Ways of creating value other than by acquisitions

“Fair Value” of an asset

There is a double fact we have noticed in thus post-COVID period: (1) physical resources scarcity is increasing over time and (2) automation and new technologies are also improving fast offering “commoditization” of solutions. It explains why more than ever on the treasury and finance history, we need to automate processes to create VALUE. I am always surprised to see that value for lots of CFO’s is only the value created by business EBITDA increase (organic growth) and external growth (i.e. M&A operations). It looks like there are no other ways and means to generate value for a business. Value is sometime difficult to assess and to measure. However, it may exist but need to be demonstrated. In ROI’s, often people offset, neglect, do not consider the qualitative aspects and qualitative gains, despite their real value. It is not because something is tough to assess that it has no value to be considered. Yet, it is a fact CFO’s often neglect. In general, they are not used to measure value. But for the more intangible value, they are even more in trouble. Creation of value also resides in the capacity to communicate to the external world how you created value and why it is good for your business. The COVID proved we need more digitization and to reinforce processes. But it looks like it does not create value, although it does. The internal controls enhancement is the most important thing to become more resilient. Rating agencies and investors will more and more focus on value creation.

Absence of valuation of non-assessable factors

What always surprises me is the frequent absence of value given to non-quantifiable things. A company or a group is valued at the sum of its parts, at the value of its goodwill, brands or patents, at the value of its reputation, financial solidity and financial valuation (whatever the method or the methods used to get this fair valuation). But to be really “fair”, a valuation should include the value of financial strengths and ways the company is organized, run and structured. The bride price paid by the acquirer is not only a financial calculation or at least it should not only be such. The dowry is not only in money in my opinion, but also in terms of quality of the organization. Obviously, some PE’s estimate the value they will bring to the targeted asset by adapting to modern standards to make it more efficient, profitable, larger and… more expensive at the end of the day. This intangible quality element is often underestimated or even worse neglected.

Buying a pig in a poke

The crises always bring their lessons and the recent WIRECARD case will also push for more internal controls, better management, stronger due diligences and to valuation of non-quantifiable elements to make sure the target asset is not rotten. I would prefer a company with best practices applied to treasury management, with ERM structure in place, with ESG philosophy, for example. Fortunately, investors start valuing and favoring these types of best practices. Having the ad hoc IT tools in place is a guarantee of a better financial management. It is important to identify headroom for improvements but not to start from scratch in terms of financial organization. The investors are now reconsidering the value of a solid, resilient and well-organized financial structure, which is a guarantee of quality or a pledge of security for a buyer. A good CFO will be able to “sell” and bring forward his/her solid state-of-the-art finance organization. I would not invest in a company without a certain degree of digitization, unless if I am convinced, I can integrate it easily in my advanced organization. The value is therefore not only financial but also strategic and technical. More and more the digitization maturity of an asset will be “better” valued and investing in modernization of the finance function will be valuable, virtuous and “monetizable” too. Would you invest in a company without an excellent cash-flow forecasting tool in place? In a company without a treasury management and ERP tool in place? In a company without paperless payment processes? Would you be ready to invest in companies with high risks of security breaches, potential target for cyber attacks and subject to frauds? I guess not. Would you invest in a company unable to measure its performances and KPI’s? Without dashboards and fully transparent compliance to financial regulations? Would you buy a pig in a poke?

Value should mean the same thing for all stakeholders

The valuation should mean the same thing for financial markets than for the firm itself. Financial investors expect value creation, but often forget to put value on strategy, financial organization and therefore “devalue” all the initiatives of modernization of the finance organization. If you only and simply think and act in terms of potential value created, you may miss part of the real and fair value of an asset and a firm. The art consists of “selling” too this value generated by a better and more resilient organization. CFO’s are usually weak in communicating these valuations, despite their growing roles and the requirements from investors. What does make more sense a maximize WACC or a sustainable capital structure (even if not optimized to the theoretical maximum)? IT investments in treasury have high ROI’s. Stop looking at costs! Look at returns in terms of quality and reliability. The CFO role, as well as Treasurer’s, become more strategic, so should the valuation do.

Fran?ois Masquelier, SimplyTREASURY