The valuation accuracy of multiples in mergers and acquisitions, and their association with firm misvaluation

This study explores the accuracy and valuation implications of the application of a comprehensive list of equity multiples in the takeover context. Motivating the study is the prevalent use of equity multiples in practice, the observed long-run underperformance of acquirers following takeovers, and the scarcity of multiplesbased research in the merger and acquisition setting. In exploring the application of equity multiples in this context three research questions are addressed: (1) how accurate are equity multiples (RQ1); which equity multiples are more accurate in valuing the firm (RQ2); and which equity multiples are associated with greater misvaluation of the firm (RQ3). Following a comprehensive review of the extant multiples-based literature it is hypothesised that the accuracy of multiples in estimating stock market prices in the takeover context will rank as follows (from best to worst): (1) forecasted earnings multiples, (2) multiples closer to bottom line earnings, (3) multiples based on Net Cash Flow from Operations (NCFO) and trading revenue. The relative inaccuracies in multiples are expected to flow through to equity misvaluation (as measured by the ratio of estimated market capitalisation to residual income value, or P/V). Accordingly, it is hypothesised that greater overvaluation will be exhibited for multiples based on Trading Revenue, NCFO, Book Value (BV) and earnings before interest, tax, depreciation and amortisation (EBITDA) versus multiples based on bottom line earnings; and that multiples based on Intrinsic Value will display the least overvaluation. The hypotheses are tested using a sample of 147 acquirers and 129 targets involved in Australian takeover transactions announced between 1990 and 2005. The results show that first, the majority of computed multiples examined exhibit valuation errors within 30 percent of stock market values. Second, and consistent with expectations, the results provide support for the superiority of multiples based on forecasted earnings in valuing targets and acquirers engaged in takeover transactions. Although a gradual improvement in estimating stock market values is not entirely evident when moving down the Income Statement, historical earnings multiples perform better than multiples based on Trading Revenue or NCFO. Third, while multiples based on forecasted earnings have the highest valuation accuracy they, along with Trading Revenue multiples for targets, produce the most overvalued valuations for acquirers and targets. Consistent with predictions, greater overvaluation is exhibited for multiples based on Trading Revenue for targets, and NCFO and EBITDA for both acquirers and targets. Finally, as expected, multiples based Intrinsic Value (along with BV) are associated with the least overvaluation. Given the widespread usage of valuation multiples in takeover contexts these findings offer a unique insight into their relative effectiveness. Importantly, the findings add to the growing body of valuation accuracy literature, especially within Australia, and should assist market participants to better understand the relative accuracy and misvaluation consequences of various equity multiples used in takeover documentation and assist them in subsequent investment decision making.

Redistribution and technology adoption under uncertainty : a political economy perspective

We examine the role of politico-economic influences on macroeconomic performance within the framework of an endogenous growth model with costly technology adoption and uncertainty. The model is aimed at understanding the diversity in growth and inequality experiences across countries. Agents adopt either of two risky technologies, one of which is only available through financial intermediaries, who are able to alleviate some of this risk. The entry cost of financial intermediation depends on the proportion of government revenue that is allocated towards cost-reducing financial development expenditure, and agents vote on this proportion. The results show that agents at the top and bottom ends of the distribution prefer alternative means of re-distribution, thereby effectively blocking the allocation of resources towards cost-reducing financial development expenditure. Thus political factors have a role in delaying financial and capital deepening and economic development. Furthermore, the model provides a political-economy perspective on the Kuznets curve; uncertainty interacts with the political economy mechanism to produce transitional inequality patterns that, depending on initial conditions, can unearth the Kuznets-curve experience. Finally, the political outcomes are inefficient relative to policies aimed at maximizing the collective welfare of agents in the economy.

How technological change affects power relations in global markets : remote developers in the console and mobile games industry

This paper focuses on Australian development firms in the console and mobile games industry in order to understand how small firms in a geographically remote and marginal position in the global industry are able to relate to global firms and capture revenue share. This paper shows that, while technological change in the games industry has resulted in the emergence of new industry segments based on transactional rather than relational forms of economic coordination, in which we might therefore expect less asymmetrical power relations, lead firms retain a position of power in the global games entertainment industry relative to remote developers. This has been possible because lead firms in the emerging mobile devices market have developed and sustained bottlenecks in their segment of the industry through platform competition and the development of an intensely competitive ecosystem of developers. Our research shows the critical role of platform competition and bottlenecks in influencing power asymmetries within global markets.

