 5% per year. Since both have the same cost of capital of 10%, the first division is worth 100 / (10% - 5%) = 2000 and the second 100 / (10% - - 5%) = 667. So thus analyzed, this company is worth 2,000 + 667 = 2,667. Everything well weighed, is this company worth 2,000 or 2,667? Answer next Monday. Have a nice day.

05-04-2018 : “The cause or the consequence? ”

A few days ago a financial news agency reported that: "Investors are flocking to the title of the temporary working group after the announcement of a sharp rise in its dividend." If it were enough to raise its share price by 8.8% to increase its dividend, even strongly, many groups would regularly increase their dividends! In fact, if the share price of CRIT, the company in question, rose 8.8% in one session, it is rather to put on the account of announced results better than expected: investors expected an EBITDA between €128m and €145m ; CRIT announced €150m, ie + 20%. It is this growth in earnings beyond the expectations of investors that triggered the rise in prices, especially since the increase in the dividend, starting from very very low and multiplied by 11, is a signal that the managers of CRIT are at comfortable with the current outlook of their business. Even with a payout ratio of 58%, CRIT is safe from need, as its cash net of any bank or financial debt represents 20% of its market capitalization. And it's all equity, which CRIT no longer needs, that can be reinvested by investors in companies that they need equity. Have a nice day

04-04-2018 : “Question from a participant of the ICCF @ Columbia Business School ”

Between the variance and the standard deviation, what is the relevant indicator to assess the dispersion of the profitability of an investment? Hello, the one that is most often used is the standard deviation because it is of order one (like x) and not of order two (like x ^ 2 and like the variance), which has two advantages: the standard deviation is more meaningful than the variance when it is compared to what it must be compared to, ie the average. Indeed we compare meters with meters and not meters with square meters. Moreover, this simplifies the equations between risk (represented by the standard deviation of order one) and profitability (the average, also of order one). The variance is it of order 2 (the average of the squares of the deviations to the average). For more, see chapter 18 of the Vernimmen. Have a nice day.

03-04-2018 : “Quote of the day ”

“The power of money leads us to the gloomiest of aristocracies, the locked safe.” Balzac

02-04-2018 : “Solution to the problem of last Friday ”

Reminder of the problem: A holds 49.4% of X and has 2 out of 5 directors. B holds 50.6% of X and holds 3 directorships and appoints the chairman. The appointment or dismissal of the Chief Executive Officer, the Chief Financial Officer, the adoption or amendment of the budget or business plan, as well as the decisions of indebtedness, investments, acquisitions or disposals of assets require the agreement of A. Does B have to consolidate X by global integration or by proportional integration under IFRS rules? And A by proportional integration or equity method? Answer: A does not control X because he needs A to be able to take most important decisions in S. So for both A and B, it is the proportional integration that is necessary. Have a nice day

30-03-2018 : “Problem for the week-end ”

A holds 49.4% of X and has 2 out of 5 directors. B holds 50.6% of X and holds 3 directorships and appoints the chairman. The appointment or dismissal of the Chief Executive Officer, the Chief Financial Officer, the adoption or amendment of the budget or business plan, as well as the decisions of indebtedness, investments, acquisitions or disposals of assets require the agreement of A. Does B have to consolidate X by global integration or by proportional integration under IFRS rules? And A by proportional integration or equity method? Have a nice day

29-03-2018 : “Question from a participant of ICCF@Columbia Business School: ”

What is the best method for calculating operating assets: the sum of equity and net financial and banking debts or the sum of fixed assets (Non-current assets) and working capital? The best is to calculate it using both methods to verify that your calculation is correct, which is the case when you find the same figure for the operating assets computed as fixed assets + working capital or as equity + net bank and financial debts. Indeed, starting from a balanced balance sheet (assets = equity + liabilities), you must find the same figure for operating assets, unless you have forgotten figures or counted some twice. The calculation by shareholders' equity + net banking and financial debt is probably marginally a little faster, but it may lead you to believe that the amount of operating assets depends on the amount of debt and equity while in fact depending on the amount of the working capital and fixed assets. For complicated points you will be guided by chapter 7 of Vernimmen which will not leave you unarmed in front of unusual accounting items. Have a nice day

28-03-2018 : “Quote of the day ”

Well, the thing about private equity is that it is kind of private. Edward Bramson

27-03-2018 : “What are financial synergies? ”

For us there are like Jupiter or Danae: a myth and nothing real. Let’s illustrate what they are supposed to be. If your cost of capital is 10 % and you acquire a company with a cost of capital of 8 % (and for the sake of simplicity of a similar size), the global cost of capital of the new group will not be lower than 9 % (the average of 10% and 8%) as investors do not remunerate a reduction in specific risk as they can diversify it away at no cost for them. Another example. If your cost of debt is 2 % and you buy a company with a cost of debt of 7% because it is very risky/indebted, the cost of debt of your group post this acquisition is unlikely to stay at 2 % as lenders will soon realize that you are now a bit riskier than before this acquisition. Obviously, if the size of this acquisition is very small compared to the size of your company, lenders will not notice and you may go on with a cost of debt of 2% and replace a 7% debt with a 2% debt and reaps a 5% saving in interest costs. But as the size of this acquisition is very small compared to you, the savings will be peanuts for you, and you do not care. When sizes are not that dissimilar, for example 10 and 3; and not 10 and 0,5; one may believe that shareholders or lenders will not notice. May be for a few weeks or a few months. Over a longer period of time, this would a bet against the collective intelligence of the market participants, the kind of bets hard to win and very frequently lost. Given our experience in M&A, financial synergies are the last trick used by advisors to justify the interest of an acquisition when the value of operating synergies are not enough to justify the kind of control premium needed to make a deal happen and M&A success fees paid, not to mention bonuses for advisors a few months after. It is not always easy to judge a few hours after the announcement of an M&A deal whether it will leads to value creation or to value destruction. But one thing is sure, if the press release mentions financial synergies, insiders think it is a value destructing deal. And if insiders think it is a value destructing deal, it is very unlikely to create value. Have a nice day.

26-03-2018 : “Solution to the problem of last Friday ”

Reminder of the problem You are a shareholder of a promising start-up and have subscribed to a convertible bond issue to be converted into shares of the next round of financing at a discount of 15% on the issue price of the shares of that next round of financing. Unfortunately, a material error was made in the minutes of the meeting authorizing the future issue of shares resulting from the conversion of convertible bonds, by providing for a number of shares issued in this respect equal to the number of convertible bonds, and not at that number divided by 1 minus the 15% discount. This kind of thing happens and nobody saw it at the moment. Fortunately for you, the convertible bonds contract is very clear and provides for a conversion of the bonds on the basis of the new share price discounted by 15%. Your lawyer, very embarrassed to say the least, offers to correct the situation by having a new resolution cancelling the first one and stating that convertion will take place on the basis of the amount of convertible bonds, increased by 15% and divided by the price of the new shares. Solution : Give your lawyer a Vernimmen! It's not the same multiplying by 1.15 or dividing by 1-15%. In the first case, you get 15% more shares, in the second 17.65%. You get robbed of 2.65% / 17.65% = 15% of your yield. This is the classic problem of the so-called outside calculations (I multiply by 15%) and so-called calculations within (I divide by 1 - 15%), also known by this type of problems: if a value has dropped by 20 %, it is not enough that it goes up 20% later on to find its starting point, an increase of 25% is needed. Have a nice day.

23-03-2018 : “Problem for the week end ”

You are a shareholder of a promising start-up and have subscribed to a convertible bond that will be converted into new shares during the next round of financing at a discount of 15% on the issue price of the shares of that next round of financing. Unfortunately, a material error was made in the minutes of the meeting authorizing the future issue of shares resulting from the conversion of convertible bonds, by providing for a number of shares issued in this respect equal to the number of convertible bonds, and not at that number divided by 1 minus the 15% discount. This kind of thing happens and nobody saw it at the moment. Fortunately for you, the convertible bonds contract is very clear and mention for a conversion of the bonds on the basis of the new share price discounted by 15%. Your lawyer, very embarrassed, offers to correct the situation by converting on the basis of the amount of convertible bonds, increased by 15% and divided by the price of the new shares. What do you think of his/her suggestion? Have a nice day

22-03-2018 : “Quote of the day ”

“Managers and shareholders should remember that accounting supports analysis, but can in no way replace it”
Warren Buffett

21-03-2018 : “Question of the day ”

When an investment bank underwrites an issue of new shares, it charges the issuing company a commission. How is this commission analysed using options theory? The commission represents the price of the put option that the company buys from the bank. In effect, the company is buying the right to sell the newly issued shares to the bank at the guaranteed price if nobody in the public wants to buy them. For more, see chapter 34 of the Vernimmen. Have a nice day.

20-03-2018 : “Quote of the day ”

Auri sacra fames! (that accursed hunger for gold!) Virgil

19-03-2018 : “Solution to the problem of last Friday ”

Reminder of the problem Company X is 50% owned by the company P, 25% by the company R and 25% by the company S. Main decisions are taken by a majority of 70% in X. Can P, which de facto has a right of veto over X, under IFRS, consolidate his participation according to the method of proportional integration, because it would share the control of X with other shareholders? Answer: No, because control sharing is with well-defined partners. But here P can share control with R, or S or R and S, but nothing says that it's always with the same partner. So P will have to consolidate X by equity method. Have a nice day PS: IFRS still has a consolidation system similar to proportional consolidation when the parent companies have a direct right to some of the assets and liabilities on a pro rata share of the liabilities. Its terms of use are much stricter than before, so that it is little used, but it still exists. For more details, see Chapter 6 of Vernimmen.

16-03-2018 : “Problem for the week-end ”

Company X is 50% owned by the company P, 25% by the company R and 25% by the company S. Main decisions are taken by a majority of 70% in X. Can P, which de facto has a right of veto over X, under IFRS, consolidate his participation according to the method of proportional integration, because it would share the control of X with other shareholders? Have a nice day

15-03-2018 : “Quote of the day ”

“A bird in the hand is worth two in the bush”
Aesop

14-03-2018 : “Question of the day ”

For company’s classified as “cyclical stocks”, how do you work out the payout and dividend yield that would be best suited to maximising the share price, especially at the bottom of the cycle? For cyclical stocks, the payout rate doesn’t mean much. What is important is the amount of the dividend per share, which companies do their best not to cut. This is what causes very erratic payout rates – very low when the economic situation is good, very high at the bottom of a cycle. At best, they’ll aim at an average payout rate over the whole cycle, which doesn’t mean much as the cycle could be very long. The worst thing a company can do is to try and keep up paying an unrealistic dividend, given the cyclical nature of the economy. Investors won’t believe that it can be maintained over the long term, and will judge the managers to be lacking in responsibility. Finally, it would appear to be very difficult for a company to aim to achieve a given dividend yield, as this is set by the investor on the basis of a valuation of the share, and not the company. There is no payout rate that can maximise the value of the share. There is the rule of paying out all surplus cash to shareholders whenever the company cannot identify investment projects that would bring in at least the cost of capital. For more information, see chapters 36 and 37 of the Vernimmen.

