Corporate Finance: Theory and Practice

997 Pages·2014·4.87 MB·English

by  Pierre Vernimmen

C F
ORPORATE INANCE
“I discovered finance with ‘The Vernimmen’ about 30 years ago. Since then the different versions have
accompanied me throughout my career and throughout the world. Not only was the alignment of the suc-
cessive editions looking good in my different offices but I must confess I have opened and cherished each of
them. Whether an investment banker, a CFO in a universal bank or more simply a world banker...”
Bertrand Badre, Managing Director and CFO of the World Bank
“I opened my first Vernimmen in 1982. After having spent just a few weekends reading it, I felt better
equipped for my role in financial management at Paribas. Now at Apax, the Vernimmen remains my com-
panion in my search for value creation (key in the private equity industry).”
Monique Cohen, Associated Director, Apax Partners
“Corporate Finance is a very useful reference book for students and practitioners, it will help both to under-
stand the principles of the financial markets and their practical application in today’s complex environment.
The book’s approach is both logical and sequential and presents some interesting cases that make study
easier and more stimulating.”
Gabriele Galateri, Chairman of Telecom Italia
“Vernimmen’s Corporate Finance is an outstanding clear and complete manual, a wonderful merger of
practice and theory. Its coverage of the market aspects of corporate finance distinguishes its content, but its
treatment of all the material makes it essential reading for the student, financier or industrialist.”
Howard Jones, Senior Research Fellow in Finance at Saïd Business School, University of Oxford
“The book itself covers all the important techniques that a financial manager must have in his repertoire of
tools. The exposition is clear and concise and, most importantly, relies on commonsense reasoning through-
out. This is not a book with obscure formulae, yet is still rigorous and at the same time a model of clarity.”
Richard Roll, Joel Fried Professor of Applied Finance at UCLA Anderson
“Corporate finance is a lively subject that changes from day to day and evolves regularly, depending on new
market developments. The Vernimmen is a true bible of corporate finance. With regular updates through
their monthly newsletter and upgrades, the authors have made it applicable to any place, any time. This is
pretty unique in the field.”
Mehdi Sethom, Managing Director, Swicorp, Head of Advisory
“Written in a fluent and readable style and supplemented by numerous real-world examples, Corporate
Finance: Theory and Practice has served as an excellent aid to my studies of finance. The book’s broad
content has been indispensable in acquiring a better understanding of all the core areas of finance, ranging
from the basics of financial analysis through to the workings of complex M&A transactions and cutting edge
financial products.”
Geoffrey Coombs, Student at ESCP Europe
“What sets the Vernimmen apart from other textbooks is its integration of practice and current affairs in a
rigorous theoretical framework. Recipes and pontification are replaced by a scientific approach. And, thanks
to the Newsletter, this is done practically in real time!”
Christophe Evers, Professor of Finance at the Solvay Brussels School, Executive Director of Texaf
Pierre Vernimmen
C
ORPORATE
F
INANCE
T P
HEORY AND RACTICE
Fourth Edition
Pascal Quiry
Maurizio Dallocchio
Yann Le Fur
Antonio Salvi
This edition first published 2014
© 2014 John Wiley and Sons, Ltd
First edition published 2005, second edition published 2009, third edition published 2011
all by John Wiley & Sons, Ltd.
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Library of Congress Cataloging-in-Publication Data
Vernimmen, Pierre.
Corporate finance: theory and practice/Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann Le Fur,
Antonio Salvi. – Fourth edition.
pages cm
Includes bibliographical references and index.
1. Corporations–Finance. 2. Business enterprises–Finance. I. Title.
HG4026.V467 2014
658.15–dc23
2014022296
A catalogue record for this book is available from the British Library.
ISBN 978-1-118-84933-0 (pbk) ISBN 978-1-118-84929-3 (ebk)
ISBN 978-1-118-84932-3 (ebk)
Cover Design: Wiley
Cover Illustration: © ISebyl/Shutterstock
Set in 10/12 and Times LT Std by SPi Global India Pvt., Ltd.