Innovation & workplace culture in the Australian interactive entertainment industry : the Halfbrick story

A recent success story of the Australian videogames industry is Brisbane based Halfbrick Studios, developer of the hit game for mobile devices, Fruit Ninja. Halfbrick not only survived the global financial crisis and an associated downturn in the Australian industry, but grew strongly, moving rapidly from developing licensed properties for platforms such as Game Boy Advance, Nintendo DS, and Playstation Portable (PSP) to becoming an independent developer and publisher of in-house titles, generating revenue both through App downloads and merchandise sales. Amongst the reasons for Halfbrick’s success is their ability to adaptively transform by addressing different technical platforms, user dynamics, business models and market conditions. Our ongoing case-study research from 2010 into Halfbrick’s innovation processes, culminating with some 10 semi-structured interviews with senior managers and developers, has identified a strong focus on workplace organisational culture, with staff reflecting that the company is a flat, team-based organisation devolving as much control as possible to the development teams directly, and encouraging a work-life balance in which creativity can thrive. The success of this strategy is evidenced through Halfbrick’s low staff turnover; amongst our interviewees most of the developers had been with the company for a number of years, with all speaking positively of the workplace culture and sense of creative autonomy they enjoyed. Interviews with the CEO, Shainiel Deo, and team leaders highlighted the autonomy afforded to each team and the organisation and management of the projects on which they work. Deo and team leaders emphasised the collaboration and communication skills they require in the developers that they employ, and that these characteristics were considered just as significant in hiring decisions as technical skills. Halfbrick’s developers celebrate their workplace culture and insist it has contributed to their capacity for innovation and to their commercial success with titles such as Fruit Ninja. This model of organisational management is reflected in both Stark’s (2009) idea of heterarchy, and Neff’s (2012) concept of venture labour, and provides a different perspective on the industry than the traditional political economy critique of precarious labour exploited by gaming conglomerates. Nevertheless, throughout many of the interviews and in our informal discussions with Halfbrick developers there is also a sense that this rewarding culture is quite tenuous and precarious in the context of a rapidly changing and uncertain global videogames industry. Whether such a workplace culture represents the future of the games industry, or is merely a ‘Prague Spring’ before companies such as Halfbrick are swallowed by traditional players’ remains to be seen. However, as the process of rapid and uncertain transformation plays out across the videogames industry, it is important to pay attention to emerging modes of organisation and workplace culture, even whilst they remain at the margins of the industry. In this paper we investigate Halfbrick’s workplace culture and ask how sustainable is this kind of rewarding and creative workplace?

Digital beings : an opportunity for Australian visual effects

Ongoing innovation in digital animation and visual effects technologies has provided new opportunities for stories to be visually rendered in ways never before possible. Films featuring animation and visual effects continue to perform well at the box office, proving to be highly profitable projects. The Avengers (Whedon, 2012) holds the current record for opening weekend sales, accruing as much as $207,438,708 USD and $623,357,910 USD gross at time of writing. Life of Pi (Lee, 2012) at time of writing has grossed as much as $608,791,063 USD (Box Office Mojo, 2013). With so much creative potential and a demonstrable ability to generate a large amount of revenue, the animation and visual effects industry – otherwise known as the Post, Digital and Visual Effects (PDV) industry – has become significant to the future growth and stability of the Australian film industry as a whole.

The impact of social media features on print media firms’ online business models

Many newspapers and magazines have added “social media features” to their web-based information services in order to allow users to participate in the production of content. This study examines the specific impact of the firm’s investment in social media features on their online business models. We make a comparative case study of four Scandinavian print media firms that have added social media features to their online services. We show how social media features lead to online business model innovation, particularly linked to the firms’ value propositions. The paper discusses the repercussions of this transformation on firms’ relationship with consumers and with traditional content contributors. The modified value proposition also requires firms to acquire new competences in order to reap full benefit of their social media investments. We show that the firms have been unable to do so since they have not allowed the social media features to affect their online revenue models.

