Valuing mining companies can be tricky

Just ask shareholders in Ginadlbie Metals and Sundance Resources. An independent expert was unable to value the resources held by Sundance in Cameroon (see Oz article here). This is an example why I typically discourage students from choosing resource companies for the major assignment!

Value vs growth investing

Value investing (looking for low P/E, high dividend yield stocks) can be difficult in a bull market, with valuations on the rise. Anna French in The Australian explains what sorts of firms the fund managers are looking at. Note that the distinction between value and growth is not always clear:

Roger Montgomery, chairman of value manager Clime Asset Management, says value is hard to find but it is not the worst he has seen it. He also has a more flexible definition of value. "Value and growth are two sides of the same coin. You can't estimate the value of a business unless you can confidently assess its growth.

Tax implications for takeover targets

A couple of colleagues (Martin Bugeja and Ray da Silva Rosa) have a paper examining the impact of the change in tax treatment of capital gains in takeovers. From the abstract:

Prior to December 1999, shareholders that sold their shares into Australian takeovers have been taxable on capital gains irrespective of the form of payment. Subsequent to this date shareholders can elect to rollover gains when equity is received as consideration. We examine the effect of this regulatory change on the association between target shareholder capital gains and both takeover premiums and shareholder wealth. Inconsistent with the target shareholder taxation being important the results indicate that target shareholder capital gains are unrelated to takeover premiums and target firm abnormal returns. Additionally, we find that cash consideration increases target shareholder returns for reasons other than taxation.

SSRN link.

Value in mergers?

Where do the value in mergers come from? Here's a paper that has a crack at answering it.

We estimate that tax savings contribute only 1.64% in additional value, while operating synergies account for the remaining 8.38%. Operating synergies are higher in focused mergers, while tax savings constitute a large fraction of the gains in diversifying mergers. The operating synergies are generated primarily by cutbacks in investment expenditures rather than increased operating profits. Overall, the evidence suggests that mergers generate gains by improving resource allocation rather than by reducing tax payments or increasing the market power of the combined firm.

Mergers - how long till the benefits are realised?

We spoke in class this week about the time it might take for merger benefits to be apparent. This is relevant when trying to value any merger or takeover 'synergies', as well as when trying to 'measure' the benefits of mergers or takeovers (using say financial statement data). According to this article, the retail expert Wesfarmers has brought in to advise on the Coles merger thinks turnaround time will be at least 5 years. That seems reasonable to me.

Currency movements and earnings

The Australian dollar has been trending up against the U.S. dollar. That will impact on the Australian dollar value of U.S. earnings reported by companies such as CSL. The CSL chair at the recent AGM stated (link):

However, Ms Alexander said CSL had no plans to hedge its currency exposure, as exchange rate movements did not have an impact on the company's underlying performance.
"Given translation for reporting purposes does not reflect a cash flow, CSL does not consider it appropriate or economic to hedge these earnings," she said.

This implies that the U.S. earnings (or more correctly, the U.S. cash flows) are not 'repatriated' back to Australia, but rather 'kept' in the U.S. If the U.S. dollar cash flows were heading back to Australia, then CSL may be taking more of an interest in hedging.

Mergers and capital gains tax

We were talking in class this week about the tax implications of using cash vs shares in a takeover. Looks like the relative advantage of using shares (i.e., the deferring of a capital gains tax liability) is under threat. Jane Shultz in The Oz writes:

TAX experts expect a major slowdown in takeover activity due to a controversial change in tax law, despite the federal Government yesterday tweaking its announcement in a move likely to save the demerger of James Packer's Publishing & Broadcasting Ltd.

On Friday, Revenue Minister Peter Dutton suddenly announced changes to the tax consolidation regime that significantly increased the amount of capital gains tax payable when assets bought in a scrip-based takeover were on-sold.

Mergers, and Sovereign Wealth Funds

We've discussed in class this week the fact that regulatory requirements can limit merger and acquisition activity. The sorts of regulators involved are the competition regulator (ACCC) and the Foreign Investment Review Board (FIRB). The Group of 7 are currently considering a proposal to limit the investment activities of so-called Sovereign Wealth Funds (i.e., countries, especially those like Singapore and China, who are amassing extremely large amounts of money). Let's keep an eye on this...

Link to Australian article.

UPDATE (19/10/07): I didn't mention the Takeovers Panel (hey, check out the 'old-school' website feel) as one of the relevant regulatory bodies, but should have. One of their current tasks is to decide whether Pallinghurst or Palmary should end up owning Consolidated Minerals. Bryan Frith article on this here.

Earnings management and earnings quality

Kin Lo from the University of British Columbia has posted an easy-to-read (i.e., no statistical analysis) article about earnings quality and earnings management at this SSRN link.

* Photo of UBC by Kevin.Creamer - taken from his Flickr page.

Private equity - Michael Jensen's thoughts

Michael Jensen (Harvard Business School) has a set of slides available from SSRN concerning his thoughts on private equity: in short, he views it as part of a new model of management.

Slides at this link.