Means that capital is "leaking out" of the company, for example to the owners through dividends or repayment of other shareholder contributions. In certain situations, for example, banks will not allow any leakage from the company before interest and amortization have been paid on the bank loans.
It is also important that leakage to existing owners be controlled in connection with an exit process. An example is by means of the so-called "Locked box" device.
LEAN is a Japanese management philosophy which entails doing the right thing at the right time and thereby reducing all loss of time and resources. LEAN is applied both in manufacturing industries and in service businesses.
This point of view has as its starting point the valuation of all activities in a business based on the values they contribute to the business. Those activities which do not add value are thereafter systematically eliminated.
LEAN's value concept is based not only on maximized share value but also on the consistent creation of value for all interests.
LEAN has been criticized for leading to inadequate staffing and to stress. But correctly used it will lead to the opposite, by evening out the burdens of work and eliminating waste of time and resources.
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An agreement between two or more parties which describes their intention relating to a more extensive business relationship or transaction. For example, it may relate to a partnership, an investment, or a disposition.
An LoI is a first step towards the real negotiations and a final agreement. The declaration of intent contains important, agreed-upon terms and conditions for continued negotiation. It can therefore be seen as a first test of whether the conditions necessary for a more comprehensive agreement exist.
The contract will contain provisions which make the agreement non-binding on the parties, but with certain exceptions (for instance as to confidentiality).
Compare also "Term Sheet", which is usually a more developed contract with more detailed terms and conditions and the prerequisites for a transaction.
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With a good balance between equity capital and borrowed capital a company can get an extra push, a financial lever, for the return on equity capital on its balance sheet. If the return on the company's total capital is higher than the rate of interest which the company pays on its loans an increased level of indebtedness gives an increased return on equity capital (i.e., the owners' capital).
When the company uses the level of indebtedness as a lever for the return on equity capital, it must at the same time understand the consequences of the increased financial risk. If the interest rate on loans is higher than the return on total capital, there will be the opposite effect and increased indebtedness will have a negative effect on equity capital. In other words, the lever work in both directions
Exemple:
In order to analyze and show the effect of a lever on indebtedness, the so-called "lever formula" is used:
Re= Rt + (Rt-Rd)x(D/E)
The lever formula is sometimes called the "Johansson formula" after Professor Sven-Erik Johansson at the Stockholm School of Economics in Stockholm, Sweden.
Assume that the company has a stable profit equivalent to a 10% return on total capital, that the average interest rate on loans is 4%, and that the company's total capital consists of 60% loans and 40% equity capital. If we put these values into the lever formula, we obtain a return on equity capital (Re):
Re=Rt+(Rt-Rd)*(D/E)=10+(10-4)*(60/40)=10+6*1,5=19%.
The level of indebtedness of 1.5 thus provides an addition of 9% on equity capital. Assume that the company increases the indebtedness level to 75% loans and 25% equity capital. The return on equity capital now becomes:
Re=10+(10-3)*(75/25)=10+6*3=10+18=28%.
The increased level of indebtedness thus provides an addition of 18% on equity capital. But now assume that the company's result is worsened and delivers a return on total capital of only 2%, i.e., lower that the 4% cost of loans. The company still has 75% loans and 25% equity capital. The return on equity capital becomes:
Re=2+(2-4)*(75/25)=2+(-2)*3=2-6=-4%.
The level of indebtedness now makes a negative contribution of -6% which results in a -4% return on equity capital, i.e., 4% of the owners' capital is being used up in one year. This example shows the effect (and the risk) of a lever when the company's total return (Rt) is less than the rate of interest on its loans.
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An abbreviation for "Leveraged Buy-out". An LBO is an investment in a company where the investment is financed by a mix of equity capital and loans. You need to find good balance between these two forms of finance in order to achieve an optimal lever for the investment.
A measure of a company's cash position. Also called "Quick Assets Ratio" or "Acid-test ratio". This measure measures the company's capacity to pay short term liabilities and is calculated:
Cash position = (current assets - inventory)/short-term liabilities.
Of course, the higher the quotient the better the company's cash position is. A quotient of 2 thus means that the company has €2 (if the report is done in Euros) available to cover €1 of its short-term liabilities. See also "Quick Assets Ratio".
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A liquid share is a share which can relatively easily be converted to cash. An example is listed shares, which usually can be sold immediately and with cash coming directly into your account. Of course, the more liquid a company's shares are the easier it is to buy and sell those shares.