Affective events theory as a framework for understanding third-party consumer complaints

Poor complaint management may result in organizations losing customers and revenue. Consumers exhibit negative emotional responses when dissatisfied and this may lead to a complaint to a third-party organization. Since little information is available on the role of emotion in the consumer complaint process or how to manage complaints effectively, we offer an emotions perspective by applying Affective Events Theory (AET) to complaint behavior. This study presents the first application of AET in a consumption context and advances a theoretical framework supported by qualitative research for emotional responses to complaints. In contrast to commonly held views on gender and emotion, men as well as women use emotion-focused coping to complain.

A nation’s role in addressing base erosion and profit shifting : balancing sovereignty with international collaboration and coordination

The notion of sovereignty is central to any international tax issue. While a nation is free to design its tax laws as it sees fit and raise revenue in accordance with the needs of its citizens, it is not possible to undertake such a task in isolation. In a world of cross-border investments and business transactions, all tax regimes impact on one another. Tax interactions between sovereign states cannot be avoided. Ultimately, the interactions mean that a nation must decide whether to engage in both collaboration and coordination with other nations and supranational bodies alike or maintain an individualised stance in relation to its tax policy. Whatever the decision, there is arguably an exercise in national sovereignty in some form. In the context of an international tax regime, whether that regime is interpreted broadly as meaning international norms generally adopted by nations around the world or domestic regimes legislating for cross-border transactions, rhetoric around national fiscal sovereignty takes on many different forms. At one end of the spectrum it is relied upon by financial secrecy jurisdictions (tax havens) as a defence to their position on the basis that ‘other’ nations cannot interfere with the fiscal sovereignty of a jurisdiction. At the other end of the spectrum, it is argued that profit shifting and international tax avoidance if not stopped is, in and of itself, a threat to a nation’s fiscal sovereignty on the basis that it threatens the ability to tax and raise the revenue needed. This paper considers a modern conceptualisation of sovereignty along with its role within international tax coordination and collaboration to argue that a move towards a more unified approach to addressing international base erosion and profit shifting may be the ultimate exercise of national fiscal sovereignty. By using the current transfer pricing regime as a case study, this paper posits that it is not merely enough to have international agreement on allocation rules to be applied, but that the ultimate exercise of national sovereignty is political agreement with other states to ensure that it is governments which determine the allocational basis of worldwide profits to be taxed. In doing so, it is demonstrated that the arm’s length pricing requirement of the current transfer pricing regime, rather than providing governments with the ability to determine the location of profits, is providing multinational entities with the ultimate power to determine that location. If left unchecked, this will eventually erode a nation’s ability to capture the required tax revenue and, as a consequence, may be deemed a failure by nation states to exercise their fiscal sovereignty.

A nation's role in addressing base erosion and profit shifting : sovereignty in relation to transfer pricing

The notion of sovereignty is central to any international tax issue. While a nation is free to design its tax laws as it sees fit and raise revenue in accordance with the needs of its citizens, it is not possible to undertake such a task in isolation. Tax interactions between sovereign states cannot be avoided. Ultimately, the interactions mean that a nation must decide whether or engage in both collaboration and co ordination with other nations and supranational bodies alike or maintain a unilateral stance in relation to its tax policy. This article considers a modern conceptualisation of sovereignty to argue that a move towards a more unified approach to addressing international base erosion and profit sharing may be the ultimate exercise of national fiscal sovereignty.

Effectiveness of reactive power capability of photo voltaic inverters to maintain voltage profile in a residential distribution feeder

Large penetration of rooftop PVs has resulted in unacceptable voltage profile in many residential distribution feeders. Limiting real power injection from PVs to alleviate over voltage problem is not feasible due to loss of green power and hence corresponding revenue loss. Reactive capability of the PV inverter can be a solution to address over voltage and voltage dip problems to some extent. This paper proposes an algorithm to utilize reactive capability of PV inverters and investigate their effectiveness for voltage improvement based on R/X ratio of the feeder. The length and loading level of the feeder for a particular R/X ratio to have acceptable voltage profile is also investigated. This can be useful for suburban design and residential distribution planning. Furthermore, coordination among different PVs using residential smart meters via a substation based controller is also proposed.

