Eight ways a blue chip company can improve value to shareholders

Businesses are evolving organizations, not static entities. When a financially sound business encounters temporary difficulties, a number of options are available to improve profitability.

1. Hire new management.
Many times management becomes complacent or is no longer hungry to move the company forward. In response, the board of directors will undertake a lengthy search to find the right people for the job.

2. Cut costs to manage corporate budget.
During periods of robust profitability, companies tend to get a little pudgy. They add a few new levels of management, spend money in research and development for ideas that have little or no value, or buy a few corporate jets. In some ways, the corporate decision makers are no different than the average individual. When an individual has a surplus of money, he or she tends to buy instead of save or invest. For instance, in an occupation where income fluctuates, during a great year there is a tendency to take the extra vacation, add on to the house or buy a new car. The net result of these actions is a higher cost structure. This higher cost structure is hammered home when economic circumstances get tough.

3. Enter new businesses and markets.
Large companies can let small companies do the test marketing and decide to enter new businesses or markets after the concept has been proven to be workable and profitable.

4. Introduce new products, services or formats.
To stay competitive, any growing business should introduce new products to the market. However, many times investors only see what the company is currently producing without factoring in the possibilities for new products or services in the future. Therefore, it is logical to conclude that an industry spending billions of dollars on research and development will eventually introduce a new product.

5. Institute stock buybacks.
A stock buyback is the opposite of a stock offering. It occurs when a company goes into the open market and retires stock with cash or a debit financing. The vast majority of stock buybacks are undertaken with a strategic eye to building shareholder value. A buyback tends to increase stock prices by sending several positive messages to investors. First of all, it sends the message that management feels the stock is cheap and that the future looks bright. Therefore, buying their stock is a good investment. The increased demand for the shares on the open market can create support for the price. Also, a stock buyback will often result in an increase in earnings per share since there are fewer shares outstanding.

6. Leverage the business: Prudent use of debt.
A number of companies pride themselves on having an immaculate balance sheet, meaning the company has little or no debt on the books. However, this structure does not necessarily provide the best return on the books or the best return to shareholders. If a company can borrow money at 7% and compound it at 15%, then assuming such debt can be a smart decision when used in moderation.

7. Shed weaker businesses and re-deploy into higher margin businesses.
Many times, companies will venture into acquisitions that take them away from their fields of expertise – like Tucson Electric Power, an electric utility, buying real estate; Westinghouse, an appliance manufacturer, making real estate loans; or General Electric buying Kidder Peabody, a brokerage firm.

Compounding these bad acquisition decisions is that, many times, the agreements come after an industry has done well, so a premium is paid. If a company is purchased for $1 billion and decreases in value to $200 million, the loss is reflected in the stock price of the purchasing company. The best thing the acquiring company can do is to refocus and put the $200 million back into enhancing its core business.

8. Enter acquisitions that allow for economies of scale.
Many acquisitions are successful when unrelated companies combine. However, it is easier when one bank buys another or Pepco merges with another utility like BGE. In this way, reducing the duplication of certain functions enhances a business’ opportunity to generate similar revenues with greater earnings.

The information contained herein has been obtained from sources believed reliable but is not necessarily complete and cannot be guaranteed, errors and omissions excepted. All prices, quotes and estimates are not guaranteed and are subject to change. For more complete information, prospectuses are available detailing all fees and charges. Please read carefully before you invest or send money. Information regarding taxes and tax deductibility of management fees is believed reliable, but please consult with your tax advisor.