13-03-2018 : “Quote of the day ”

“The role of accountants is to record, not to value - this task falls to investors and managers”
Warren Buffett

12-03-2018 : “Question from one of on followers on Facebook ”

What do you think of the apparently growing interest of investors for start-ups ... given the failure rate so high, I do not understand the craze for such a risky investment ... what is your opinion on this topic ? In a way, it's the same principle as for a lottery where you can win 100 M € and lose your bet of 100 €. Even if there is only one winner at 100 M €, many people will participate, even if they know that their probability of winning is very very low, they simply overestimate it. Here everyone dreams of funding the next Facebook. Have a nice day

12-03-2018 : “Can we say that if ROCE is higher than WACC, then the return on equity is higher than the cost of equity? ”

Yes, there is no doubt about that and it can be seen in the following way: If the ROCE is higher than the WACC, then the entreprise value is higher than the carrying amount of the operating assets. Since the value of the net debt has no reason to be greater than its carrying amount simply because the ROCE is higher than the WACC (since the debt does not participate in the creation of value beyond the interest rate paid), and since the value of equity is equal to the entreprise value less the value of the net debt, the surplus between the entreprise value and the carrying amount of operating assets, benefits only to shareholders and not to debt holders. Therefore, the value of equity is greater than the book value of equity as it is equal to the book value + this surplus. And if the value of equity is greater than its book value, it is that the return on equity is higher than the cost of equity. For more see, chapter 26 of the Vernimmen. Have a nice day.

09-03-2018 : “What is the average control premium paid in takeovers, and what are the factors that determine this premium? ”

The average premium paid in takeovers is around 25 to 30%. This is obviously just an average, and premiums can be much larger or smaller.
The theoretical basis for this control premium is the present value of synergies (increase in sales, reduction in costs, etc.) that the link-up should generate.
The acquiring company is thus prepared to pay a premium, as it will manage the target is such a way as to ensure that the profits made by the business combination of the target and the acquiring company will be higher after the link-up than they are today.

For more information, see chapter 31 of the Vernimmen

08-03-2018 : “Quote of the day ”

“Managers and investors should understand that accounting data are a beginning and not an end in valuing a firm” Warren Buffett

07-03-2018 : “Why does a share buyback result in an increase in EPS when inverse P/E is higher than the cost of debt after tax? ”

P/E is equal to the value of shares divided by net profits. Inverse P/E corresponds to an instantaneous book return on an investment.

If a company is worth 100 with net profits of 5, its P/E is 20. The inverse of 20 is 5%, which is the return you get when you pay 100 per share, while the net profit for the shareholder is 5.
If the company buys its own shares for 100, it gets an instantaneous book return on this investment of 5%, and if it can borrow at 3% after tax to do so, it makes a profit, which explains why in this situation EPS increases.
But this is purely arithmetic, and depends only on P/E and the after tax interest rate at which the company can borrow, which is not proof of the creation of value.

For more information, see chapter 37 of the Vernimmen.

06-03-2018 : “Quote of the day ”

“Above all, it is better to think than to follow.”
Warren Buffett

06-03-2018 : “AXA buys XL for 12.4bn and is down on the stock market by 5.9bn: the price of not respecting its word? ”

Yesterday with the announcement of this deal, which increases the insurance assets of AXA (in business damage insurance) and reduces the weight of those in the management of savings in accordance with the strategy announced, the share price fell by 9.7%. The premium paid is not low (about 40% on an average over several months, or € 3.5 billion), but there are also synergies (announced at $0.4bn per year, which does not seem excessive). Without taking it into account, it is therefore € 2.4 billion in value loss because a few months ago the president of AXA announced not wanting to do large acquisitions, but simply some between 1 and 3 billion €. Those of you with some gray hairs remember that AXA's acquisition of Equitable in the United States in 1991 also caused a lot of disruption to the stock market. This is the deal that allowed AXA to stop being a group focused on France, and to successfully take on a global scale. What the stock market, not stubborn, recognized afterwards. In short, opportunities are made to be seized and there are only fools who do not change their minds. If AXA succeeds in this integration, investors will show it quickly after this bust of anger. Have a nice day

05-03-2018 : “Question from a Facebook follower ”

What is a cyclical sector? A cyclical sector is characterized by an activity that increases or decreases substantially more than the general economy. We can see it by looking at the evolutions of the turnover over a long period of time or by thinking in a room. In general, when the selling price of the goods or services is high, the sector is cyclical because in the event of a bad economic situation, certain customers will no longer have the financial means to buy the good or the service and will postpone purchases until the economic situation improves. Thus shipbuilding is a cyclical activity, because the freight lines stop ordering new boats when their activity falters and start again ordering new boats only when their market has been on the rise for a while. If the market is aftermarket (customers buy the product to replace a previous version they have already purchased in the past), it is more likely to be cyclical because customers will postpone their renewal decision when the conditions will be difficult and will make live a few years more the current product. Think about the automobile in the western world. But it is the opposite in emerging countries where the market is a market of original equipment. Have a nice day.

01-03-2018 : “Quote of the day ”

Before you make your fortune, you first have to build a road. Chinese proverb

28-02-2018 : “Question from a Facebook follower ”

In financial analysis, does not a perimeter effect induce a volume effect? Yes but it is not to be confused with a volume effect. A volume effect is due to customers buying more or less products / services compared to last year. The change in scope is due to the acquisition or sale of subsidiaries. The assessment of the change in volume must be done at constant perimeter so as not to disturb the basis of comparison. Indeed, we could have a progression in volume which would be, at first analysis, seen as positive (the customers buying us more), but which would correspond to a fall of activity if one realized that it is integrally and even beyond this explained by an acquisition: in fact the customers buy us less and it is only because the company has acquired a competitor that one sees a progression in volume. For more details, see Chapter 9 of Vernimmen Have a nice day

27-02-2018 : “Quote of the day ”

The greatest failure for an investor is not to failing to invest in a promising start-up, but failing even to have come across it. Antoine Freysz

26-02-2018 : “Question from one of our readers ”

What is the difference between dilution of control and dilution of EPS in a capital increase? Let's assume you own 50% of the share capital of a company. There is a capital increase that you do not follow and your percentage in this company falls, for example, to 40%. So you have been diluted in control of 20%, from 50% to 40%. The dilution of the control has nothing to do with the dilution of the EPS which reflects the evolution of the EPS between before and after the capital increase. If your EPS goes from €2 before the capital increase to €1.86 after the capital increase because the funds raised on this occasion are not invested immediately or have a lower return in the first place, we say that EPS was diluted by 7%. For more details, your Chapter 26 of Vernimmen. Have a nice day.

23-02-2018 : “Quote of the day ”

Things can only be predicted after they've happened.
Eugene Ionesco

22-02-2018 : “Question from one of our readers ”

I do not understand what is the risk of reinvesting coupons on a fixed-rate bond. When valuing a bond, implicitly it is assumed that the coupons received before maturity are reinvested until the maturity of the bond at the rate of return of the bond. Take the example of a bond that yields 8% over another two years. The market rate is 8%. The bond is then worth 100, ie 8 / (1 + 8%) + 108 / (1 + 8%)^2, which also corresponds, by multiplying the first term in the numerator and the denominator by (1 + 8%) : 100 = 8 x (1 + 8%) / (1 + 8%)^2 + 108 / (1 + 8%)^2, which is also equivalent to: 100 = (8 x (1 + 8%) + 108) / (1 + 8%)^2 and we can see that we need to capitalize the first flow of 8 at 8% over the second year to find a value of the bond of 100. That said, rates can change over the period. If they go up, you will be able to reinvest your coupon at more than 8% and if you can wait for the repayment of the bond without having to sell it before, you will have obtained a return of more than 8% on your investment. But if the rates go down, you will reinvest your coupon at less than 8% and if you wait for the bond to be repaid but can not sell it before, you will get a return of less than 8% on your investment. This is known as reinvestment risk on a fixed rate bond. For more details, see Chapter 20 of Vernimmen. Have a nice day.

21-02-2018 : “Quote of the day ”

There is nothing more unbearable than the regularity of the exceptional.
Cioran

20-02-2018 : “Question from one of our readers ”

Question asked on the Vernimmen.com website. For the sake of consistency and homogeneity, in calculating the turnover of the ratios for suppliers and inventories, why do not we report these two items to turnover? Indeed, one expresses the working capital according to the turnover, the customer ratio according to the turnover, why it is not the same with the ratio for suppliers and inventories? What we are trying to measure with the ratio of suppliers is the average time with which they are paid, to get an idea of the balance of power that may exist between the company and its suppliers and to have over time a idea of the evolution in a positive or negative sense of this ratio. Imagine that the company buys products for 40 every day and sells its finished product for 100 per day. Imagine that sales and supplies are regular throughout the year. Finally, imagine that the company pays its suppliers on average 40 days, which is quite commonplace in Europe. As of December 31st, there will be 40 days of purchases in the supplier post representing the last 40 days of purchases not yet settled at the end of the year, ie 40 x 40 = 1600. If you make the supplier ratio in days of purchases , and putting aside the VAT, you will have: 1600 / (365 x 40) x 365 = 40 days. If you do it in relation to turnover, you will have 1600 / (365 x 100) x 365 = 16 days. The reality is 40 days, not 16 days, and you could draw erroneous conclusions from this 16 days assuming, for example, that suppliers would not trust the company, that it would have a bad payment history, or that it pays them quickly to have a lower purchase cost, etc. which would be rantings. We do not seek the homogeneity of a ratio to another ratio (between the ratio of customer and supplier delays, for example), we look for a homogeneity, for a given ratio, between its numerator and its denominator. Indeed the outstanding customers is due to the act of selling, i.e. the turnover. It is therefore normal that one uses then at the denominator the turnover. But for the suppliers, their amount is not related to the sales but to purchases, it is therefore the line purchases which is used in the denominator. The reasoning is the same for inventories. Sometimes it is not possible to find the accounting line purchases because the income statement is presented by function and not by nature. We can then be led to use turnover as the denominator in the ratio of suppliers, but it is a second-best that then allows comments for trends but not for absolute level. For more details, see chapter 11 of Vernimmen. Have a nice day.

16-02-2018 : “Quote of the day ”

We don't seek enough information out of statistics, and we demand too many conclusions from them.
Auguste Detoeuf

15-02-2018 : “Question from one of our readers ”

How to account for the effects of proportional consolidation in DCF or multiples method?
Do nothing special because everything has been integrated proportionally to the company's share in this subsidiary. There is therefore no minority interest to be valued and deducted from entreprise value. For more details, see Chapter 31 of the Vernimmen.
Have a nice day

14-02-2018 : “Quote of the day ”

Buy low, sell high, play golf
Anonymous

13-02-2018 : “Question from one of our readers ”

Why, in measuring a company's debt level and sustainability, is the net debt / operating cash-flow ratio not used instead of the Net Debt / EBITDA ratio? The net debt \ EBITDA ratio is better than the D \ operating cash-flow ratio from a conceptual point of view because the operating cash-flow is a cash-flow unlike the EBITDA and debts are repaid with cash. However, it suffers from two defects that make it practically not used in practice. The ratio net debt / EBITDA is popular, as it is very simple to calculate. Removing the change from working capital to EBITDA significantly increases the calculation time and requires 2 balance sheets instead of one. Moreover, because of changes in the working capital, the operating cash flow is much more volatile than the EBITDA. The net debt / EBITDA ratio would therefore be more volatile over time than the debt / EBITDA ratio, which is unacceptable for a "quick and dirty" indicator that should not vary substantially from one year to the next in order to be compared to a critical level that moves very little over time. Have a nice day

12-02-2018 : “Quote of the day ”

The single cause of the crisis is prosperity.
Clément Juglar

09-02-2018 : “Question from one of our readers ”

How to account for the effects of proportional consolidation in DCF or multiples method? Do nothing special because everything has been integrated proportionally to the company's share in this subsidiary. There is therefore no minority interest to be valued and deducted from entreprise value. For more details, see Chapter 31 of the Vernimmen. Have a nice day

02-02-2018 : “Question from one of our readers ”

cannot understand why the more costs are included in the value of inventories, the greater the result of the year. An inventory of finished products (but this is also true for an inventory of raw materials), is the sum of costs that the company has incurred during this exercise to produce those finished products, but which cannot be left in the profit and loss account of this year as these costs were included in products that were not sold that year, but that should be sold in the following year. In fact, the income statement gives the result on the products SOLD this year, not on the products MANUFACTURED this year. Thus the cost of the raw materials and the share of the wages of the production workers who manufactured these yet-to-be-sold products will appear on the asset side of the balance sheet in the form of inventories of finished products, and no longert in the income statement as costs. So the more costs I add to my inventory, the more costs I take out of the income statement and put on the asset side of the balance sheet under the headline finished goods item. And the more costs I take out of the income statement, the higher the net income. For more details, see Chapter 7 of Vernimmen. Have a nice day.

