Chemtura says its board has authorized management to consider a wide range of strategic alternatives available to the company to enhance shareholder value. Strategic alternatives to be considered may include, among others, select business divestitures, value-creating acquisitions, changes to the company's capital structure, or a possible sale, merger, or other business combination involving the entire company, Chemtura says. Chemtura announced last April that it would eliminate about 620 jobs, or 10% of its global workforce, as part of a restructuring plan that would result in about $50 million/year in costs savings beginning in 2008.
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Copyright Chemical Week Associates Jan 7-Jan 14, 2008
[Headnote]
UNITED STATES/AMERICAS
Chemtura says its board has authorized management to "consider a wide range of strategic alternatives available to the company to enhance shareholder value." The company has formed a committee of independent directors to oversee the process and has retained Merrill Lynch to act as financial adviser.
"Strategic alternatives to be considered may include, among others, select business divestitures, value-creating acquisitions, changes to the company's capital structure, or a possible sale, merger, or other business combination involving the entire company," Chemtura says.
"We interpret the announcement as a signal that Chemtura's fundamentals, heavily dependent on housing and auto, have taken another step down after two years of unabated deterioration," says Edward Yang, analyst at CIBC World Markets (New York). "Three major restructurings in two years, an activist shareowner, and high management churn make a potential breakup likely."
Chemtura announced last April that it would eliminate about 620 jobs, or 10% of its global workforce, as part of a restructuring plan that would result in about $50 million/year in costs savings beginning in 2008 (CW, April 11/18,2007, p. 9). Under the plan, it discontinued antioxidant production at its Pedrengo and Ravenna, Italy facilities during third-quarter 2007 and sold its $20million/year organic peroxide business to Pergan (Bocholt, Germany) last June (CW, June 13, 2007, p. 39). Chemtura also sold its $35-million/year optical monomers business to Acomon (Zug, Switzerland) last October in order to "place greater focus on its core businesses."
Chemtura named Edward P. Garden, a principal and co-founder of hedge fund Trian Fund Management (New York), to its board last year after the fund acquired a nearly 5% stake in company. Trian says it "seeks to invest in undervalued and under-performing public companies, and prefers to work closely with the management of those companies to effect positive change through active, handson influence and involvement."
Industry sources say that Chemtura had received bids from possible buyers, including private equity firms, in early 2007, but that a deal was not completed.
Chemtura says it does not expect to disclose any further developments regarding its exploration of strategic alternatives unless and until the board completes the review.Chemtura's earnings improved in the most recent quarter for which it has reported. It posted third-quarter net income of $2 million (1 cts/share) including special items, compared to a $40-miIIion loss in the year-ago period. Sales rose 9%, to $950 million. Chemtura says it expects continued improvement in the fourth quarter, due in part to increased demand from the electronics industry
Sabtu, 15 Maret 2008
Chemtura to Review Options, Including Possible Sale(job)
Chemtura to Review Options, Including Possible Sale
Chemtura says its board has authorized management to à "consider a wide range of strategic alternatives available to the company to enhance shareholder value”
"Strategic alternatives to be considered may include, among others, select business divestitures, value-creating acquisitions, changes to the company's capital structure, or a possible sale, merger, or other business combination involving the entire company,"
Restructuring plan (eliminate about 620 jobs, or 10% of its global workforce) à result about $50 million/year in costs savings
· "Seeks to invest in undervalued and under-performing public companies, and prefers to work closely with the management of those companies to effect positive change through active, hand son influence and involvement."
Chemtura says its board has authorized management to à "consider a wide range of strategic alternatives available to the company to enhance shareholder value”
"Strategic alternatives to be considered may include, among others, select business divestitures, value-creating acquisitions, changes to the company's capital structure, or a possible sale, merger, or other business combination involving the entire company,"
Restructuring plan (eliminate about 620 jobs, or 10% of its global workforce) à result about $50 million/year in costs savings
· "Seeks to invest in undervalued and under-performing public companies, and prefers to work closely with the management of those companies to effect positive change through active, hand son influence and involvement."
