Industry Archives - Consilue

Impact of the technology on the shareholder value creation

administrator — Sun, 11 Nov 2018 19:02:30 +0000

TECHNOLOGY BRINGS REVOLUTIONARY CHANGES INTO THE BUSINESSES. IT ENABLES NEW DIMENSIONS OF COST OPTIMIZATION ON ONE SIDE, AND EXTREMELY FAST AND CHEAP EXPANSION ON THE OTHER SIDE. THIS CENTURY IS FOR SMART INVESTORS DEFINITELY A GOLDEN ERA. FROM THE PERSPECTIVE OF VALUE CREATION, MEGA INVESTMENT OPPORTUNITIES ARE SHOWING ON THE INVESTOR RADARS – CASE OF MASTERCARD INC.

Mastercard Inc. is a specialized technology company offering e-payment solutions to banks, governments and others. In other words, clients are offered super-fast network for processing end-users’ transactions. The company philosophy is to simplify and upgrade the payment process. Efforts of the company are built around the main concern – to offer safety and security. The company today has 1,8 billion cardholders around the world, mainly in USA, UK, Canada and Brazil. Their brands MasterCard, Maestro and Cirrus became known as synonym for non-monetary business.

Sustainable achieving of high margins in the long-term

Through decades of operations the company developed key competitive advantages, which guarantee today’s success and include strong brand, high level of trust and global network of partnerships. Strong brand impacts the demand, high level of trust as the element of differentiation enables high profit margins and global network of partnerships results in economies of scale and optimal cost structure of operations.

Financials confirm the superb performance of Mastercard Inc. Market share of the company in 2017 hit 17% (2016: 16%, 2015: 12%), while net sales reached 12,5 billion USD. Business performance is improving as a result of consumption rise and changing consumer habits. In terms of value creation, an important fact is linked to the ability to maintain high and stable margins. EBIT margin for years already exceeds 50,0%.

Chart: Net sales and EBIT developments of Mastercard Inc.

Shareholder value creation is what really counts!

The success story of Mastercard Inc. (or some other company operating in tech-sector) recognized by investors is actually a bit deeper. It is linked to the potential of future value generation, which is significantly impacted also by a relatively low operations growth financing needs.

Technology is an interesting phenomenon. It allows one to reach economies of scale fast and without significant investments in capital expenditures (CapEx) or Operating expenditures (OpEx).

The growth as such for Mastercard Inc. does not represent a significant financing burden (compared to non-tech sector companies). In other words, the operations can expand through the existing solutions and significantly impact the value created. If we additionally take into the account the fact that nowadays still 80% of transactions are in cash and the pace of changing consumer habits, we understand the true value drivers.

How easy it is for Mastercard Inc. to finance its existing operations is obvious even now. Despite the relatively high (16,0%) growth of net sales in 2017, the level of shareholder’s equity remained on the same levels. Net profits were paid out in full. The needs of increasing invested capital were addressed completely with increased levels of financial debt. Despite raising of the financial debt, the indebtedness ratios are actually improving, since the market value of equity increases faster than the financial debt.

Every company has its own specifics of shareholder value creation, so it is important to understand what boosts company value the most!

The CEO of Mastercard Inc. Ajay Banga says: »Our investments are focused on the safety, security and development of solutions that fuel high growth of our business.« He is well aware of the areas of the biggest risks and the biggest opportunities. This fact confirms also recent acquisitions, which are executed with a purpose to expand the capabilities of the company and take over the technical solutions, which are about to present a competitive edge for the company in the future. For example, with acquisition of VocaLink Holdings Limited company gained advanced know-how in the area of real-time account transaction processing; with acquisition of Brighterion, Inc. the company gained the AI technology to better understand the transaction flows and prevent the security and safety gaps.

Companies that continuously create value for shareholders have competitive advantage over competitors and wider, meaning in the industry. In case of Mastercard Inc. we talk about the combination of attractive industry and strong competitive advantages. The company stock outperforms even those with biggest potential, selection of NASDAQ index companies.

Chart: Performance of Mastercard Inc. stock vs NASDAQ index

The thoughts of Mastercard Inc. management are concentrated on the core value driver – company’s growth and securitisation of underlying risks. The tools used are exclusively of technological nature. Technology & competitive advantages are the answer to smart managing of companies in 21st century.