01-02-2018 : “Quote the day ”

"Banks have a primary duty to be cautious, since it is other people's money that they lending." Michel Cicurel Have a nice day!

31-01-2018 : “Question from one of our readers ”

Is the choice of the FIFO method (first in, first out) more advantageous than that of the LIFO method (last in, first out) to reduce my working capital (WC)? It is necessary to see the WC, before being an equation of accounting items (stocks + customers - suppliers), above all like a cash lag between the moment when I pay my suppliers of all orders and the moment when I am paid by my clients. Under these conditions, the way in which I subsequently record inventories in FIFO or LIFO does not have an impact on the WC that pre-exists to its accounting measure, since it is fundamentally a cash lag. In some countries (like France), the tax authorities do not authorize the LIFO. Under IFRS, LIFO is also not allowed. So you have no choice. It is only in the USA where the accounting standards accept LIFO that the subject can arise. But it is only when the price variations of the elements of the inventories are important that the subject LIFO versus FIFO is really at stake. With the generally low inflation we are experiencing, this debate has little intensity, except in sub-sectors with volatile commodity prices. For more details, see Chapter 7 and 11 of Vernimmen . Have a nice day

30-01-2018 : “Quote of the day ”

"The richer you are, the harder it is to know how much you are worth." Felix Dennis, a British multimillionaire Have a nice day !

29-01-2018 : “Question from one of our readers ”

Why do stock option holders prefer that their company, if it is to redistribute cash, do so by share buy-backs on the market rather than by a public takeover bid or extraordinary dividends? The share-buy-back by purchasing shares on the stock market gives the impression that the share price must necessarily rise because there is one more buyer on the market. So stock options will have more value. But academic research has never shown that this supposed increase is real and significant in its amount. Conversely, the tender offer, which is generally made, with a premium over the stock market price of 10 to 15%, leads to a fall in post-tender shares prices, as well as for the extraordinary dividend when paid. And there is no automatic adjustment of the exercise price of the stock option in any of those two devices. Hence a certain impoverishment for their holders. For more details, see Chapter 37 of Vernimmen . Have a nice day.

26-01-2018 : “Quote of the say ”

"One of the innate features of a bubble is that is will explode when one least expects it, and in a much more violent manner than one anticipated." Jean-Pierre Petit

25-01-2018 : “Question from one of our readers ”

Why is cash flow calculated excluding capital gains and losses on disposal? The logic is that the capital gains and losses are implicitly already taken into account in the selling prices of fixed assets sold that appear below in the cash-flow statement table (in the investment function). So we can not include them in the cash-flow too, otherwise those capital gains or losses would be counted twice. This allows to have a more stable cash-flow, that is to say, less likely to vary greatly because, most often, exceptional elements are non recurrent. For more details, see chapter 5 of Vernimmen. Have a nice day.

24-01-2018 : “Quote of the day ”

"Banks have a primary duty to be cautious, since it is other people's money that they lending." Michel Cicurel

23-01-2018 : “Question from one of our readers ”

Why do you prefer the presentation of the cash-flow statement that ends up with the variation of the net debt rather than the variation of the available cash? The variation of the available cash, which is often the last line of the cash-flow statement established in an accounting logic, is not a relevant financial criterion because it can easily be modified thanks to window dressing. As an example, you pull out at the end of the year on a short-term credit line and use these funds to place them in your bank account. You will thus make appear a rise in cash available which can reassure the ill-informed reader, but which is completely artificial. By reasoning in the last line of the cash-flow statement with the variation of the net debt , one avoids this flaw and at a glance one knows if the company increased its net debt or reduced it over the past period, what we do not know by looking at changes in the available cash. For more details, see Chapter 5 of the Vernimmen. Have a nice day.

22-01-2018 : “Why are US banks now announcing losses related to the lowering of the corporate tax rate from 35 % down to 21 % when this is a favorable measure for them? ”

In fact, those which have tax loss carryforwards and which activated them on the assets side of their balance sheet are in this situation. Indeed, when they recorded a pre-tax loss in the past, of 100 for example, they were able to reduce it to 65 by accounting for a future tax credit of 100 x 35% = 35 (taking into account the corporate tax rate of 35%). This was of course conditional on the expectation that, in the future, their earnings would be large enough to be offset against this loss of 100, thus saving them future taxes for 35. They then recorded among their assets in their balance sheet a deferred tax asset of 35. With a corporate tax rate that drops to 21%, the amount of deferred tax assets becomes false, since carryforward losses will no longer generate a tax saving of 35% of their amount, but simply 21% . Therefore, these deferred tax assets must be depreciated by 40% of their amounts ((1- 21/35) .Therefore the losses published at this time which concern only past estimates of future tax savings. For more details on deferred taxes, see Chapter 7 of Vernimmen. Have a nice day.

19-01-2018 : “Question from one of our readers ”

What is the difference between Roce (Retun on capital employed) and WACC (the cost of capital)?
On the one hand, there is what you ask for and on the other, what you get.
In exchange for the funds that they entrust to the company, investors want to obtain a minimum return that compensates them for the risk taken on their investment in the company: it is the cost of capital.
On the other hand, the company yields a certain rate of return on its operating assets, which have been financed entirely by funds provided by investors: this is ROCE.
There is no mathematical relationship between the cost of capital and ROCE. The first is a financial concept (required rate of return), the second is an accounting concept (achieved rate of return). On the other hand, their difference (ROCE - cost of capital) gives birth to the value created by the company (when ROCE > capital cost over time) or the value destroyed by the company (when ROCE < cost of capital over time).
For more see chapter 27 of the Vernimmen.
Have a nice day

18-01-2018 : “Understand who can! ”

A broker, certainly not one of the most important one, but the only one to follow this mid cap listed in Paris, has revised down its annual sales forecast now counting on €618m in 2017/2018 against €634 m. In addition, this broker targets an EBITDA of €38.2m, or 6.2% of sales, against a target of 6.5% set by the company. This broker maintained its Neutral recommendation while lowering its target price from 6 to 5.80€. So far, so good. The current share price is €3.50, offering, if you believe in the work of this broker, a potential price increase of 66% (sic). In these circumstances, why not a Purchase recommendation? Are there so many undervalued companies in its universe of analysis that a mere 66% increase to a target price deserves only a Neutral recommendation? Or does it want to please at the same time the savvy investor who understands that a recommendation Neutral means in plain English Sell, and the mid cap management who would not appreciate a Sell recommendation and could cut all investment banking business with this broker? As for the target price of €5.80, is it there to amuse the gallery and flatter the midcap, while deceiving the confident but inexperienced investor? In other words, does the investment banking business that this broker provides to the midcap, in addition to its financial analysis work, disturb its view? But has it forgotten the deontology and the rules of management of conflicts of interest between its interests (as an investment banker of this midcap) and as a professional financial analysist to its clients, the investors who read its works ? Have a nice day.

17-01-2018 : “Question from one of our readers ”

I just answered the first question of the quiz on vernimmen.com
Q1. In the absence of a corporate tax, does the rate of depreciation have any influence on cashflow? The answer is no. I do not understand the answer because cashflow = net income + depreciation + sundry other items. So if the rate of depreciation evolves, depreciation will evolve and there will be an impact on the cashflow?
You must understand that net income itself is affected by the amount of depreciation since in the absence of corporation tax, net income is equal to EBITDA - depreciation + financial result + exceptional result. Therefore cashflow is equal to: EBITDA - depreciation + financial result + exceptional result + depreciation + sundry other items = EBITDA + financial result + exceptional result + sundry other items, which is an indifferent balance to depreciation.
Have a nice day.

16-01-2018 : “Quote of the day ”

"No generation can contract debts greater than can be paid during the course of its own existence. " Thomas Jefferson

15-01-2018 : “An unexpected and positive side effect of a financial krach. ”

Until 1882, Paul Gauguin worked as a broker on the Paris Stock Exchange and was an artist in his spare time. The crash of the financial groupe Union Générale in January 1882, and the fall of the Stock Exchange that followed after a few years of irrational exuberance, made him lose his job and he decided to devote himself entirely to his artistic career. The Paul Gauguin exhibition at the Grand Palais in Paris, which inspired this note, closes its doors on January 22nd. Have a nice visit and have a nice day.

12-01-2018 : “There are no miracles in finance. ”

Total had announced that it would continue to pay the same dividend per share despite lower earnings and free cash flows due to falling oil prices. The oil group had succeeded in doing so by proposing to its shareholders to receive their dividend, at their discretion, in Total shares issued with a discount of 5% on the share price or in cash. Every quarter, nearly two-thirds of its shareholders opted for the dividend in Total shares, because pocketing a 5% discount is not something most investors refuse. Those in need of cash resale the shares thus obtained. And Total has thus saved in cash for quarters almost two thirds of its dividend. For the first time at the end of 2017, Total offered to pay its quarterly dividend in cash or in Total shares, but without the 5% discount. Guess what ? Total has just indicated that the proportion of shareholders who, in these circumstances, opted for the scrip dividend has fallen to 21%. Shareholders know how to count. . . If the price of a barrel does not relapse, it is likely that the next step for Total will be to pay a dividend entirely in cash. You may be wondering why Total had to use this scheme to post a constant dividend per share, but paid for a very significant portion in shares issued with a discount on prices, rather than lowering its dividend and paying it in cash only to the level of free cash flow generated after oil price decline. The answer is that in the small world of super majors oil companies, 4 Anglo-Saxon and Total, shareholders, often Anglo-Saxon pension funds, are there to receive dividends that will allow them to pay regular pensions to their pensioners . Any decline in the facial dividend would have been ill taken, breaking the bond of trust that dates back to 1981, the last time Total lowered its dividend. In the same vein Shell's CEO (Ben van Beurden) declared: "The dividend is a sacred element at Shell, I will do everything to protect it" and he used the same trick as Total to maintain constant its dividend per share despite a collapse of 60% in the oil price.
All this may seem artificial to you, but who would have told you that behavioral finance did not exist? Have a nice day.