FREE CASH FLOW (FCF), ECONOMIC VALUE ADDED (EVA) AND NET PRESENT VALUE (NPV):
FREE CASH FLOW (FCF), ECONOMIC VALUE ADDED (EVA) AND NET PRESENT VALUE (NPV):
A Reconciliation of Variation of Discounted-Cash-Flow (Dcf) Valuation
INTRODUCTION:
“Discounted cash flow basically use for investment decision making and valuation is well entrenched in finance theory and practice”
Reconciliation:
FCF is more extensions of DCF concept to security valuation (techniques).
EVA is DCF concept to performance evaluating
NPV is a traditional application of DCF thinking (sometimes use for investment project selection)
1. CASH FLOW
“Basically is one of most important pieces of financial information, simply mean the differences between amount money that came and went out”
1. A. The cash budget identity
àComponent: operating revenues and cost, net security issuance, interest payment, dividend payment, taxes paid and net investment.
àPractice: investor need to bring the number into conformity with reality
Source = use
Rt + ∆CBt = Qt + Int++ Div t+ Taxes t + ∆l t + ∆WC t
1. B. Dividend
Dividend= (NPATt + depreciation) – total net investment + net debt issuance
1. C. Division of cash flow among investor
“Proponent of the FCFE method emphasize that free-cash-flow to equity is “….dividend that could be paid to shareholder”
--the difference between FCFE and dividend paid in given year may be characterized as investment in “excess marketable securities” and its omission from consideration is moot so long as such investment have zero NPV
Note: CFD = interest payment - net debt issuance
1. D. taxes
One of the components of cash flow to equity
Taxes: tax with no debt financing – interest-tax – shield benefit
Note: Adjustment is important!!!!!
E. Free cash flow to the firm
“ CFF is the sum of cash flow to equity (CFE) and cash flow to debt holders (CFD), reduced by the interest-tax-shield benefit from the cash flow to debt holder.
CFF = NOPAT1 + depreciation + total net investment
“CFF can be expressed as after tax operating profit from otherwise equivalent unlevered firm + dep – total net investment
2. VALUATION (basically to confirmed the conceptual equivalent of Various DCF procedures, given necessary information regarding cash flow)
“Three most basic business context in which issues arise are project valuation, security valuation, and firm valuation”
Purposeà to show conceptual consistency in valuation
2. A. equity by the dividend discount approach
2. B. Equity valuation by the free cash flow equity approach
Nb: for the A and B à same formula
2. C. debt valuation
2. D. total firm valuation
Similar with the CFF, but they are sigma before the formula
2. E. Project valuation
2. F. Economic profit (EP) and economic value added
“The concept of economic profit (EP) boil down to simple restatement of total firm valuation that “reallocates” investment expenditure from the period in which they are made to period over which their resulting benefit”
“the relocation assigns to each period an “EVAtm depreciation” component representing the “Usage” of portion of the cost of the firm assets plus “a capital charge” representing the opportunity cost of the remaining net investment in the firm.
3. MEASUREMENT ISSUE
Practice: the valuation task is carried out using information from a firm’s financial and tax accounting records.
Important use of valuation concepts requiring use of accounting information is determining of managerial compensation
3. A Derivation of operating cash flow from accounting profit
“As a result of application of the realization and matching principles and tax rules, accounting statement reporting of periodic revenues and cost may dedicative considerably from actual cash flow relating to the same revenues and cost item.
3. B. Derivation of economic profit from accounting profit
“as evidenced by the expression for economic profit, the economics profit approach discounted economics profit, rather than cash flow, and is therefore not only concerned with reconciliation of accounting profit and cash flow, but also focuses on issues defining the capital investment in the firm”
4.CONCLUSSION
Conceptually --- are equivalent
A Reconciliation of Variation of Discounted-Cash-Flow (Dcf) Valuation
INTRODUCTION:
“Discounted cash flow basically use for investment decision making and valuation is well entrenched in finance theory and practice”
Reconciliation:
FCF is more extensions of DCF concept to security valuation (techniques).
EVA is DCF concept to performance evaluating
NPV is a traditional application of DCF thinking (sometimes use for investment project selection)
1. CASH FLOW
“Basically is one of most important pieces of financial information, simply mean the differences between amount money that came and went out”
1. A. The cash budget identity
àComponent: operating revenues and cost, net security issuance, interest payment, dividend payment, taxes paid and net investment.