Public sector project delay : the Malaysian perspective and the way forward

Construction delay has been a protracted problem for the Malaysian construction industry. Recent report showed that 80% of public sector projects are behind schedule. This underachieving time performance has led to many problems including public complaints, loss of reputation and revenue for the government and a slump in the industry’s GDP contribution. Research in the area of project delay has mushroomed worldwide with attempts to place mitigation plans, but delay remains a global phenomenon. There is now an urgent need for revolutionizing construction practices and past research, backed up with few successful cases suggests that Supply Chain Management (SCM) could prove beneficial to reduce or eliminate delays in construction. SCM which originated from the automotive manufacturing industry promotes a more collaborative approach to construction management and has recently gained attention of the construction industry. However every country, including Malaysia, would certainly have disparities of their own compared to others being it from the cultural point of view, nature of problems, locality or improvements needed. Therefore, this paper will present part of a Ph.D. research which aims at illustrating the Malaysian construction industry experts’ perception of the Malaysian public sector project delay, provide insight into these dilemmas, highlights the problems with current practices, its effects and the improvements needed. Subsequently, this paper would propose ratification to the problems using SCM. A semi-structured interview has been conducted to practitioners with at least 20 years’ experience in the industry. The findings showed that Malaysia may be unique compared to other countries and that by considering a number of additional factors, SCM could prove beneficial to increase efficiency of the Malaysian public sector projects.

Malnutrition coding shortfalls in Australian and New Zealand hospitals

Aim The International Classification of Diseases, version 10, Australian modification (ICD-10-AM) is used to classify diseases in hospital patients in Australia and New Zealand. ICD-10-AM defines malnutrition as ‘[body mass index] BMI <18.5 kg/m2 or unintentional weight loss of ≥5% with evidence of suboptimal intake resulting in subcutaneous fat loss and/or muscle wasting’. The Australasian Nutrition Care Day Survey (ANCDS) is the most comprehensive survey to evaluate malnutrition prevalence in acute care patients from Australian and New Zealand hospitals. This study determined if malnourished participants were assigned malnutrition-related codes according to ICD-10-AM. Methods The ANCDS recruited acute care patients from 56 hospitals. Hospital-based dietitians evaluated participants' nutritional status using BMI and Subjective Global Assessment (SGA). In keeping with the ICD-10-AM definition, malnutrition was defined as BMI <18.5 kg/m2, SGA-B (moderately malnourished) or SGA-C (severely malnourished). After 3 months, in this prospective cohort study, staff members from each hospital's health information/medical records department provided coding results for malnourished participants. Results Malnutrition was prevalent in 30% (n = 869) of the cohort (n = 2976) and a significantly small number of malnourished patients were coded for malnutrition (n = 162, 19%, P < 0.001). In 21 hospitals, none of the malnourished participants were coded. Conclusions This is the largest study to provide a snapshot of malnutrition coding in Australian and New Zealand hospitals. Findings highlight gaps in malnutrition documentation and/or subsequent coding, which could potentially result in significant loss of casemix-related revenue for hospitals. Dietitians must lead the way in developing structured processes for malnutrition identification, documentation and coding.

An assessment of the geographical scale of recurrent gene flow in wild populations of two species of Mekong River carps (Henicorhynchus spp.)