11-01-2018 : “Quote of the day ”

"The richer you are, the harder it is to know how much you are worth." Felix Dennis, a British multimillionaire Have a nice day !

10-01-2018 : “Question from a reader ”

I just answered the first question of the quiz on vernimmen.com Q1. In the absence of a corporate tax, does the rate of depreciation have any influence on cashflow? The answer is no. I do not understand the answer because cashflow = net income + depreciation + sundry other items. So if the rate of depreciation evolves, depreciation will evolve and there will be an impact on the cashflow? You must understand that net income itself is affected by the amount of depreciation since in the absence of corporation tax, net income is equal to EBITDA - depreciation + financial result + exceptional result. Therefore cashflow is equal to: EBITDA - depreciation + financial result + exceptional result + depreciation + sundry other items = EBITDA + financial result + exceptional result + sundry other items, which is an indifferent balance to depreciation. Have a nice day.

09-01-2018 : “Quote of the day ”

“The “Vernimmen” is the perfect reference corporate finance book. I used it in my classes, looked back into it during my internships, use it again now to deep dive into corporate finance for my thesis and know I will keep interacting with it later in my career.”
André Geha, Graduate Student at MIT Sloan

08-01-2018 : “Question from one of our reader ”

Why is a bond's sensitivity to market fluctuations higher for long-term bonds, and why is it stronger for bonds paying a low interest rate too? Imagine the bond as a wooden stick, with which you will leverage by leaning on a stone, to lift a large object. This wooden stick is all the longer as the residual life of this obligation is long. If this stick is short, that is to say that your bond has a short residual life, it will be difficult to move the object in question, because a short stick does not leverage much. Your bond therefore has a low sensitivity. If the stick is long because the reimbursement flow is far, it is easier to move the object. The sensitivity of the bond is therefore stronger. Now let us continue the analogy to understand the influence of the intermediate flows, that is to say the interest paid on the bond, for a given duration of the latter and therefore for a given length of the stick. The interest payments will be spread over the length of the stick as weight and will be all the more so heavy as the interest rate of the bond is high. If these weights are heavy, they will hinder the movement of stick which, because of this, will move less the object to lift. The sensitivity of the bond will be low. If now the interest paid by the bond is low, the weights on the stick will be small and will not interfere much; leverage will thus be stronger than before and the sensitivity of the bond will be high. If this literary and analogical explanation did not convince you, you still have to make simulations from the modeling of the value of a bond on an excel file to experiment this double relation. Or to resume your mathematics classes to see that the first derivative of the sensitivity in relation to the maturity is positive, and negative in relation to the bond interest rate. Have a nice day.

05-01-2018 : “Intel ”

The reaction of Intel's stock price and that of its competitors the day before yesterday is an excellent illustration of the theory of portfolio and that of efficient markets. When Intel's share price declines by more than 5% in response to product security concerns, its rivals rise at the same time as investors immediately anticipate that Intel customers will switch suppliers. Not putting all your eggs in one basket for those who want to limit the specific risk of a share is not a bad (or recent) idea! Have a nice day.

04-01-2018 : “Question from one of our reader ”

I have to value an industrial company that will make a big investment for the launch of a new factory from 2022 that will replace the current plant.
The investment in the coming years (from today to 2021) is so heavy that the company has significant negative free cash flows that are not compensated by the activity in the current premises and are slightly compensated by the terminal value.
Even by making a cash flow fade over the next few years, this does not bring out with a positive valuation.
Should we do some corrections? Which valuation approach would you adopt in such a situation? Have you take into account the resale value of the current plant once the new plant is operational in your flows? Check your calculations again. If your flows do not change, it means that this new plant is unprofitable and likely to sink the company. It may be necessary to ask the question of the relevance of this investment rather than the valuation of this company. Have a nice day.

03-01-2018 : “Mergers and acquisitions in 2017. ”

4th year of the high cycle phase of this highly cyclical activity and highly correlated with stock market indices (see the first graph of chapter 44 of Vernimmen, which goes back to 1986). The United States are still impressive with a volume of transactions almost double those in Europe ($1635bn against $861bn) when their GDP is only 10% higher. Happy American M&A bankers who benefit in addition of a lower level of competition compared to Europe. Asia again in front of Europe ($939bn) for the third year in a row. Have a nice day

02-01-2018 : “While visiting the temporary exhibition at the Jacquemart-André museum in Paris, dedicated to the Hansen Collection of French paintings, you may wonder why ”

While visiting the temporary exhibition at the Jacquemart-André museum in Paris, dedicated to the Hansen Collection of French paintings, you may wonder why Wilhelm Hansen had to sell half of his collection in 1922 because of the bankruptcy of his bank, Danish Landmansbank. Indeed, the causal link is not obvious. In fact, the bankruptcy of the lender does not directly concern the borrower, who remains of course debtor of his debt, except for the cash he may have entrusted to him. In fact, along with other collectors and art dealers, Wilhelm Hansen had formed a consortium able to buy entire collections of paintings to keep the ones they were interested in and sell the others. To finance themselves, they had been indebted, in the short term to the Landmansbank, which regularly renewed the loan while it was in activity. When it went bankrupt, its liquidator demanded, of course, repayment of the short-term credit when it was due. And since the guarantee (the paintings) were not particularly liquid (oils as well as pastels), Hansen and his associates, who held to their honor, sold the paintings rather than defaulting. All this could have been avoided, my wife said to me with good common sense, if they had run into long term debt. The problem is that banks at that time only lent in the short term because they had only short-term resources. The banking transformation was still in its infancy. Have a nice day and a happy New Year.

29-12-2017 : “Quote of the day ”

"Capitalism, as Marx has understood so well, is not destined to survive." Nikita Krouchtchev

28-12-2017 : “Question from a participant to the ICCF@Columbia Business School ”

I do not understand why overvaluing stocks of raw materials is inflating net income artificially? Think about the balance sheet, it's easier on this point. If, on the assets side, the inventories value is fictitiously increased, then in the liabilities and equity side, because it is necessary to keep the balance sheet balanced, the only item which will be inflated correlatively is equity, via the net income, which is higher this exercise. As a matter of fact, we bought for 100 what we will value in stock at the end of the year for a fraudulent amount of 110 for example, hence a fictitious profit of 10. This is done to the detriment of next year net income where the cost of the raw material will have increased, reducing margins, since corresponding to the price in stock of the raw material which price was fraudulently inflated this year. For more details, see Chapter 7 of Vernimmen. Have a nice day.

27-12-2017 : “Quote of the day ”

"Dividend - procedure used to get at profits, when all other procedures have been exhausted." Auguste Detoeuf

26-12-2017 : “We are pleased to announce that the fifth edition of The Vernimmen is now available from all good bookstores and on-line retailers. ”

With thousands of copies of the latest edition sold, Corporate Finance, Theory and Practice is one of the most popular financial textbook, thanks to its four unique features: • A balanced blend of theory and practice: authors hold academic positions at top ranking business schools and are also investment banker, private equity investor or sit on the boards of listed and unlisted companies. • A presentation of concepts that explain situations, followed by a discussion of techniques in a direct and succinct style. • Content enriched by the www.vernimmen. com website, which is one of the leading finance teaching sites worldwide. • Free monthly updates on finance through The Vernimmen.comNewsletters, with over 70,000 subscribers. For this edition a new chapter was created. It is devoted to managing operational real estate and should help you to answer the frequently asked question: Should the company own or rent its operational building? This not of small importance and will be particularly helpful as companies following IFRS or US GAAP will soon be required to account for operational leases in the same way as financial leases are accounted for. The summary of this new chapter is available on http://www.vernimmen.com/Vernimmen/Summaries_of_chapters.php We have also done a major updating job to create a tool that is accurate, reliable, comprehensive and relevant. We have included the very latest accounting standards, most statistics and graphs are from end 2016, the latest innovations in financial practice are discussed and the latest financial theories are presented. To make sure that you get the most out of your Vernimmen, each chapter ends with a summary, a series of problems and questions (832) (solutions provided). For those interested in exploring the topics discussed in greater depth, there is an end-of-chapter bibliography and suggestions for further reading, covering fundamental research papers, articles in the press and published books. A large number of graphics and tables (over 100) have been included in both the appendix and in the body of the text which can be used for comparative analyses. There are over 3,500 entries in the index. To have a look on the contents of the 2017 edition of the Vernimmen go on page http://www.vernimmen.com/Vernimmen/2017_Edition.php and to buy the 2017 edition of The Vernimmen, go on page https://www.amazon.co.uk/gp/product/1119424488/ref=as_li_tl… What they said about 2017 edition of The Vernimmen: “I discovered finance with ‘The Vernimmen’ about 30 years ago. Since then the different versions have accompanied me throughout my career and throughout the world. Not only was the alignment of the successive editions looking good in my different offices but I must confess I have opened and cherished each of them. Whether an investment banker, a CFO in a universal bank or more simply a world banker…”
Bertrand Badré, Former Managing Director and CFO of the World Bank “What sets the Vernimmen apart from other textbooks is its integration of practice and current affairs in a rigorous theoretical framework. Recipes and pontification are replaced by a scientific approach. And, thanks to the Newsletter, this is done practically in real time!”
Christophe Evers, Professor of Finance at the Solvay Brussels School, Executive Director of Texaf “I always use the paper edition of the Vernimmen, which is clear and comprehensive, as a reference tool. The site is well designed, always up-to-date and also extremely useful for explaining financial concepts simply and intelligently to non-financial colleagues.”
Laurence Debroux, Member of the Executive Board / CFO of Heineken “Corporate Finance is a very useful reference book for students and practitioners, it will help both to understand the principles of the financial markets and their practical application in today's complex environment. The book's approach is both logical and sequential and presents some interesting cases that make study easier and more stimulating.”
Gabriele Galateri, Chairman of Generali, former chairman of Telecom Italia and Mediobanca, former CEO of FIAT "Vernimmen provided people like me who were new to the world corporate finance a perfect mix of theory and practical examples to help them develop long lasting financial concepts. The book is a written manual for finance, explaining the fundamentals in a very thought provoking way, making it intriguing to delve into the complexities. This book is a must have in your personal library as you will refer back to it even after years."
Sharat Gangwani, Business Response Analyst at Citadel LLC “The “Vernimmen” is the perfect reference corporate finance book. I used it in my classes, looked back into it during my internships, use it again now to deep dive into corporate finance for my thesis and know I will keep interacting with it later in my career.”
André Geha, Graduate Student at MIT Sloan “Vernimmen's Corporate Finance is an outstanding clear and complete manual, a wonderful merger of practice and theory. Its coverage of the market aspects of corporate finance distinguishes its content, but its treatment of all the material makes it essential reading for the student, financier or industrialist.”
Howard Jones, Senior Research Fellow in Finance at Saïd Business School, University of Oxford “The Vernimmen: proof that an outstanding teaching approach and genuine accessibility are fully compatible with comprehensive and sharp analyses.”
Christian Mulliez, Executive Vice-President and Chief Financial Officer L’Oréal “The book itself covers all the important techniques that a financial manager must have in his repertoire of tools. The exposition is clear and concise and, most importantly, relies on commonsense reasoning throughout. This is not a book with obscure formulae, yet is still rigorous and at the same time a model of clarity.”
Richard Roll, Joel Fried Professor of Applied Finance at UCLA Anderson

