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If observed market value is greater than intrinsic value, then
the board and management team must eventually find a way to justify
their company’s market value. If they do not, then there is a real
risk that the share price will fall back to a level commensurate
with the underlying intrinsic value.
To close a gap of this nature, executives must find a way to
deliver a level of performance higher than they believed was
possible under the strategy being pursued. The only way to do this
is to develop and implement higher value strategies, and then
communicate a new and higher set of financial performance
expectations to the capital markets.
If the observed market value is less than the intrinsic value,
the capital markets might not understand the company’s strategy.
Alternatively, investors might lack confidence in the ability of
the management team to execute the strategy successfully. Dealing
effectively with these communication and management capability
issues should result in the creation of wealth for existing
shareholders. But beyond that, if the board and management team are
to create wealth for shareholders on an ongoing basis, they must
again focus on enhancing intrinsic value by developing and
implementing higher value strategies.
In the long run, observed market value must be underpinned by
intrinsic value – not just market sentiment. Through effective
communication, these two views of value should eventually
converge.
KBA has sound methodologies with which to determine intrinsic
value at segment, business unit and group level under a range of
alternative strategies, together with an analytical framework for
determining the size of any share price premium or discount
attributable to market sentiment.
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