àPractice: investor need to bring the number into conformity with reality
Source = use
Rt + ∆CBt = Qt + Int++ Div t+ Taxes t + ∆l t + ∆WC t
1. B. Dividend
Dividend= (NPATt + depreciation) – total net investment + net debt issuance
1. C. Division of cash flow among investor
“Proponent of the FCFE method emphasize that free-cash-flow to equity is “….dividend that could be paid to shareholder”
--the difference between FCFE and dividend paid in given year may be characterized as investment in “excess marketable securities” and its omission from consideration is moot so long as such investment have zero NPV
Note: CFD = interest payment - net debt issuance
1. D. taxes
One of the components of cash flow to equity
Taxes: tax with no debt financing – interest-tax – shield benefit
Note: Adjustment is important!!!!!
E. Free cash flow to the firm
“ CFF is the sum of cash flow to equity (CFE) and cash flow to debt holders (CFD), reduced by the interest-tax-shield benefit from the cash flow to debt holder.
CFF = NOPAT1 + depreciation + total net investment
“CFF can be expressed as after tax operating profit from otherwise equivalent unlevered firm + dep – total net investment
2. VALUATION (basically to confirmed the conceptual equivalent of Various DCF procedures, given necessary information regarding cash flow)
“Three most basic business context in which issues arise are project valuation, security valuation, and firm valuation”
Purposeà to show conceptual consistency in valuation
2. A. equity by the dividend discount approach
2. B. Equity valuation by the free cash flow equity approach
Nb: for the A and B à same formula
2. C. debt valuation
2. D. total firm valuation
Similar with the CFF, but they are sigma before the formula
2. E. Project valuation
2. F. Economic profit (EP) and economic value added
“The concept of economic profit (EP) boil down to simple restatement of total firm valuation that “reallocates” investment expenditure from the period in which they are made to period over which their resulting benefit”
“the relocation assigns to each period an “EVAtm depreciation” component representing the “Usage” of portion of the cost of the firm assets plus “a capital charge” representing the opportunity cost of the remaining net investment in the firm.
3. MEASUREMENT ISSUE
Practice: the valuation task is carried out using information from a firm’s financial and tax accounting records.
Important use of valuation concepts requiring use of accounting information is determining of managerial compensation
3. A Derivation of operating cash flow from accounting profit
“As a result of application of the realization and matching principles and tax rules, accounting statement reporting of periodic revenues and cost may dedicative considerably from actual cash flow relating to the same revenues and cost item.
3. B. Derivation of economic profit from accounting profit
“as evidenced by the expression for economic profit, the economics profit approach discounted economics profit, rather than cash flow, and is therefore not only concerned with reconciliation of accounting profit and cash flow, but also focuses on issues defining the capital investment in the firm”
4.CONCLUSSION
Conceptually --- are equivalent
Trying Free Cash Flows to Market Valuations
Trying Free Cash Flows to Market Valuations
“In a companion piece to his article in the last issue*, Robert Howell turns his attention to the importance of free cash flow in determining valuations”
1. Introduction
Financial statement overhaul traditional format need major design à useful for meaningful financial analysis, decision-making, and value creation.
“Financial statement needs to put more emphasis on the free cash flow that a business generates”
2. Relating Free Cash Flows to Market Values
A firm’s market value reflects the collective judgment of the shareholder expectation in the future cash flow. If the expectation cash flow constantà Market value constant, is the expectation cash floe is betterà Market value should be raise, if the expectation cash flow is turn downà Market value is erode
“Management should regularly undertake those process to their own firm; Invertors should do the same to each infestation “
“ it is possible to directly relate a business’s free cash flow to its market value, financial statement should make this connection easy (today do not)
3. Managing for Free Cash Flows and Shareholder Value Creation
Management fundamental responsibleà increase shareholder valueà by increasing the NPV of the future system of cash flow.
There are there ways:
Increase cash earning by growing the business]
Reduce investment (managing working capital and fixed and other assets more tightly)
Financial management has two element
Managing the mix of capital to minimize the firm’s WACC
Using fee cash flow, or free cash flow after interest payment and debt service, to increase company future value.