22-12-2017 : “American tax reform ”

We will comment 3 points:
1 / The United States becomes the 3rd largest country to limit the tax deductibility of financial expenses. After France which limits the deductibility of financial expenses greater than €3m to 75% of their amount, the United States joins Germany by refusing tax deductibility for financial expenses that exceed 30% of EBITDA.
From a financial point of view, there is no reason for the state to encourage a specific tax reduction (the deductibility of financial charges) for companies to prefer a source of financing (indebtedness) to the detriment of another (equity), especially when excessive indebtedness generally increases business difficulties. For more details, see The Vernimmen.com Newsletter n° 62, November 2011. 2 / The United States abandons their worldwide tax system for corporate income tax that taxes foreign affiliates of US groups on their profits made abroad when they were repatriated to the United States in the form of dividends, which are then taxed for the difference between the US 35% rate and the local rate. As the US 35% rate was one of the highest in the world (see The Vernimmen.com Newsletter n° 105, July 2017), the consequence of this system was the incentive not to repatriate to the United States the profits of foreign subsidiaries that are not reinvested locally and to accumulate piles of cash abroad, as famously illustrated by Apple (see The Vernimmen.com Newsletter n°75, July 2013); all while waiting for a measure of grace, as there was in the past, allowing an exceptional repatriation during a few months with a very reduced taxation. Alternatively, some US companies were being absorbed by a foreign company in order to evade the US tax system for their foreign affiliates. We have seen merger-acquisition transactions mainly explained by tax considerations, which does not seem very healthy (see The Vernimmen.com Newsletter n°83, September 2014).
The lowering of the corporate tax rate from 35% to 21% of course made this global profit regime essentially ineffective since most of the world's major countries have a tax rate close to or higher than 21% (the United Kingdom and Switzerland are exceptions). 3 / The non-real estate capital expenditures of US companies become fully deductible from the base of their corporate income tax until 2022. No need to wait several years by the technique of depreciation to obtain this outcome. Have a nice day

21-12-2017 : “Can the decision to split the share price of a publicly traded company have an impact on the value of that company? ”

In all rationality no. If you multiply the number of your shares by 10, normally the share price is divided by 10 at the same time. In fact, whatever the number of shares in which a cake is cut, the size of the cake does not change. However, it can rarely happen that there is an increase in the total value of shares because a large split makes the purchase of this share accessible to a larger number of small shareholders. In addition to Berkshire Hathaway's A shares currently quoted at $ 298,200 each, B shares are listed, which represent 1 / 1,500 of the A shares and are worth $ 198.98 at the same time against a theoretical value of 298 200/1500 = $ 198.80. But you see that the gap is small. Have a nice day

20-12-2017 : “Quote of the day ”

"Dividend - procedure used to get at profits, when all other procedures have been exhausted." Auguste Detoeuf

19-12-2017 : “Question from one of our readers ”

What is the difference between refinancing and restructuring a debt? The refinancing of a debt is simply the issuance of a new loan to finance the repayment of the previous loan in due time. The restructuring of a debt is the modification of the terms of an existing debt: duration, interest rate, covenants, because the company can not cope in time with the deadlines of this debt, or because the situation of the company or the loan market has improved and the company wants to take advantage of it (lower interest rate, possibility of going into debt over longer terms, less stringent covenants, etc.) to improve the conditions of its debt. Have a nice day. Have a good day.

18-12-2017 : “Quote of the day ”

"The ultimate risk is not taking a risk." James Goldsmith

15-12-2017 : “Question from one the follower of the Vernimmen Facebook page ”

What is the difference between Roce (Retun on capital employed) and WACC (the cost of capital)? On the one hand, there is what you ask for and on the other, what you get. In exchange for the funds that they entrust to the company, investors want to obtain a minimum return that compensates them for the risk taken on their investment in the company: it is the cost of capital. On the other hand, the company yields a certain rate of return on its operating assets, which have been financed entirely by funds provided by investors: this is ROCE. There is no mathematical relationship between the cost of capital and ROCE. The first is a financial concept (required rate of return), the second is an accounting concept (achieved rate of return). On the other hand, their difference (ROCE - cost of capital) gives birth to the value created by the company (when ROCE > capital cost over time) or the value destroyed by the company (when ROCE < cost of capital over time). For more see chapter 27 of the Vernimmen. Have a nice day

14-12-2017 : “Quote the day ”

"Selling is good. Getting paid is better." Proverb

13-12-2017 : “Question from a Facebook follower ”

It is a start-up in the field of research that carries out the popularization of scientific articles on behalf of publishers or large groups. The company issues 10,000 shares for 15% of the capital, their issue price is € 283. I am about to invest € 10,000 because I believe in business but I would like to be sure that the issue price is consistent. What questions to ask for this? If the company is a real start up with just 1/2 years of activity, the proposed price is staggering because if this company issues 10,000 shares for 15% to 283 € the action means that the company is looking to to raise € 2.83 million, which is important at this stage, for a pre-money valuation of 10,000 / 15% x 283 - 2.8 M = €16 million, which is 3 to 6 times higher than usual for a company at this stage of development. For more see chapter 40 of the Vernimmen. Have a nice day

13-12-2017 : “Atos offer on Gemalto ”

With a share price increasing from €20 to €80 between early 2008 and mid 2014, Gemalto has been both an industrial and a stock market success story. Then the successful machine has stopped with, in recent quarters, 4 successive warnings on the results and a price that has fallen gradually since mid-2015 to €33 before yesterday. On the contrary, Atos saw its share price increases from €35 in 2008 to €125 yesterday, witnessing a very successful organic and external growth strategy. With a full cash offer of €46, a premium of 44% on the last price, but 0% on the Gemalto prices of mid August before a new warning on the results, there is no doubt that Gemalto will lose its independence. The only question left is who will be its buyer. By setting the price of Gemalto yesterday at €45.6, just below Atos' offer at €46, investors say they do not believe in the possibility of a counter-offer more advantageous for them. Dura lex sed lex. Have a nice day.

12-12-2017 : “Quote of the day ”

"The richer you are, the harder it is to know how much you are worth." Felix Dennis, a British multimillionaire

11-12-2017 : “Question from a Facebook follower ”

I have to value an industrial company that will make a big investment for the launch of a new factory from 2022 that will replace the current plant. The investment in the coming years (from today to 2021) is so heavy that the company has significant negative free cash flows that are not compensated by the activity in the current premises and are slightly compensated by the terminal value. Even by making a cash flow fade over the next few years, this does not bring out with a positive valuation. Should we do some corrections? Which valuation approach would you adopt in such a situation? Have you take into account the resale value of the current plant once the new plant is operational in your flows? Check your calculations again. If your flows do not change, it means that this new plant is unprofitable and likely to sink the company. It may be necessary to ask the question of the relevance of this investment rather than the valuation of this company. Have a nice day.

08-12-2017 : “Question from one of our readers ”

What is the difference between refinancing and restructuring a debt? The refinancing of a debt is simply the issuance of a new loan to finance the repayment of the previous loan in due time. The restructuring of a debt is the modification of the terms of an existing debt: duration, interest rate, covenants, because the company can not cope in time with the deadlines of this debt, or because the situation of the company or the loan market has improved and the company wants to take advantage of it (lower interest rate, possibility of going into debt over longer terms, less stringent covenants, etc.) to improve the conditions of its debt. Have a nice day. Have a good day.

06-12-2017 : “Question from one of our readers ”

If I raise €1m from investors, and these €1m are wired at once, but are not spent at once, rather progressively in the project, is the C0 (flow initial) in the NPV or IRR equation corresponds to the amount given to me at once (€1m)? When calculating the NPV for the investor, you must take into account the investor's investment at the moment when the investor wires the funds, whether the company uses these funds immediately or later is of no importance. If the company does not need the money right away, it penalizes the NPV and the IRR of the investor. This is why investment funds usually require an investment commitment from investors and call the funds as they invest them, so investors do not have to wire money that will be stay idle on a bank account. Investment funds may even differ calling investors for liquidity for a few months by getting into short term debt to make investments while waiting to call the funds of investors. (See the letter Vernimmen.net n ° 97 of October 2016). Have a nice day.

04-12-2017 : “Question from a reader ”

What is the impact of the outsourcing of some of the businesses of the company on its cost of capital? Especially in the automotive industry, with OEMs?
In general, outsourcing reduces the cost of capital because it transforms fixed and variable costs into only variable costs. If the company has less fixed costs, it will be less sensitive to the economic situation and therefore its beta and its cost of capital will be lower (see section 18.5 of Vernimmen).
That said, the experience of 2008 showed that if the supplier goes bankrupt, the car manufacturer is in a very bad situation because in general it has a limited number of suppliers. It is therefore obliged to help it, at least temporarily, to avoid being no longer supplied. Outsourcing in this extreme context is therefore a little illusory.
Have a nice day.

01-12-2017 : “Quote of the day ”

"Beware of small differences between large numbers." Adage

30-11-2017 : “Question from one of our readers ”

Is it relevant to compare the expenses of an income statement by nature to production rather than turnover? This is fair for income statements presented by nature, since the expenses of this income statement are the expenses corresponding, not to the turnover (products sold), but to the production (products that have been produced), with a regularization through inventory changes to fall back on an operating result which corresponds well to the difference between the turnover and the cost of the products sold (and not only produced). For more details, see Chapter 3 of Vernimmen ).
Have a nice day

29-11-2017 : “Quote of the day ”

"If you see a Swiss banker jumping out of a window, then jump out after him. There must be money in it." Voltaire

28-11-2017 : “Answer to yesterday's brainstorming problem (mentioned at the end of this post) ”

The decisions for which A's agreement is required are the most important decisions for a company. They can only be taken if A and B agree. Therefore A and B are in joint control over X. For more details, review chapter 6 of Vernimmen 2018. The problem A holds 49.5% of X of which the remaining 50.5% are held by B. A is represented on the board of X by 2 directors and B by 3. The decisions of the board of directors are taken by a simple majority except for the approval or the modification of the budgets or the business plan, for the investments and the financings, for the acquisitions or disposals not envisaged in the business plan. , and for appointments and dismissals of officers, decisions for which A's agreement is required. Is A in a position of joint control or significant influence over X?

27-11-2017 : “Brainstorming ”

A holds 49.5% of X of which the remaining 50.5% are held by B. A is represented on the board of X by 2 directors and B by 3. The decisions of the board of directors are taken by a simple majority except for the approval or the modification of the budgets or the business plan, for the investments and the financings, for the acquisitions or disposals not envisaged in the business plan, and for appointments and dismissals of officers where the approval of A is requested. Is A in a position of joint control or significant influence over X? See you tomorrow for the answer. Have a nice day.

