Fundamental Company Changes – Understanding the Manager’s Role

Hi,

Although this post is not exactly on a specific idea or concept, it still deals with a certain aspect of managing a new venture.

Organizations are going through many procedures that might oblige the management of the company to strive for performing material changes in the organizational operation and manpower. Sometimes, these changes are preformed due to intrinsic motivation of the company current management as a result from the influence of external factors, such as: change in the competitive environment and regulation that force changes in operation for to improving the current efficiency level and in order to retain the competitive position in the market.
In contrast, re-organization in many situations is being compelled by the owners as a result from different matters, such as: changes in high rank officers and management by the controlling shareholders and changes in ownership.
Execution of drastic changes is a problematic in every organization because it is engaged with a sense of uncertainty in the operation level and personal level of each one of the employees. This sense is normal in the present of instability in working environment as a result of lay-offs, entry of new employees, changes in organization structure and efficiency lower than normal during the transition period.The managing task during the re- organization period is immensely complex for in most cases there is strong resistance among the workers and especially when the feeling surrounding is that the shock is not essential and it might not bring the results which will grow benefit to the organization directly and to the workers indirectly.
The main driver of success is the workers, from minors to seniors, therefore the main target of the managers is to harness them in favor of executing the process. This kind of vigorous cooperation is not a trivial matter, therefore the manager must aspire to assimilate the goals and forecasted effects among others.
The manager should try to make his workers acknowledge the necessity of these changes by defining accurately, as much as possible, the efforts needed, the goals and future projections. This will demonstrate the fact the cost spent in the long term will be significantly lower from the growing utility for the company and employees.It is important to point out that there is a high risk embedded in executing this material changes in the company. In spite of that the success will refresh the work force and increase operating efficiency and by that creating new opportunities for obtaining new goals.

For exploring more about how to persuade your workers and to negotiate inside executive boardrooms, I encourage you to read 'The Art of Woo: Using Strategic Persuasion to Sell Your Ideas' by G. Richard Shell and Mario Moussa.

Gadi

Utilizing the 'Market Approach' When Calculating Equity Value of Companies - A common Error

I would like to discuss about an error that is common among financiers, accountants, lawyers and even analysts when trying to analyze transaction data in the market.
(Learn more about the 'Market Approach' - )http://www.nysscpa.org/cpajournal/2004/1004/essentials/p50.htm

In many cases when one tries derive a fair value indication of a certain private company from transactions held in the company's stocks or options, he or she often tends to make an errors that can be rather confusing. I'll explain it with the following rather simple example.

Let’s say, I bought 50% of a certain company and paid US10M. Assuming that it's also considered an arm's length transaction in the market, if I asked you guys, how much do you think is the fair value of 100% of the equity of the company? I bet that you'll immediately say US20M without even questioning your response.
Would you change your answer if I told you I had bought only preferred shares, and the rest are common shares being hold by others? How much would agree to pay for 100% of the equity? Do you still think it's worth US20M? Why?
Well, things are not that simple as they seem. In the business world and especially on the turf of the VCs, execution of deals is getting more and more complicated. To secure stockholders or creditors companies issue a wide range of equity instruments (i.e common shares, preferred shares, convertible bonds, options etc). In those 'weird cases', those 'back of the envelope calculations' would give us misleading values.
For that reason analysts first try to understand the deal structure and the equity or debt instruments that were purchased. By using more complex models they strive for a more reasonable indication of fair value.
(For an example on how to calculate fair value among different classes of shares see also www.journalofaccountancy.com/Issues/2008/Mar/AllocatingValueAmongDifferentClassesofEquity)

Adding some more details to the question above, I tell you now that company has 50 common shares and 50 preferred shares. And I bought the whole 50 preferred shares which indeed entitle me to 50% of the voting rights but that does not necessarily mean it's exactly 50% of the rights for earnings.
Logically, the 50% in preferred shares that I bought for 10 million is worth more than the remaining 50% in common shares since the preferred shares legally hold additional rights (e.g liquidation preferences, ratio of conversion to common stock in the future etc ) and thus in most cases:

FV (1 preferred share) > FV (1 common share)

To simplify the answer, theoretically the company is worth less than US20M.

In a nut shell, I advise players in the market (especially entrepreneurs) to give special attention to rights embedded in different equity instruments when executing deals and when determining the price of assets/ventures/companies.

I hope it gives you some food for thought.

Gadi