“The ultimate financial management challenge is to use free cash flows to invest in new business opportunities that build shareholder value”
4. Xerox Corp. Profits vs. Cash Flows
This is example of how potentially misleading accounting profits can be…
Early 1999, stated that year 1998 is an excellent year à stock price climbing from $42 to $64
Throughout 1999, Xerox reported bad news “softness in its significant Brazilian market, a profit warning for the third quarter that stunned Wall Street, then another warning and large earning shortfall for the fourth quarter. à year end the stock price $20
May 2000 à the stock price fall to $5
“basically Xerox did was attribute more its leasing transaction to current (e.g., ’98 and ’99) revenues and profits than its should have” –because the added revenues booked only increased its receivable ad had no beneficial effect on cash flow --
5. Metrics to Monitor Free Cash Flows and Value Creation
Traditional financial statement analisis just focused on measures of “profitability” and “risk”.
Profitability fuccused à ROA and ROE
Risk measures à Liquidity and Solvency
“ROA often overstated, ROE also in most cases the resulting calculation is over stated”
ROA suffers for two account:
It fails to recognize the flow characteristics of working capital
Having fewer resources tied up in working capital is better in that it reduces the amount of cash required to support growth and improves ROIC
“Solvency measures are the times-interest earned ratio and various debt-to-capital ratios”
“if the company lax\ck adequate free cash flow to cover its debt service, it is insolvent, regardless of what ratios say”
6. Summary
Free cash flow has to be the focus of major financial statement overhaul and may be directly related to current market valuations to determine if the current free cash flows support current market values
“In a companion piece to his article in the last issue*, Robert Howell turns his attention to the importance of free cash flow in determining valuations”
1. Introduction
Financial statement overhaul traditional format need major design à useful for meaningful financial analysis, decision-making, and value creation.
“Financial statement needs to put more emphasis on the free cash flow that a business generates”
2. Relating Free Cash Flows to Market Values
A firm’s market value reflects the collective judgment of the shareholder expectation in the future cash flow. If the expectation cash flow constantà Market value constant, is the expectation cash floe is betterà Market value should be raise, if the expectation cash flow is turn downà Market value is erode
“Management should regularly undertake those process to their own firm; Invertors should do the same to each infestation “
“ it is possible to directly relate a business’s free cash flow to its market value, financial statement should make this connection easy (today do not)
3. Managing for Free Cash Flows and Shareholder Value Creation
Management fundamental responsibleà increase shareholder valueà by increasing the NPV of the future system of cash flow.
There are there ways:
Increase cash earning by growing the business]
Reduce investment (managing working capital and fixed and other assets more tightly)
Financial management has two element
Managing the mix of capital to minimize the firm’s WACC
Using fee cash flow, or free cash flow after interest payment and debt service, to increase company future value.
“The ultimate financial management challenge is to use free cash flows to invest in new business opportunities that build shareholder value”
4. Xerox Corp. Profits vs. Cash Flows
This is example of how potentially misleading accounting profits can be…
Early 1999, stated that year 1998 is an excellent year à stock price climbing from $42 to $64
Throughout 1999, Xerox reported bad news “softness in its significant Brazilian market, a profit warning for the third quarter that stunned Wall Street, then another warning and large earning shortfall for the fourth quarter. à year end the stock price $20
May 2000 à the stock price fall to $5
“basically Xerox did was attribute more its leasing transaction to current (e.g., ’98 and ’99) revenues and profits than its should have” –because the added revenues booked only increased its receivable ad had no beneficial effect on cash flow --
5. Metrics to Monitor Free Cash Flows and Value Creation
Traditional financial statement analisis just focused on measures of “profitability” and “risk”.
Profitability fuccused à ROA and ROE
Risk measures à Liquidity and Solvency
“ROA often overstated, ROE also in most cases the resulting calculation is over stated”
ROA suffers for two account:
It fails to recognize the flow characteristics of working capital
Having fewer resources tied up in working capital is better in that it reduces the amount of cash required to support growth and improves ROIC
“Solvency measures are the times-interest earned ratio and various debt-to-capital ratios”
“if the company lax\ck adequate free cash flow to cover its debt service, it is insolvent, regardless of what ratios say”
6. Summary
Free cash flow has to be the focus of major financial statement overhaul and may be directly related to current market valuations to determine if the current free cash flows support current market values
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