It is not that difficult to have a business with a valuation of millions of dollars. It is easy if you start off with a business worth billions, and then continue losing some billion here and some there regularly; slowly but surely, your business would be worth millions.
It looks like HP has taken this strategy rather seriously; you can see it from HP's style of running the business. Buy assets for billions and then write them down. HP's value has fallen from $60 b to $25 b in less than a year.
Loss of wealth over the years:
Physical growth does not necessarily translate into profits. For growth to add value, it has to generate return in excess of cost of capital. When this does not happen, it is destruction of wealth. Key to achieving excess returns is to ensure that purchase price is not heavy. Often, synergy effects are pointed out as value drivers to justify whatever the price paid.
When things fail, the blame-game begins. There are investment banks and audit firms, who gain fees irrespective of the deal. Then there is the board, who is supposed to oversee the proceedings and approve acquisitions before management can complete it. And the management, who does it. Collectively, these parties can destroy shareholders' wealth in the name of acquisition, control, growth and synergy. DCF presentations are made in support of any (acquisition) price. Cheery consensus.
Good corporate governance is what matters in the end for shareholders to see their wealth grow. If there are conflicts of interest among the managers, shareholders and others, it does not bode well.
It looks like HP has taken this strategy rather seriously; you can see it from HP's style of running the business. Buy assets for billions and then write them down. HP's value has fallen from $60 b to $25 b in less than a year.
Loss of wealth over the years:
Physical growth does not necessarily translate into profits. For growth to add value, it has to generate return in excess of cost of capital. When this does not happen, it is destruction of wealth. Key to achieving excess returns is to ensure that purchase price is not heavy. Often, synergy effects are pointed out as value drivers to justify whatever the price paid.
When things fail, the blame-game begins. There are investment banks and audit firms, who gain fees irrespective of the deal. Then there is the board, who is supposed to oversee the proceedings and approve acquisitions before management can complete it. And the management, who does it. Collectively, these parties can destroy shareholders' wealth in the name of acquisition, control, growth and synergy. DCF presentations are made in support of any (acquisition) price. Cheery consensus.
Good corporate governance is what matters in the end for shareholders to see their wealth grow. If there are conflicts of interest among the managers, shareholders and others, it does not bode well.
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