Question

1)What are the benefits of restructuring and please provide two real life examples.

2) Discuss the objectives of corporate governance and why this has led to increased costs for publicly traded companies.

3) What are the key elements of business valuations and how would you value Walmart?

Answer 1

1. Restructing can be defined as a procedure or a method that a firm uses in which it changes the strategy of its operations or direction of its organization. Most of cases of restructuring involve downsizing. The business may eliminate departments, dismiss employees or close some of its non -profitable retail operations. It may also outsource some of its operations to save money. In other cases of restructuring, it involves reassignment or alterations of duties within the organisation to improve performance or incorporate new technologies.

The benefits of restructuring are as follows :

1. if the firm downsizes, it may lead to decrease in the operational cost. for example, if employees are dismissed, employee cost will go down.

2. Eliminating layers in the management may lead to improved communication and decision making.

3. Implementing new technology would increase operational effectiveness.  

Example 1 : Google's reorganization / restructuring its efforts to silo its core business offerings like Search, Google Cloud, YouTube, Android and Chrome, from its "Other Bets"-- a collection of seemingly random investments, mostly in a wide range of technological advancements. All of this culminated in the creation of "Alphabet Inc." the holding company that oversees all of this.Google didn’t just add an addendum to its strategy — it shifted the company’s focus entirely and reorganized its structure fully to support the new plan.

Example 2 : Atlassian’s change management initiative was spurred from an internal observation (reviews are not effective), Atlassian didn’t just change one aspect of the performance management — it changed the entire process.

Atlassian trashed its existing review process in favor of a more continuous and less numeric model. Instead of a biannual formal review, managers and employees now discuss performance once a month, during an already-scheduled one-on-one meeting. Six years later, and Atlassian is the proud owner of $425M Trello, and still making news as one of the most exemplary fast growing tech companies of the year.

2. Corporate governance is intended to increase the accountability of a company and to avoid disasters/ fraudulent in nature before they occur. The 3 pillars of corporate governance are security, accountability and transparency. All the objectives are critical in successful running and execution of the company.

Transparency
Transparency means that information should be provided in easily understandable forms and media; that it should be freely available and directly accessible to those who will be affected by governance policies and practices, as well as the outcomes resulting therefrom; and that any decisions taken and their enforcement are in compliance with established rules and regulations.

Accountability
Accountability is a key tenet of good governance. Who is accountable for what should be documented in policy statements. In general, an organization is accountable to those who will be affected by its decisions or actions as well as the applicable rules of law.

Effectiveness and Efficiency
Good governance means that the processes implemented by the organization to produce favorable results meet the needs of its stakeholders, while making the best use of resources – human, technological, financial, natural and environmental – at its disposal.

Over the last several years, the external environment in which public companies operate has become increasingly complex for companies and shareholders. The increased regulatory burdens imposed on public companies in recent years have added to the costs and complexity of overseeing and managing a corporation’s business and bring new challenges from operational, regulatory and compliance perspectives. All thee have led to increase in the costs for pubicly traded companies to ensure compliance and regulatory measures.

3. Valuation of a business is not based directly on past or present performance, but based on future projects.

• Income-Based Approach: In this approach, estimated future returns are converted to present value at an appropriate rate of return for the investment. The selected rate of return should reflect the degree of uncertainty or risk associated with the future returns and returns available from alternative investments. Higher uncertainty or risk leads to a higher expected rate of return, which produces a lower value for an investment.
• Market-Based Approach: In this approach valuation ratios are derived from market transactions involving companies that are similar to the subject business. Past transactions involving the subject business, if any, are also considered. Selected valuation ratios are then applied to the business’ adjusted historical or projected financial results to arrive at indications of value.
• Asset-Based Approach: In this approach, the assets and liabilities of the business are restated from historical cost to fair market value. Individual assets and liabilities of a business can be appraised using various approaches to asset valuation.
• The Discounted Cash Flow (DCF) valuation is a cash flow model where cash flow projections are discounted back to the present to calculate value per share. This is one of the ways in which we can value walmart.