24-11-2017 : “Quote of the day ”

"If you're not prepared to hold a share for ten years, you shouldn't hold it for ten minutes." Warren Buffett

23-11-2017 : “Question from one of our readers ”

When a company has cash that is restricted, for example, as a collateral on a loan, do you consider it as cash in the net bank and financial debt calculations? And for the liquidity ratio? In the liquidity ratios, it must be excluded because this cash is blocked as a collateral for a credit elsewhere. It can not serve twice. For net debt, it is necessary to be consistent and take this restricted cash into account since it is a partial counterpart of a bank or financial debt. Have a nice day

22-11-2017 : “Quote of the day ”

"God doesn't play dice." Albert Einstein

21-11-2017 : “Question asked during a recruitment interview for a financial analyst position ”

What is the relationship between the profitability and solvency of a company?
There is a definite correlation between the two, although it is not absolute. Indeed, if a company is profitable, that is to say if it generates a return on capital employed above its cost of capital, its assets will have a certain value and probably higher than their carrying value for which they appear on its balance sheet. In addition, its profitability will enable it to generate positive net results that will allow it, except if it distributes them in full as dividends, to reinforce the share of its equity in the balance sheet and thus improve its solvency.
For more details, read or reread Chapter 14 of the Vernimmen.
Have a nice day

20-11-2017 : “Quote of the day ”

"It is the size of the pizza that matters, not how many slices you cut it into." Merton Miller

17-11-2017 : “Salvator Mundi ”

Imagine that Leonardo da Vinci sold his work to Louis XII and his wife Anne of Brittany who had ordered it to celebrate the taking of Milan for € 100,000 at the time, which does not seem expensive given his already high reputation at the time.
Capitalized at 1.64% per year, you find at the end of 507 years (one estimates the date of realization of the work between 1506 and 1513),. . . $ 450 million, i.e. the price paid yesterday.
First conclusion: at $ 450M, and even if we did not participate in the auction that started at $ 70M, the buyer does not seem to be a bad deal for the only one of the 15 paintings by Leonard de Vinci that is not in a museum.
Second conclusion: Be wary of long-term capitalizations that ignore wars, revolutions, inflationary flares, changes of tastes and other scourges.
Third conclusion: Going to the Louvre in Paris and Abu Dhabi, you will see 5 paintings by the master, including the wonderful Madonna and Child with Saint Anne. It There is more in life than just finance!
Have a nice day

16-11-2017 : “Question ”

An experiment was recently carried out where a child, an astrologer and a financial analyst were each given €10,000 to invest for eight years. Who do you think achieved the best results? The child. If markets are really efficient, the answer is completely random. For more, see chapter 15 of the Vernimmen.

15-11-2017 : “Solution to the problem of yesterday ”

Yesterday's brainstorming problem is reminded at the end of this post A can not make decisions alone, he only has blocking power. He is not in exclusive control. There is no shareholders' pact; several combinations of shareholders are possible to reach the majority with A or without A. There is therefore no joint control of A on B. It simply has a notable influence on B, which it will have to consolidate by equity method. If you want to review your consolidation techniques, chapter 6 of Vernimmen 2018 is for you. Have a good day A holds 42% of B whose shareholders' balance consists of investors each holding between 1.6% and 14.5% of the capital. A is represented on the board of directors by 5 directors out of 12. There is no shareholder agreement or agreement between A and B. A 2/3 majority is required for key decisions: budget, significant investments, acquisition. A is in a situation of exclusive control, joint or in significant influence over B, in view of the consolidation rules set out in Chapter 6 of the Vernimmen.

14-11-2017 : “Brainstorming ”

A holds 42% of B whose shareholders' balance consists of investors each holding between 1.6% and 14.5% of the capital.
A is represented on the board of directors by 5 directors out of 12. There is no shareholder agreement or agreement between A and B. A 2/3 majority is required for key decisions: budget, significant investments, acquisitions.
Is A in a situation of exclusive control, joint control or in significant influence over B, in view of the consolidation rules set out in Chapter 6 of the Vernimmen?
We will give the answer tomorrow
Have a nice day

09-11-2017 : “Question from one of our reader ”

When a company has cash that is restricted, for example, as a collateral on a loan, do you consider it as cash in the net bank and financial debt calculations? And for the liquidity ratio? In the liquidity ratios, it must be excluded because this cash is blocked as a collateral for a credit elsewhere. It can not serve twice. For net debt, it is necessary to be consistent and take this restricted cash into account since it is a partial counterpart of a bank or financial debt. Have a nice day

07-11-2017 : “Quote of the day ”

From what we can identify, the only reason today people buy or sell Bitcoin is to make money, which is the very definition of speculation, and the very definition of a bubble. It has no use.

06-11-2017 : “The misfortune of Altice ”

Its share price collapsed by 22.6% on Friday lowering its market capitalization from €21.9bn to €16.9bn. All this for quarterly results 1.8% below expectations both in terms of sales and gross operating surplus.
Excessive do you find? Remember that for a highly indebted company like Altice - its net bank and financial debt totals € 50.1bn, or 5.3 times the 2017 EBITDA - the leverage effect also applies in value. The 22.6% fall in the value of Altice's equity corresponds to a fall of only 7% in the value of its entreprise value. This is because the value of the debt remains constant, which increases at the level of equity the decline in the entreprise value.
Have a nice day

02-11-2017 : “Question asked during a recruitment interview for a financial analyst position: What is the relationship between the profitability and solvency of a company ”

Do shareholders and lenders carry out financial analysis in the same way? Yes, because a company that creates value (for shareholders) will be solvent (for lenders). For more, see chapter 8 of the Vernimmen.

01-11-2017 : “Quote of the day ”

Having money means having all possibilities in your hand. Lacking money means remaining a prisoner of an eternal present, hindered by your own needs. Pascal Bruckner

31-10-2017 : “Question asked during a recruitment interview for a financial analyst position: What is the relationship between the profitability and solvency of a company ”

There is a definite correlation between the two, although it is not absolute. Indeed, if a company is profitable, that is to say if it generates a return on capital employed above its cost of capital, its assets will have a certain value and probably higher than their carrying value for which they appear on its balance sheet. In addition, its profitability will enable it to generate positive net results that will allow it, except if it distributes them in full as dividends, to reinforce the share of its equity in the balance sheet and thus improve its solvency.
For more details, read or reread Chapter 14 of the Vernimmen.
Have a nice day

30-10-2017 : “Quote of the day ”

Whoever condemns money condemns people to servitude and is the accomplice of their downtrodden condition. Pascal Bruckner

27-10-2017 : “How do you explain that a company can have an entreprise value greater than the book amount of its operating assets, while its return on capital employed is lower than its cost of capital? ”

This means that the market sees more than the tip of his nose! That is, investors anticipate that the ROCE of this company will improve in the years to come and exceed the cost of capital. Remember that ROCE is only valid for the year for which it is calculated, whereas the entreprise value takes account of all future free cash flows generated by the operating assets. Haven nice day

26-10-2017 : “Quote of the day ”

Today's economic agent is swimming in irrational waters with a few moments of lucidity, when he or she takes the time to think. Dominique Fiers

25-10-2017 : “Question ”

When a company is listed on the stock market, shareholders bring in equity that I would call "new". But what happens to the equity already held by the company before the IPO: is this converted into shares? The IPO of a company can be done in two ways, or by a mix of these two ways:
Either the company proceeds with a capital increase by issuing new shares that are sold to investors who become shareholders of the company on that occasion. The company gets the proceeds of the share issue and increases its equity in the balance sheet for the same amount.
Either the current shareholders sell existing shares to investors who become shareholders of the company on that occasion. In this case, the company's balance sheet is not changed.
In any event, the equity of the company, whether listed or not, is made up of shares and the IPO does not change this situation. Simply with the IPO, these shares are listed and potentially sellable or very easily buyable.
Have a nice day.

24-10-2017 : “Quote of the day ”

"Every day I see a whole host of investment opportunities unfolding before me and my only problem is to distinguish the good ones to be seized from the bad ones to be shunned." Antoine Riboud

23-10-2017 : “Question ”

When we calculate the pay out ratio, should we compute: (dividends paid + share buybacks) / net income or rather (dividends paid + share buybacks - share issues) / net income Yes for the second possibility if the capital increases are only the result of the exercise of stock options, which dilutive effect is often neutralized by making share repurchases for the same amount. Have a nice day.

20-10-2017 : “Citation du jour ”

"L'économie est le seul domaine où deux personnes peuvent se partager le prix Nobel en ayant affirmé des choses opposées (Myrdal et Hayek)." Roberto Alazar

19-10-2017 : “Can the equity market risk premium be negative? The Financial Times has written that over the past 130 years, it has been negative about one in four times. ”

We love the FT to which one of us has subscribed since the age of 19. Yet on this point, we do not agree with them. In fact, they calculated the market risk premium by computing it as 1 / PE ratio - risk free money rate. This assumes that the value of a share is determined by Gordon Shapiro's method V = pay-out ratio x EPS / (k-g) This assumes that the future growth rate, g, is constant. This is not always true, and even often false. Therefore, based on a practical but false methodology (quick and dirty), it is not surprising that the results quoted by the FT are false. In fact, when you use a methodology that is correct, but much more complex to implement, you will find very very rarely negative equity risk premiums. For example, since 1986, the starting date for the European and American risk premium graph that we give in Chapter 19 of the Vernimmen, none of the risk premiums is negative. The proportion quoted without the FT is therefore completely false. Have a nice day.

18-10-2017 : “Citation du jour ”

"Si vous prenez de l'argent dans votre poche droite pour la mettre dans votre poche gauche, vous n'êtes pas plus riche pour autant." Merton Miller

18-10-2017 : “Quote of the day ”

Whoever condemns money condemns people to servitude and is the accomplice of their downtrodden condition. Pascal Bruckner

17-10-2017 : “How long has PwC audited the accounts of Goldman Sachs? ”

For 91 years, since 1926, sic. Certainly it can be assumed that it is no longer with the same members of PwC. . . As for Wells Fargo, it has been 86 years since it was faithful to KPMG (since 1931), a recent auditor of Citigroup, for only 48 years (1969). Deloitte is a bit new to Morgan Stanley (20 years since 1997). This could change under influence. . . of European regulations which impose a change every 20 years and to open the auditors' mandate to competition at least every 10 years. This is rather healthy, at least in principle, to have an outside look that changes regularly and a competition that can play truly. The most virtuous countries in governance are not always those who claim to be. Have a nice day

16-10-2017 : “Report sine die of the Aramco IPO? ”

This is what the Financial Times thinks and it is not a huge surprise. Which investor, in a pure financial logic, would like to become shareholder of a group with a small free float (5 to 10%), alongside an undemocratic state with decision-making processes at least opaque and with a monstrous conflict of interest because of the oil tax, by far the first resource of Arabia? Not to mention a sector which, due to the energy transition, may have to leave a significant part of its assets in the ground forever. Last but not least, the difficulty of carrying out a process of making Aramco a truly independent public company offering normal guarantees of internal governance and reporting at a point in the stock market cycle of which we take no great risk to say that it is more close to its end than its beginning. Have a nice day.