Printed in Great Britain by TJ International Ltd, Padstow, Cornwall, UK
Trim Size: 189 X 246 mm fm.indd 04:42:10:PM 09/08/2014 Page v
About the authors
Pascal Quiry holds the BNP Paribas Chair in Finance at HEC Paris and he is a founder
of an investment fund which specialises in investing in start-ups and unlisted SMEs. He is
a former managing director in the M&A division of BNP Paribas where he was in charge
of deals execution.
Maurizio Dallocchio is Bocconi University Professor of Corporate Finance and Past
Dean of SDA Bocconi School of Management. He is also a board member of international
and Italian institutions and is one of the most distinguished Italian authorities in finance.
Yann Le Fur is an Adjunct Professor at HEC Paris Business School and became Mergers
and Acquisitions Director for Alstom after working as an investment banker for a number
of years, notably with Schroders, Citi and Mediobanca.
Antonio Salvi is Full Professor of Corporate Finance at “Jean Monnet” University, Italy.
He also teaches corporate finance at EM Lyon Business School and SDA Bocconi School
of Management.
Pierre Vernimmen, who died in 1996, was both an M&A dealmaker (he advised Louis
Vuitton on its merger with Moët Henessy to create LVMH, the world luxury goods
leader) and a finance teacher at HEC Paris. His book Finance d’Entreprise, was, and still
is, the top-selling financial textbook in French-speaking countries and is the forebear of
Corporate Finance: Theory and Practice.
Trim Size: 189 X 246 mm fm.indd 12:22:4:PM 09/10/2014 Page vi
Summary
A detailed table of contents can be found on page 941
Preface viii 11 WORKING CAPITAL AND CAPITAL EXPENDITURES 181
Frequently used symbols xii 12 FINANCING 202
13 RETURN ON CAPITAL EMPLOYED
1 WHAT IS CORPORATE FINANCE? 1 AND RETURN ON EQUITY 216
14 CONCLUSION OF FINANCIAL ANALYSIS 236
S I
ECTION
F S II
INANCIAL ANALYSIS 15 ECTION
I
NVESTORS AND MARKETS 243
P O
ART NE
F
UNDAMENTAL CONCEPTS P O
ART NE
IN FINANCIAL ANALYSIS 17 I
NVESTMENT DECISION RULES 245
2 CASH FLOW 19
15 THE FINANCIAL MARKETS 247
3 EARNINGS 29
16 THE TIME VALUE OF MONEY AND
4 CAPITAL EMPLOYED AND INVESTED CAPITAL 44 NET PRESENT VALUE 268
5 WALKING THROUGH FROM EARNINGS 17 THE INTERNAL RATE OF RETURN 285
TO CASH FLOW 57
6 GETTING TO GRIPS WITH CONSOLIDATED ACCOUNTS 71 PART TWO
T
7 HOW TO COPE WITH THE MOST COMPLEX HE RISK OF SECURITIES
POINTS IN FINANCIAL ACCOUNTS 89 AND THE REQUIRED RATE
OF RETURN 299
P T
ART WO 18 RISK AND RETURN 301
F
INANCIAL ANALYSIS
19 THE REQUIRED RATE OF RETURN 329
AND FORECASTING 115
8 HOW TO PERFORM A FINANCIAL ANALYSIS 117 PART THREE
F
9 MARGIN ANALYSIS: STRUCTURE 143 INANCIAL SECURITIES 347
10 MARGIN ANALYSIS: RISKS 166 20 BONDS 349
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vii
21 OTHER DEBT PRODUCTS 371 38 SHARE ISSUES 695
22 SHARES 386 39 IMPLEMENTING A DEBT POLICY 708
23 OPTIONS 406
S V
24 HYBRID SECURITIES 428 ECTION
F
25 SELLING SECURITIES 446 INANCIAL MANAGEMENT 725
P O
S III ART NE
ECTION
C
ORPORATE GOVERNANCE
V
ALUE 471
AND FINANCIAL ENGINEERING 727
26 VALUE AND CORPORATE FINANCE 473 40 SETTING UP A COMPANY OR FINANCING
27 MEASURING VALUE CREATION 492 START-UPS 729
28 INVESTMENT CRITERIA 510 41 CHOICE OF CORPORATE STRUCTURE 748
29 THE COST OF CAPITAL 528 42 INITIAL PUBLIC OFFERINGS (IPOS) 770
