NEWSLETTER of March 17, 2023

The following content has been added at finexpert:

Morgan Stanley
COST OF CAPITAL: A PRACTICAL GUIDE TO MEASURING OPPORTUNITY COST
This is a practical guide to estimating the weighted average cost of capital (WACC) for a company. The cost of capital is a measure of both expected return and the discount rate. For example, investors discount future free cash flows at the WACC to come up with a present value in a discounted cash flow model. Our goal is to find a figure that reflects opportunity cost sensibly, is economically sound, and provides the investor and businessperson with a solution to apply to the problem. We recommend settling on a sensible cost of capital and then allocating the bulk of analytical time and attention to thinking about the potential paths of future cash flows. >more

KfW Research
KEINE ANGST VOR ZOMBIES: SCHULDENTRAGFÄHIGKEIT BEI 95 % DER UNTERNEHMEN IM MITTELSTAND GEGEBEN
The discussion about a growing number of zombie companies in the SME sector is not new. Such concerns were recently boosted by the fact that the feared wave of insolvencies in the wake of the Corona crisis failed to materialize. However, this concern appears to be unfounded. This is shown by a special analysis of the KfW SME Panel. Only around 4% of all small and medium-sized enterprises show critical debt sustainability. They are unable to meet their interest obligations due to low profitability. There was no discernible increase in the proportion of financially weak companies during the crisis years. In addition to economic policy packages, the ability to adapt and innovate, stable profitability even in times of crisis and a broadly solid financial foundation have brought SMEs through the crisis well. >more

Freshfields Bruckhaus Deringer
M&A MONITOR
In this edition we reflect on dealmaking trends in 2022 and look ahead to 2023. We consider the macroeconomic and geopolitical impact on the M&A landscape this year and focus on the challenges ahead as signs of recovery start to appear. Given the challenges in the dealmaking environment, we examine the merits of spin-offs as a meaningful alternative to M&A for companies considering strategic divestments. We look at how illiquidity and valuation challenges could affect dealmaking as the debt market readjusts, and we explore the trends in energy M&A as businesses transition to net zero. Finally, we round-up the year-end deal data. >more

KfW Research
VENTURE CAPITAL-MARKT IN DEUTSCHLAND DASHBOARD Q4 2022
In the new dashboard on the German venture capital market, KfW Research explains the developments on the market for venture capital in Germany on a quarterly basis. The focus is on investment activity in terms of the number and volume of VC deals with German start-ups by, for example, financing phase, investor origin or technology areas, exit activity and market comparison with important international benchmarks. A look at the development of venture debt transactions rounds off the overview. >more

IPOS AND SPACS: RECENT DEVELOPMENTS
Rongbing Huang, Jay R. Ritter, and Donghang Zhang
2023
After two decades of low initial public offering (IPO) activity and a number of regulatory changes, the number of IPOs of both operating companies and special purpose acquisition companies (SPACs) boomed in the U.S. in 2021 before collapsing in 2022. In recent years, surging valuations have resulted in many private companies achieving “unicorn” status, a valuation of $1 billion or more, partly fueled by investments from mutual funds. Many of the unicorns that have gone public have done so with dual-class share structures. We compare three alternative mechanisms for going public, including traditional IPOs, mergers with SPACs, and direct listings. The most common exit for successful venture capital-backed companies, however, continues to be by merging with a larger company. >more

DO ESG FACTORS INFLUENCE FIRM VALUATION? EVIDENCE FROM THE FIELD
Franck Bancel, Dejan Glavas, and George Andrew Karolyi
2023
We surveyed more than 300 financial executives on best practices in integrating Environmental, Social, and Governance (ESG) factors into corporate valuation. Hypotheses drawn from previous ESG research were pre-registered prior to the survey, were tested on responses, and were validated further during follow-on interviews with a subset of valuation experts. Findings show external stakeholders, such as buy-side investors and investment advisors, play a crucial role in guiding the use of ESG in valuation. We confirm that the low quality of ESG ratings data remains a significant impediment to its integration into valuation processes. Additionally, the discount rate is the key parameter adjusted in best practices valuations based on discounted cash flow approaches. We conclude by interpreting our survey and interview results for current efforts by regulatory agencies to promulgate policy on climate-related and ESG reporting. >more