The Mekong is the most productive river fishery in the world, and such as, the Mekong River Basin (MRB) is very important to very large human populations across the region as a source of revenue (through fishing and marketing of aquatic resources products) and as the major source for local animal protein. Threats to biodiversity in the MRB, either to the fishery sector itself or to other sectors are a major concern, even though currently, fisheries across this region are still very productive. If not managed properly however, fish population declines will cause significant economic impact and affect livelihoods of local people and will have a major impact on food security and nutrition. Biodiversity declines will undoubtedly affect food security, income and socio-economic status of people in the MRB that depend on aquatic resources. This is an indicator of unsustainable development and hence should be avoided. Genetic diversity (biodiversity) that can be measured using techniques based on DNA markers; refers to variation within and among populations within the same species or reproductive units. In a population, new genetic variation is generated by sexual recombination contributed by individuals with mutations in genes and chromosomes. Over time, populations of a species that are not reproducing together will diverge as differential impacts of selection and genetic drift change their genetic attributes. For mud carp (Henicorhynchus spp.), understanding the status of breeding units in the MRB will be important for their long term persistence, sustainability and for implementing effective management strategies. Earlier analysis of stock structure in two economically important mud carp species (Henicorhynchus siamensis and H. lobatus) in the MRB completed with mtDNA markers identified a number of populations of both species where gene flow had apparently been interrupted or reduced but applying these data directly to management unit identification is potentially compromised because information was only available about female dispersal patterns. The current study aimed to address this problem and to fully assess the extent of current gene flow (nDNA) and reproductive exchange among selected wild populations of two species of carp (Henicorhynchus spp.) of high economic importance in the MRB using combined mtDNA and nDNA markers. In combination, the data can be used to define effective management units for each species. In general, nDNA diversity for H. lobatus (with average allelic richness (A) 7.56 and average heterozygosity (Ho) 0.61) was very similar to that identified for H. siamensis (A = 6.81 and Ho = 0.75). Both mud carp species show significant but low FST estimates among populations as a result of lower genetic diversity among sampled populations compared with genetic diversity within populations that may potentially mask any 'real' population structure. Overall, population genetic structure patterns from mtDNA and nDNA in both Henicorhynchus species were largely congruent. Different population structures however, were identified for the two Henicorhynchus species across the same geographical area. Apparent co-similarity in morphology and co-distribution of these two relatively closely related species does not apparently imply parallel evolutionary histories. Differences in each species population structure likely reflect historical drainage rearrangement of the Mekong River. The data indicate that H. siamensis is likely to have occupied the Mekong system for much longer than has H. lobatus in the past. Two divergent stocks were identified for H. lobatus in the MRB below the Khone Falls while a single stock had been evident in the earlier mtDNA study. This suggests that the two Henicorhynchus species may possess different life history traits and that different patterns of gene flow has likely influenced modern genetic structure in these close congeners. In combination, results of the earlier mtDNA and the current study have implications for effective management of both Henicorhynchus species across the MRB. Currently, both species are essentially treated as a single management unit in this region. This strategy may be appropriate for H. lobatus as a single stock was evident in the main stream of the MRB, but may not be appropriate for H. siamensis as more than a single stock was identified across the same range for this species. Management strategies should consider this difference to conserve overall biodiversity (local discrete populations) and this will include maintaining natural habitat and migration pathways, provision of fish sanctuaries (refuges) and may also require close monitoring of any stock declines, a signal that may require effective recovery strategies.

Contributions of the private sector to global biodiversity protection: case study of the Fortune 500 companies

Since the inception of the UN Convention on Biological Diversity (CBD) in 1992, little progress has been achieved in terms of involving the business community in protecting biological diversity worldwide. This article assesses the current activities of US Fortune 500 companies with respect to global biodiversity protection and the goals of the CBD. Data and information collected from 500 companies within eight major industrial sectors were further categorized at the company level to assess each company's involvement in global biodiversity protection. Our findings show that although companies' business profiles highly influence their decision-making process regarding the adoption of biodiversity protection policies and measures, their revenue profiles are less influential. We show that despite generating low revenues, companies in the utility sector are more active in the adoption of biodiversity protection policy than those in the financial sector, which generate high revenues. This study also demonstrates that companies must be convinced of the major effects of biodiversity loss on their bottom lines to be motivated to protect biological diversity. Companies' business and business-related risk profiles can also influence the adoption of biodiversity protection policies within the company. The study further demonstrates that a measurable biodiversity impact indicator is necessary for the companies to get seriously involved in the mitigation action. Finally, this study proposes a three-step biodiversity loss mitigation action framework that is drawn upon the assessment of the 500 companies that can contribute to develop an elaborative framework of business sector-specific mitigation plan. © 2013 Copyright Taylor and Francis Group, LLC.

Enterprise Business Technology Governance: Three Competencies to Build Board Digital Leadership Capability.

The competent leadership of digital transformation needs to involve the board of directors. The reported lack of such capability in boards is becoming a pressing issue. A part of leadership in such transformation is the board of director’s competence to lead Enterprise Business Technology Governance (EBTG). In this paper we take the position that EBTG competencies are essential in boards, because competent EBTG has been shown to contribute to increased revenue, profit, and returns. We update and expand on the results of a multi-method approach to the development of a set of three board of director competencies needed for effective EBTG.