What is “Shareholder Value”

What is “Shareholder Value”

May 29th, 2018 // 7:00 pm @

It sounds like a simple question, but as businesses have developed, how to add shareholder value has become a more complicated question. Traditionally one made profits and paid them in dividends to shareholders, this simple model is no longer necessarily relevant.

It is critical to any company that it understands what drives it’s shareholder value, because get it wrong and you will fail to deliver the added value shareholders want.

Broadly speaking shareholders receive added value, by either receiving dividends, or in an increase in the value of their shares in the company which they can then sell and realize their profit.

The traditional model of delivering a profit to pay for dividends still exists, and for many companies it is at least part of the way they give their shareholders a profit on their investment.

How to deliver profit differs by company and by time, sometimes it is through profitable growth, and sometimes through cost cutting. Warren Buffet and 3G Capital bought H.J.Heinz and have not driven up sales, but relied on strong brands to maintain sales momentum while they cut costs to drive profit.

However in many areas of business now it is the increase in the value of the shareholding that is the biggest way shareholders get added value. They buy shares at one price and sell them latter for a higher price and therefore make a profit. What drives that increase in share value can be many fold.

Some of the biggest most valuable companies on the planet have never made a profit. Tesla, the maker of electric cars and spacecraft has never been profitable yet has a market capitalisation of over $48 billion dollars, because people believe in the long term it will be a very profitable company.

Within the technology sector we now have many “Unicorns” start up companies worth more than a billion dollars. Their investors are not normally planning to wait until they are profitable, they are expecting them to be sold at a higher value or have an initial public offering of their shares that nets them a profit.

Sometimes this increase in shareholder value is simply achieved by increase in revenue. I have built two companies that were valued when sold as a simple multiple of their revenue, and profitability was close to irrelevant.

The driver of share value can be technology if it provides a significant advantage or a patent that delivers the same added value. Many recent sales of pharmaceutical companies have been driven mainly by the desire to buy drugs in patent, rather than the risk in trying to develop them in house.

And there is always the market impact, markets go in cycles and every so often they go a little silly. In 2000 any company showing size and growth that was a .com was valued at levels that were unsustainable. I helped build Stepstone.com into the largest job board in Europe and as importantly into looking like it was market leader by ensuring we were represented in every major European Market. Leading to an IPO of over £500 million, hundreds of times it’s revenue let alone it’s profitability.

The Stepstone management understood the wild market, the need for speed to market, and the need to look big. I spent a year building or buying job boards across Europe to be the biggest and to look the biggest.

These wild bull markets however always crash, from the railway share crashes of the last century to the Internet crash of 2000. The value of companies such as Stepstone crashed spectacularly over just a few days. Those who took their profit early won, those who hung on lost.

Any good company and its management should have a very clear understanding of the balance of how it is trying to add shareholder value, and their business strategy should flow from that.

The ability to articulate how one intends to add shareholder value is the cornerstone of any well run company, not only understanding what the drivers are but how they intend to achieve those goals.

Category : Blog &Business Strategy &Key Business Success Drivers

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