Maung Maung Tun - Investment Management

Key (1)

Reliable strategy + timely investment = cumulative value

This is the most basic principle in business. The ultimate goal of institutional investment is to create value for shareholders.

Spending on projects such as new plants, equipment, and research and development can affect a company's economic prospects for many years to come. Because a company's stock price reflects investors' best estimates of future cash flows, these expenditures can reduce operating costs. Improve product quality. Or build the company's competitive advantage, increasing its stock price.

Focusing too much on shareholder value does not mean that other stakeholders, including creditors, suppliers, customers, employees, and local communities, are not important. Any company that consistently acts against the interests of its other stakeholders will jeopardize the company’s prospects and ultimately destroy shareholder value. However, shareholders are the owners of the company. Therefore, they will judge the actions of managers by the stock market value.

Critics say that too much focus on share price encourages managers to focus on quarterly earnings, at the expense of long-term expectations. However, numerous studies have shown that share prices tend to rise after a company announces new capital spending and R&D programs, promises to rebalance the stock market, and rewards those efforts.

But a company cannot be careless. Capital expenditure plans that create shareholder value are carefully crafted business strategies. Companies like Coca-Cola, General Electric, Merck and Rocter & Gamble have consistently succeeded in creating shareholder value. All of these companies have clear strategies for building and maintaining competitive advantage. Ill-considered investments and investments that do not reflect the success of a sound business strategy can destroy shareholder wealth. Many studies have found that when a company shifts its focus to unrelated business areas where it has no competitive advantage, the market perceives that the strategy or the assets it acquires are distracting from the company’s focus, and stock prices decline.

For example, AT&T attempted to move into computer manufacturing in the mid-1980s. After years of losses, the company expanded its commitment to computer manufacturing by acquiring NCR in 1991 for $7.5 billion. However, investors reacted negatively, and the transaction wiped $4–$6 billion off AT&T 's total stock market value . However, when the company abandoned computer manufacturing in 1995, the company's stock market value rose 10.6 percent, or more than $9 billion, on the day it announced its reorganization.

A good business strategy has the potential to gain an advantage over its competitors. If a company can prevent entry, it can eliminate competitors from entering its business. Or at least gain a head start. Pharmaceutical companies such as Merck have used patent protection in this way. Other sources of competition include developing economies. If average production costs fall with scale, a company can establish itself as a low-cost producer in the market if it gains an advantage over its competitors. Similarly, a company like Procter & Gamble, which has expanded to include many related products, can gain a competitive advantage in terms of market management compared to competitors that produce only one product.

Whatever their source, a company's strategy is likely to generate a steady stream of capital expenditures if it builds competitive advantages. However, if investors understand the credibility of the company's strategy, those expenditures will be reflected in higher stock prices.