13-10-2017 : “Is it necessary or not to put the real estate business in the company to sell it? ”

It is up to you to see whether the selling shareholders want to keep the operating real estate on their own and to invoice the operating company for rents, providing them with some income at the risk of losing one day the tenant and have to find another, or even have to redeploy the building to bring it into line with the needs of a new tenant that may be different from the previous tenant.
It also depends on whether or not the buyer wants to own the operating property. Sometimes the inevitable price increase of the company owning its real estate can make it more difficult for a buyer to buy, and you lose in competitive intensity in the sales process, or you may even lose your only buyer.
The last chapter of the Vernimmen coming edition is devoted to the financial management of real estate operating assets.
Have a nice day

12-10-2017 : “Quote of the day ”

"Money ...... is the oil which renders the motion of the wheels [of trade] more smooth and easy." David Hume

11-10-2017 : “How to value a company that owns its operating real estate assets by using the multiple method? ”

Using the opco propco method which is set out in the last chapter of the new Vernimmen devoted to the financial management of operating real estate assets. It assumes that the company is divided into two parts: an operational part (opco) which leases the operating property from the other part, the property part (propco), at a market price. The value of your company's equity is then the sum of the equity value of the two parties. For the operational part, its EBITDA is reduced by the rent it pays (usually fictitiously) to the real estate part. To find its entreprise value, you must multiply its EBITDA by the multiple of EBITDA of comparable companies that do not own their operating real estate assets. You then subtract net bank and financial debt (excluding the share that finances real estate, if there is one). If the comparables differ by their real estate policy, some owning the real estate, others leasing it, you must use multiples of the EBITDA before rent (the EBITDAR) that you apply to the EBITDAR of the opco part. For the real estate part, you value real estate on the basis of an appraisal / sales price per square meter and you deduct the real estate debt to obtain the value of the equity. The value of your company's equity is then the sum of the equity values of the two parties. More in the last chapter of the new edition of the Vernimmen which has just been published. Have a nice day.

10-10-2017 : “Quote of the day ”

"Every day I see a whole host of investment opportunities unfolding before me and my only problem is to distinguish the good ones to be seized from the bad ones to be shunned." Antoine Riboud

10-10-2017 : “Richard Thaler, 2017 Nobel Prize for Economics ”

Behavioral finance is thus rewarded through one of its pioneers. Even if its applications in corporate finance are limited to this day, behavioral finance has figured prominently in the Vernimmen for years (chapter 15 for those who would have forgotten).
It will be noted that he teaches in Chicago like Eugene Fama, designer of the theory of efficient markets and Nobel Prize in 2013 for views very different from those of Richard Thaler. A demonstration of how academic freedom within the same institution is a real source of wealth.
Michael Jensen has not (yet) received the Nobel Prize (for his work on agency theory and governance) among the founding fathers of today's finance.
Have a nice day.

09-10-2017 : “I do not understand the concept of beta of debt. ”

To simplify, one can say that when one is a shareholder of a company, one runs two risks: the risk of its economic activity and the risk of its financial structure which results from the choices that it made to finance itself with more or less debt. While it may be assumed that the risk of a firm's business is virtually the same for all firms operating in a given industry, the risk of the financial structure differs as from one business to another just like their different financial structures. In other words, the beta of equity (or the beta of the shares of a company that is synonymous) depends on the risk of the operations that runs this company in relation to the average risk of the economy in general and the risk of its financial structure (which depends on the level of debt in the financing of assets). To calculate the unlevered beta is to find within the beta of the stock, the share due to the operating risk by setting aside the part of risk due to the financial structure of the company. In other words, it is calculating what would be the beta of the shares of this company as if it had neither debts nor net cash. Hence the term unlevered beta. Indeed, if the company has zero net debt, the beta of its equity (or that of its shares which is synonymous) corresponds only to the risk of the operating activity or the risk of its operating assets. It is therefore the beta of the operating asset. If the equity beta measures the sensitivity of a share's value to market fluctuations, the beta of operating assets (the unlevered beta) measures the sensitivity of fluctuations in the value of the operating assets relative to market fluctuations. Have a nice day

06-10-2017 : “Quote of the day ”

History has shown that control divorced from consequence will end badly. Some shareholders from Facebook

05-10-2017 : “Question ”

What problems arise when measuring financial equilibrium? That’s a tough question as there is no equilibrium in the true sense of the word in corporate finance. As Modigliani and Miller have shown, there is no optimum financial structure (split of financing of capital employed between debt and equity). All financial structures have their place and whether they are acceptable or not depends only on the level of risk that the shareholders are prepared to run. A highly geared company will thus be more profitable, all other things being equal, than a company without debts, but it will also carry more risk. Neither situation is better than the other – they are simply equivalent with different risk/reward ratios.
In the short term, we could describe financial equilibrium as the ability of a company to meet its debts at all times. It’s thus essentially a liquidity problem.This will depend on:
- the amount of short term liabilities relative to the amount of short term assets – if you have short term liabilities of 10, and short term assets of 7, and you cannot either reschedule your debts or raise new funds, you may as well file for bankruptcy.
- how quickly your assets become liquid and how soon you have to pay off your debts. This information is not made public and external analysts are hard pressed to estimate it. Internally, it’s the ABC of any finance director’s key indicators. For more information, see chapter 35 of the Vernimmen.

04-10-2017 : “Quote of the day ”

Avarice starts where poverty ends Balzac

03-10-2017 : “Solution to the problem of yesterday ”

When you buy an investment project at its net present value, and if the actual flows are in line with forecasts, your IRR is by construction the discount rate used to calculate the net present value, i.e. 6% in our example. And the net present value of the investment of buying the right to make an investment at a price equal to the net present value of that investment is of course zero. This does not mean that you have destroyed value; it means that you have earned the cost of capital of the investment, neither more nor less.
The idea is that the NPV represents not only the value created by an investment, but also the additional price that one could pay to make the investment while being adequately remunerated in relation to the risk taken.
For more details, see Chapter 16 of Vernimmen .
Have a nice day.

02-10-2017 : “Problem ”

You have identified an industrial investment project that you have secured the right to realize and whose net present value at 6% is €15m. You finally decide not to carry out this project because of lack of financial resources, but to sell it to a third party who acquires the right to carry out this project for €15m.
For this third party, what should be the net present value of this project all included and what will the IRR be if the reality is in line with expectations?
The answer will be tomorrow.
Have a nice day.

29-09-2017 : “Quote of the day ”

"One doesn't die from having debts, one dies from no longer being able to incur them." Louis Ferdinand Céline

28-09-2017 : “Can we say that if ROCE is higher than WACC, then the return on equity is higher than the cost of equity? ”

Yes, there is no doubt about that and it can be seen in the following way: If the ROCE is higher than the WACC, then the entreprise value is higher than the carrying amount of the operating assets. Since the value of the net debt has no reason to be greater than its carrying amount simply because the ROCE is higher than the WACC (since the debt does not participate in the creation of value beyond the interest rate paid), and since the value of equity is equal to the entreprise value less the value of the net debt, the surplus between the entreprise value and the carrying amount of operating assets, benefits only to shareholders and not to debt holders. Therefore, the value of equity is greater than the book value of equity as it is equal to the book value + this surplus. And if the value of equity is greater than its book value, it is that the return on equity is higher than the cost of equity. For more see, chapter 26 of the Vernimmen. Have a nice day.

27-09-2017 : “Quote of the day ”

"One doesn't die from having debts, one dies from no longer being able to incur them." Louis Ferdinand Céline

26-09-2017 : “Question asked during a recruitment interview for trainees. What is the impact of a credit sale of 100 on the 3 main financial statements? ”

On the income statement, there was an increase in sales by the amount of sales (VAT excluded), a decrease in inventories of finished goods for an amount equal to the cost of production of the object thus sold and an increase in the profit before tax for the amount of the difference between the sales and the production cost. The corporate income tax increases by the corporate income tax generated by this sale and the net result by the amount of the net result generated by this sale. On the balance sheet, the receivables increase by the amount of the sale inclusive of VAT, inventories of finished products decrease by the production cost of the object sold and on the liability and equity side, the equity increases by the amount of the net result generated by this sale. Lastly, debts to the state increases by the VAT collected on this sale as well as the corporate income tax generated by this sale. On the cash flow statement, the net income or the cash flow from operations are increased by the net income generated by the sale. The change in working capital is increased by the same amount (sales including VAT - cost of production which reduces inventories - VAT collected - corporate tax payable), so that the impact on the cash flow from operations is nil; which is logical as the customer has not yet paid, the impact on the cash of the company of this sale on credit is nil. Have a nice day!

25-09-2017 : “So typically American! ”

Facebook had plans to distribute new non-voting shares to its shareholders allowing Mr. Zuckerberg to continue to sell Facebook shares without falling below 50% of the voting rights; a level of votes he gets thanks to a third category of shares with 10 voting rights per share. The country that prides itself on being the champion of good governance is far from putting it into practice at home (one seventh of the S & P 500 members have several classes of shares with your different rights).
Shareholders took the case to court and Facebook has just withdrawn its project. If in France, everything ends with songs according to the Canadian proverb, in the United States, it is with a trial that everything ends!
To get the week off to a good start, remember that since July the SP500 index manager no longer accepts multi-class stock companies in its index; even if those already in the index can keep them in place.
Have a nice day (with songs and without being sued if possible ...).

22-09-2017 : “Quote of the day ”

"I've reluctantly discarded the notion of my continuing to manage the portfolio after my death - abandoning my hope to give new meaning to the term "thinking outside the box." Warren Buffett

21-09-2017 : “Toshiba sells its memory chip division to a consortium led by Bain Capital for $ 19 billion ”

LBOs of this size have not been seen for a long time, the big LBOs in recent years have been around $ 5 billion. But we are very far from historical records, since for example the 10 th biggest LBO in history was $ 27 billion in size. At 3.5 times EBITDA, the price reflects both the situation of a seller forced to sell to escape the worst (due to its losses in its nuclear division) and a cyclical sector with heavy investments that makes that only a fraction of EBITDA is available to service debt. Its listed Asian competitor, SK Hynix, is currently valued 3 times EBITDA. Have a nice day

21-09-2017 : “Can we say that if ROCE is higher than WACC, then the return on equity is higher than the cost of equity? ”

Yes, there is no doubt about that and it can be seen in the following way: If the ROCE is higher than the WACC, then the entreprise value is higher than the carrying amount of the operating assets. Since the value of the net debt has no reason to be greater than its carrying amount simply because the ROCE is higher than the WACC (since the debt does not participate in the creation of value beyond the interest rate paid), and since the value of equity is equal to the entreprise value less the value of the net debt, the surplus between the entreprise value and the carrying amount of operating assets, benefits only to shareholders and not to debt holders. Therefore, the value of equity is greater than the book value of equity as it is equal to the book value + this surplus. And if the value of equity is greater than its book value, it is that the return on equity is higher than the cost of equity. For more see, chapter 26 of the Vernimmen. Have a nice day.