30 RISK AND INVESTMENT ANALYSIS 545 43 CORPORATE GOVERNANCE 783
31 VALUATION TECHNIQUES 558 44 TAKING CONTROL OF A COMPANY 797
45 MERGERS AND DEMERGERS 820
S IV
ECTION 46 LEVERAGED BUYOUTS (LBOS) 837
CORPORATE FINANCIAL POLICIES 589 47 BANKRUPTCY AND RESTRUCTURING 852
PART ONE PART TWO
CAPITAL STRUCTURE POLICIES 591 MANAGING WORKING CAPITAL,
CASH FLOWS AND FINANCIAL RISKS 867
32 CAPITAL STRUCTURE AND THE THEORY
OF PERFECT CAPITAL MARKETS 593 48 MANAGING WORKING CAPITAL 869
33 CAPITAL STRUCTURE, TAXES AND 49 MANAGING CASH FLOWS 881
ORGANISATION THEORIES 605 50 MANAGING FINANCIAL RISKS 900
34 DEBT, EQUITY AND OPTIONS THEORY 622 Epilogue–Finance and Strategy 925
35 WORKING OUT DETAILS: THE DESIGN OF Top 20 Largest Listed Companies 933
THE CAPITAL STRUCTURE 641 Contents 941
Index 951
P T
ART WO
E
QUITY CAPITAL 659
36 RETURNING CASH TO SHAREHOLDERS 661
37 DISTRIBUTION IN PRACTICE:
DIVIDENDS AND SHARE BUY-BACKS 677
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Preface
This book aims to cover the full scope of corporate finance as it is practised today
worldwide.
A way of thinking about finance
We are very pleased with the success of the first three editions of the book. It has
encouraged us to retain the approach in order to explain corporate finance to students
and professionals. There are four key features that distinguish this book from the many
other corporate finance textbooks available on the market today:
(cid:116) Our strong belief that financial analysis is part of corporate finance. Pierre Vernimmen,
who was mentor and partner to some of us in the practice of corporate finance,
understood very early on that a good financial manager must first be able to analyse a
company’s economic, financial and strategic situation, and then value it, while at the
same time mastering the conceptual underpinnings of all financial decisions.
(cid:116) Corporate Finance is neither a theoretical textbook nor a practical workbook. It is
a book in which theory and practice are constantly set off against each other, in the
same way as in our daily practice as investors at Monestier capital, DGPA and as
M&A director at Alstom, as board members of several listed and unlisted companies,
and as teachers at HEC Paris and Bocconi business schools.
(cid:116) Emphasis is placed on concepts intended to give you an understanding of situations,
rather than on techniques, which tend to shift and change over time. We confess to
believing that the former will still be valid in 20 years’ time, whereas the latter will,
for the most part, be long forgotten!
(cid:116) Financial concepts are international, but they are much easier to grasp when they are
set in a familiar context. We have tried to give examples and statistics from all around
the world to illustrate the concepts.
The five sections
This book starts with an introductory chapter reiterating the idea that corporate financiers
are the bridge between the economy and the realm of finance. Increasingly, they must play
the role of marketing managers and negotiators. Their products are financial securities
that represent rights to the firm’s cash flows. Their customers are bankers and investors. A
good financial manager listens to customers and sells them good products at high prices.
A good financial manager always thinks in terms of value rather than costs or earnings.