The pace at which the technology is brought into the daily operations is high. It requires introduction of new business models. Preparation of more advanced business strategies. Continuous restructuring of activities. Implementation of creative ideas etc. As a result, the capital market positions of the most active companies are drastically improving. They attract investors. Grow the value for shareholders.

What about you? Are you aware of potential that the technology has in the context of your operations? Do you consider its implementation? Do you know which investments are smart and which actually represent a burden for your company?

What are the other shareholder value creation success stories that we know?

Company Uber offers transportation services and has no cars; Facebook is a media company and creates no content; Alibaba is a trading company with no stocks; Airbnb markets real estate, which are in possession of others etc. All these companies master the technology and its impact on value creation. Technology is revolutionizing the whole industries, which is primarily the cause why many sectors stagnate.

The answer on how to “Uber-ize” many other businesses is hiding the potential for new billionaires!

The post Impact of the technology on the shareholder value creation appeared first on Consilue.

Case study: Fast company growth brings financing challenges

administrator — Thu, 25 Jan 2018 16:01:29 +0000

Pain: Financing of company growth opportunity

A mid-size wholesaler came across a business opportunity on the mature market, that would boost the company growth. The management performed some preliminary market tests first and got a very positive feedback. They were well aware that their reaction needs to be fast and sound if they want to succeed. Main specifics that significantly impacted their response were 1) net working capital intensive business and 2) relatively modest operational margins. The business opportunity is in terms of revenues 5x the current level and large portion of the growth will have to be at least temporarily financed also with debt. This was the reason why Consilue was engaged – to advise the client on the most appropriate financing mix, play its role of the independent trust-worthy intermediary and to speed up the process of gathering funds.

Addressing the pain: Growth strategy comes first

The scale of the opportunity surprised everyone in the company. Since the client had at that time relatively modest understanding of the developments that resulted in it, the project was approached more strategically. Consilue dig into the understanding of the structural changes first. The market analysis and the industry analysis pointed out significant moves on both supply & demand side. To name the most significant ones:

– opening of the market for more competitive non-EU suppliers (release of EU tariffs & quotas)

– competitors have long-term trading alliances linked to EU suppliers and are non-responsive

– concentrated industry, but very rigid competition

– tensions of clients to seek new, more flexible alternatives to intensify the competition

After in-depth financial and business analysis of the company, we figured out that the competitive advantage of the client on which the idea of the future success is based, significantly depends on the particular currency exchange rate and can therefore be of temporary nature. There were also speculations about the possible responses of dominant players which are financially much stronger and already have all the facilities needed.

Reflecting all these facts, the Consilue together with the company management prepared the financial projections (income statement, statement of financial position, cash-flow statement) under various scenarios of corporate growth development. The projections revealed the financing needs as well as most optimal financing mix and the target maturities. Based on the findings the communication and negotiation with governmental crediting institutions and commercial banks continued.

Due to the temporary nature of the competitive advantage, the client was also advised how to act after they gain their target market share in order to rather develop a long-lasting competitive advantages and thus consolidate their position on the market.

Results: Company growth financing CHECKED

The client received the funds in very short time period. Consilue supported the client in the process of funding with value-added advices. Thanks to us, the client was able to replace part of its current funding activities (factoring; non-competitive interest rate loans) with carefully selected, less risky in terms of maturities, cheaper and more tailored sources of funding.

Client’s testimonial:

We are fully equipped for our attack. We understand the background. We did not lose much time. We fully & truly believe into this opportunity. So let’s attack!

Thanks to our consultants for a great support, responsiveness and proactive thinking. Also the approach to financing is smart – we will leverage the company gradually as the business progress, we carefully chose the liability types and select the maturities in a way that related risks are minimized.

Advisor’s thought:

In cases when a company comes across such a big business opportunity and the financing needs for company growth increase so much, that it might be challenging to persuade risk-averse creditors such as banks and governmental institutions. In these cases, the key role in the process is carried by the consultant, who independently reviews the feasibility of the project, review the growth strategy and underlying risks, estimates the financing needs, determines the optimal financing mix, attributes most appropriate types of funding, maturities etc. With the help of the consultant often not only the funding is agreed faster, but also the costs of company growth financing decrease, since the future business risks are perceived as lower and funds gathering process is normally more transparent and straight-forward.

The post Case study: Fast company growth brings financing challenges appeared first on Consilue.