20-09-2017 : “Quote of the day ”

"The only cause of the depression is prosperity." Joseph Schumpeter

18-09-2017 : “A moment of brainstorming to start the week on the right foot ”

Is it true that a 1 % increase in interest rates on a 10-year bond yielding a 1 % nominal interest rate, while the market rate is 1 %, causes the bond price to fall more than the same rate 1 % increase on a 10-year bond yielding a nominal interest rate of 6 %, while the market rate is 6 %? Is the difference in impact of the same order as the difference in market rates (1 % versus 6 %)? Smaller ? Bigger ? Same place, same hour tomorrow for answers. Have a nice day

15-09-2017 : “Question from one of our follower: If there are so many advantages with tap issues, why is it not used all the time frequent issuers are interested in tap issues? ”

A s reminder a tap issue is a new issue of a bond with the same characteristic than another bond issued a while ago, sold at the market price and which enlarges the size of the initial issue. When you are not a frequent issuer, you may only issue a bond every 2-4 years because your financing needs are not that high. Having issued 3 years ago a 5-year bond, either you tap your initial issue but the maturity of the new bond will be 5 - 3 = 2 years which is pretty short and may create a future liquidity problem in your balance sheet if you finance long term capex with the proceeds; or you issue a new bond for 5 or 7 years for example. Most unfrequent issuer will choose the latter option and will not tap their initial bond. For frequent issuers like governments, large corporates, etc. that issue bonds every quarter or semester, this is less of a problem, at least for the first years after the issue of a long term bond. They can do tap issues several times in a row, but after a while, they will stop for this liquidity problem as the maturity of the initial bond is fixed and cannot be changed. Have a nice day

15-09-2017 : “Question from one of our follower: If there are so many advantages with tap issues, why is it not used all the time frequent issuers are interested in tap issues? ”

As a reminder a tap issue is a new issue of a bond with the same characteristic than another bond issued a while ago, sold at the market price and which enlarges the size of the initial issue. When you are not a frequent issuer, you may only issue a bond every 2-4 years because your financing needs are not that high. Having issued 3 years ago a 5-year bond, either you tap your initial issue but the maturity of the new bond will be 5 - 3 = 2 years which is pretty short and may create a future liquidity problem in your balance sheet if you finance long term capex with the proceeds; or you issue a new bond for 5 or 7 years for example. Most unfrequent issuer will choose the latter option and will not tap their initial bond. For frequent issuers like governments, large corporates, etc. that issue bonds every quarter or semester, this is less of a problem, at least for the first years after the issue of a long term bond. They can do tap issues several times in a row, but after a while, they will stop for this liquidity problem as the maturity of the initial bond is fixed and cannot be changed. Have a nice day

00-00-0000 : “Quote of the day ”

If you have a complicated story, you’re not really welcomed so much in the public market. Josh Harris

00-00-0000 : “The passing away of Charlie Munger ”

Charlie Munger, vice-chairman of Berkshire Hathaway, died on Tuesday evening a month and 4 days shy of his hundredth birthday, having still not retired, or even semi-retired. We can't help thinking that hard intellectuel work is good health, and that finance keeps those who practice it regularly! Charlie Munger, a lawyer by training, is the man whose letter to the shareholders of Berkshire Hathaway inspired our October news article, which questioned the impact of Berkshire Hathaway's management style as the source of its exceptional performance. In retrospect, we are glad to have been able to write that article while he was still with us. Charlie Munger is the man who convinced Warren Buffett to change his investment strategy, as the latter admitted in 2005 in his letter to shareholders: "The blueprint he gave me was simple: forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices". In fact, in his early days, Warren Buffett invested in companies in great difficulty, and therefore cheap, such as Berkshire Hathaway, which was active in the textile sector at the time. Then came the time for minority stakes in growing companies such as Amex, Coca-Cola, The Washington Post, and more recently Apple, taking advantage of moments of undervaluation, either in times of economic or financial crisis, or because market efficiency sometimes slumbers, like reason, or the takeovers of Geico in insurance, or Burlington Northern and Santa Fe Railway. Charles Munger and his 93-year-old younger partner, Warren Buffett, were probably the best allocators of capital in the history of mankind, since in 57 years an investment of €1,000 in the S&P 500 index became €24,428, giving an actuarial return of 10% a year; while the same sum invested in Berkshire Hathaway shares became €3,777,937, giving an actuarial return of 20%. Correctly allocating capital, which is a resource that exists in limited quantities, to avoid wasting it and to make the best possible use of it, is at the heart of corporate finance. Hats off to Mr Munger.

00-00-0000 : “The passing away of Charlie Munger. ”

Charlie Munger, vice-chairman of Berkshire Hathaway, died on Tuesday evening a month and 4 days shy of his hundredth birthday, having still not retired, or even semi-retired. We can't help thinking that hard intellectual work is good health, and that finance keeps those who practice it regularly! Charlie Munger, a lawyer by training, is the man whose letter to the shareholders of Berkshire Hathaway inspired our October news article, which questioned the impact of Berkshire Hathaway's management style as the source of its exceptional performance. In retrospect, we are glad to have been able to write that article while he was still with us. Charlie Munger is the man who convinced Warren Buffett to change his investment strategy, as the latter admitted in 2005 in his letter to shareholders: "The blueprint he gave me was simple: forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices". In fact, in his early days, Warren Buffett invested in companies in great difficulty, and therefore cheap, such as Berkshire Hathaway, which was active in the textile sector at the time. Then came the time for minority stakes in growing companies such as Amex, Coca-Cola, The Washington Post, and more recently Apple, taking advantage of moments of undervaluation, either in times of economic or financial crisis, or because market efficiency sometimes slumbers, like reason, or the takeovers of Geico in insurance, or Burlington Northern and Santa Fe Railway. Charles Munger and his 93-year-old younger partner, Warren Buffett, were probably the best allocators of capital in the history of mankind, since in 57 years an investment of €1,000 in the S&P 500 index became €24,428, giving an actuarial return of 10% a year; while the same sum invested in Berkshire Hathaway shares became €3,777,937, giving an actuarial return of 20%. Correctly allocating capital, which is a resource that exists in limited quantities, to avoid wasting it and to make the best possible use of it, is at the heart of corporate finance. Hats off to Mr Munger.

00-00-0000 : “15th anniversary of Adolf Merckle's death. ”

Except to some of our German-speaking readers, this name won't say much. It was that of a 74-year-old German industrialist (HeidelbergCement, Ratiopharm, Phœnix Pharmahandel, etc.) who had become his country's 5th richest man and who, in the early hours of 5 January 2009, left his family home in Blaubeuren to lie down on a nearby railway track. How could anyone go to such extremes? By short-selling Volkswagen shares that economic and financial analysis showed to be grossly overvalued, but ignoring the fact that a secret battle going on within the founding family was leading some of its members to buy Volkswagen shares whatever the price, causing it to jump from €211 to more than €900 in two days. ... While there were many theoretical opportunities for short-selling in 2023 (Orpéa, Casino, Atos, etc.), this sad example should serve as a reminder that short-selling is a particularly risky investment technique, with the potential to lose far more than the amount invested. There is a reason why short-selling specialists rarely use it over long periods, even if they are convinced that a stock is overvalued. In this regard, we are reminded of the aphorism of the economist J.M. Keynes, whose fortune owed at least as much to the fruits of his skillful speculation as to his royalties and courses: "Markets can stay irrational longer than you can stay solvent."

“Comment, question or quotation of the day”

21-12-2024 : “The forthcoming IPO of AsmodÃ©e, European leader in board games ”

23-11-2024 : “Robertet or the value of a voting right ”

09-11-2024 : “The future governance of Havas ”

02-11-2024 : “Boeing: largest-ever capital increase in the United States ”

29-10-2024 : “Tribute to John McQuown, passive investing pioneer ”

21-09-2024 : “Vivendi, or the lenders who applaud a demerger with both hands ”

20-08-2024 : “Do share buybacks boost share prices? ”

17-08-2024 : “3 lessons from the recent squeeze out of Adevinta ”

14-08-2024 : “Riddle for your week-end ”

16-06-2024 : “Privatizing France TÃ©lÃ©visions? ”

29-05-2024 : “Believe, an expert who outclasses the advisory banks ”

25-05-2024 : “So, is the offer on Believe fair or not? ”

08-05-2024 : “Peugeot Invest or value-destroying reinvestment ”

27-04-2024 : “Will New York become TotalEnergies' main stock exchange? ”

13-04-2024 : “The strange accounting for capital gains on partial disposals of fully consolidated subsidiaries. ”

06-04-2024 : “Kering and the Milanese real estate prices ”

04-03-2024 : “Could you join the IASB and become an accounting regulator? ”

27-02-2024 : “Warren Buffett's 2024 annual letter to shareholders ”

17-02-2024 : “Uber and share buybacks ”

16-02-2024 : “Believe's delisting - look for the mistake ”

31-01-2024 : “Magic thinking in China: ban short selling ”

10-01-2024 : “15th anniversary of Adolf Merckle's death ”

03-01-2024 : “British American Tobacco is writing down the value of its brands. ”

28-12-2023 : “Three emblematic property transactions ”

02-12-2023 : “The passing away of Charlie Munger ”

16-11-2023 : “Orpea and South Korea ”

14-11-2023 : “Is Orpea worth as much as TotalEnergies? ”

21-10-2023 : “Naming and shaming in Japan ”

14-10-2023 : “Euronext, mission : impossible? ”

01-10-2023 : “Vedanta, a spin-off in an emerging country ”

17-09-2023 : “Reverse auction ”

16-08-2023 : “Novo Nordisk illustrates one of the laws of breakeven ”

08-07-2023 : “Casino: Death of a zombie ”

25-06-2023 : “Capex and dividends ”

19-06-2023 : “Do less stupid things than your neighbours. ”

17-06-2023 : “HSBC's long and costly exit from the French retail banking market. ”

16-04-2023 : “Getlink's decarbonisation margin ”

19-03-2023 : “Greed and short-sightedness. ”

12-03-2023 : “Are large groups pushing up inflation? ”

01-03-2023 : “Should Berkshire-Hathaway pay dividends? ”

23-02-2023 : “Japan is another world. ”

09-02-2023 : “Societe Generale's strange communication on its distribution to shareholders. ”

24-01-2023 : “Very interesting quarterly results from Procter and Gamble ”

19-01-2023 : “Renault Nissan: divorce at the back of the class. ”

26-12-2022 : “De-risking your retirement savings or getting poorer? ”

07-11-2022 : “Answer to the weekend brainstorm. ”

05-11-2022 : “This weekend's brainstorm ”

13-10-2022 : “Taking losses to bounce back ”

11-10-2022 : “Could you be the CFO of Softbank? ”

07-09-2022 : “150% above break-even in the automotive industry! ”

05-09-2022 : “A staggering inefficiency ”

10-08-2022 : “The pre-emption right: the right to pay more? ”

29-07-2022 : “SEB and the inflation ”

15-07-2022 : “Turbulence in the credit market ”

12-07-2022 : “EDF, a logical evolution ”

24-05-2022 : “Walmart and the inflation. ”

18-03-2022 : “One of the biggest value destruction in recent history ”

15-03-2022 : “Question from a reader. ”

03-03-2022 : “How do you dispose of a 20% stake in a Russian listed company? ”

02-03-2022 : “Question from a young professional. ”

28-02-2022 : “Warren Buffett's 2022 annual letter to his shareholders ”

25-02-2022 : “ Porsche's IPO project, or the schizophrenia of investors ”

23-02-2022 : “Quote of the day. ”

21-02-2022 : “Solution to the Weekend brainstorming ”

21-01-2022 : “Question from a reader ”

17-01-2022 : “Answer to the weekend brainstorm. ”

14-01-2022 : “Weekend brainstorming ”

12-01-2022 : “Quote of the day ”

10-01-2022 : “Interest rates and high-tech shares ”

20-12-2021 : “Shell, SSE and the financial challenges of the energy transition ”

11-12-2021 : “L'Oreal: two lessons in corporate finance ”

08-12-2021 : “Question from a student ”

02-11-2021 : “Answer to the weekend teaser ”

29-10-2021 : “Teaser for the weekend ”

27-10-2021 : “Question from a student ”

25-10-2021 : “Quote of the day. ”

20-10-2021 : “Question from a reader ”

18-10-2021 : “Question from an ICCF@CBS participant ”

14-10-2021 : “Quote of the day ”