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Abstract:
The takeover boom of the 1980s challenged entrenched corporate management, who since the 1930s held the reins of corporate decision-making, often at the expense of shareholder interests. The effect was to transfer control over vast corporate resources to smaller, more focused and in many cases private corporations and individuals, who returned huge amounts of equity capital to shareholders. This accomplished the freeing of resources long trapped in mature industries and uneconomic conglomerates.

The popular media's stories about this phenomenon differ markedly from the stories told by careful academic research. We examine these stories, the political reactions to them, and the economic effects of the reactions. We also evaluate the effect of corporate restructuring on capital investment and R&D. We explain the phenomenon of excess capacity, and the forces that lead to exit. Finally, we analyze the breakdown of internal control systems and make recommendations to strengthen them.

Takeovers, LBOs, leveraged buyouts, politics of finance, corporate restructuring, entrenched management, excess capacity, internal control systems, exit

Abstract:
group of academics and practitioners addresses a number of questions about the workings of the stock market and its implications for corporate decision-making. The discussion begins by asking what the market wants from companies: Is it mainly just steady increases in earnings per share, which are then capitalized by the market at the current industry P/E multiple to produce a higher stock price? Or does the market pay attention to the quality, or sustainability, of earnings? And are there more revealing measures of annual corporate performance than GAAP earnings - measures that would provide investors with a better sense of companies' future cash-generating capacity and returns on capital?

The consensus was that although many investors respond uncritically to earnings numbers, the most sophisticated and influential investors consider far more than current earnings when pricing stocks. And although the stock market is far from omniscient, the heightened scrutiny of companies resulting from the growth of hedge funds, private equity, and investor activism of all kinds appears to be making the market more efficient in building information into stock prices.

The second part of the discussion explored the implications of this view of the market pricing process for corporate strategy and the evaluation of major investment opportunities. For example, do acquisitions have to be EPS-accretive to be value-adding, or is there a more reliable means of assessing an investment's value added than pro forma EPS effects? Does the DCF valuation method always offer a better guide to value than the method of comparables used by many Wall Street dealmakers? And under what circumstances are the relatively new real options valuation approaches likely to provide a significant advantage over conventional methods?

The main message offered to corporate practitioners is to avoid letting cosmetic accounting effects get in the way of value-adding investment and operating decisions. As the corporate record on acquisitions makes painfully clear, there is no guarantee that an accretive deal will turn out to be value-increasing (in fact, the odds are that it will not). As for choosing a valuation method, there appears to be a time and place for each of the major methods - comparables, DCF, and real options - and the key to success is understanding which method is best suited to the circumstances.

Abstract:
In this article, we argue that for many large companies the tops-down, earnings per share-based model of financial management that has long dominated corporate American is becoming obsolete. The most serious challenge to the long reign of EPS is coming from a measure of corporate performance called "economic value added," or EVA. EVA is by no means a new concept. Rather it is a practical, and highly flexible, refinement of economists' concept of "residual income"--the value that is left over after a company's stockholders (and all other important stakeholders) have been adequately compensated. For companies that aim to increase their competitiveness by decentralizing, EVA is likely to be the most sensible basis for evaluating and rewarding the periodic performance of empowered line people, especially those entrusted with major capital spending decisions.EVA, moreover, is not just a performance measure. When fully implemented, it is the centerpiece of an integrated financial management system that encompasses the full range of corporate financial decision-making--everything from capital budgeting, acquisition pricing, and the setting of corporate goals to shareholder communication and management incentive compensation. By putting all financial and operating functions on the same basis, an EVA system effectively provides a common language for employees across all corporate functions, linking strategic planning with the operating divisions, and the corporate treasury staff with investor relations and human resources.We begin by describing the shortcomings of the tops-down, EPS-based model of financial management. Next we explain the rise of hostile takeovers--as well as the phenomenal success of LBOs--in the 1980s as capital market responses to the deficiencies of the EPS model. The EVA financial management system, we go on to argue, borrows important aspects of the LBO movement--particularly, its focus on capital efficiency and ownership incentives--but without the high leverage and concentration of risk that limit LBOs to the mature sector of the U.S. economy. In the final section, we present the outlines of an EVA-based incentive compensation plan that is designated to simulate for managers and employees the rewards of ownership.