Shares in a company which is not listed on a securities exchange, by contrast, are difficult to sell (and to value). It is then said that the shares are illiquid. Even listed shares can be difficult to convert to cash if there is little trading (i.e., shallow market depth) in the shares, for instance in a smaller company which is listed on a smaller securities exchange.
Illiquid shares are coupled with a higher risk in that they cannot be sold if the owner no longer believes in the company. Thus, all else being equal, liquid shares will be valued more highly than illiquid shares.
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"Listing" usually means that a company's shares are listed on a "regulated market" -- a "securities exchange" or "stock exchange". The name of the shares (abbreviated), price and trading volume are noted on the market place's summary (list) of trading in shares during a specific time period (hours, days, weeks, etc.). A listing also means that sellers and buyers can trade in the shares.
In the public press, there is sometimes a certain amount of confusion about what is meant by the concept when it is said that a company's shares are to be listed. It may not be clear whether the company's shares are to start being traded on a regulated market or an alternative market.
A "securities exchange" is an enterprise which has received permission from a governmental authority to conduct trading in securities in a regulated market place. It is usually the regulating authority which has oversight over securities exchanges and trading platforms. If a company chooses listing on a regulated market the company must be approved by the securities exchange to which the listing relates, which is a very comprehensive process.
Common to all regulated market places is that they operate under strict laws and rules which regulate the trading in securities. The requirements for listing a company's shares and how the listings will appear vary among various market places and geographical locations. All companies must prepare a prospectus when shares (or other securities) in the company are offered to the public for trading. The prospectus describes the company, the business, financial facts, risks and opportunities.
An alternative, simpler market place for trading in securities is called a trading platform or MTF (Multilateral Trading Facility). A securities company can obtain permission to operate an MTF, but a regulated securities exchange may also operate an MTF. In addition to regulated securities exchanges and MTFs, there are a number of smaller, unregulated (local) stock markets for trading in securities where buyers and sellers can meet.
With the final goal of listing on a securities exchange, the strategy for a smaller company may be first to introduce the company's shares on an MTF (an exchange lite) and then later change the listing to a regulated market. The Board of Directors and the management can thus practice for a certain time on the simpler market.
As an investor in shares, you must be pay attention to the market on which the company's shares are listed. A listing on a regulated exchange is an assurance that the company fulfils the extensive requirements of that securities exchange, which is to be seen as a stamp of quality. Even companies whose shares are traded on other markets may voluntarily meet many of the requirements which the listed companies must satisfy, but they don't need to and thus the risk in the shares is greater. If you invest in shares which are not listed on a regulated market it is especially important that you understand both the opportunities and the risks with which the purchase of the shares is associated.
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Means that a company's shares are listed (are introduced) on to a regulated market. There are authorized governmental authorities in a country which give a company (a securities exchange) permission to operate a regulated marketplace. A place for trading which is not as fully regulated is called a "trading platform" or an MTF (Multilateral Trading Facility). Read more under "Listing".
A securities exchange introduction and listing are done principally in order, if it is necessary, to finance the company through a new issuance of shares or other securities. Another important purpose is to offer existing owners a marketplace where they can sell their shares and at the same time give new owners an opportunity to buy shares in the company. After a listing the shares are "liquid", i.e., can be converted to cash.
Liquid shares are associated with lower risk as compared with unlisted shares, since the shareholder can more easily sell the shares if she or he does not like the developments in the company -- you can "vote with your feet". When the risk is diminished, the share's price ought to rise after a listing -- which is not always the case.
When a company chooses to list its shares on a securities exchange, the requirements for information disclosure increase. The company must accept the rules of the securities exchange in some form of listing agreement. The intention of these rules which the companies must follow is to protect investors, e.g., by requiring correct information and, to the extent possible, preventing insider trading in the shares.
Circumstances and changes which affect the share's market price must be made public, including, among other things, financial information, information on material changes in ownership, and changes in key-management. No one is supposed to be able to profit by trading in shares based on information which is not public or which is misleading.
A listing on a securities exchange is a very extensive and demanding process. It takes at least a year to prepare a company for a securities exchange, to make the company "exchange ready" and to effectuate the listing. What is absolutely the most important thing is to understand and determine the purpose of the listing, for example:
A listing process contains a large number of activities, among other things to:
A conclusion is that the preparations must be begun in good time before the target date for the listing. An effective project leader and project management are needed in order to coordinate activities among the owners, the Board of Directors, the company, advisors, governmental authorities, and the securities exchange that has been chosen. Last but not least, all costs must be monitored throughout the entire process -- the total cost of the listing is going to be a significant item for the company.
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A designation for an investment in a company which is not developing in a satisfactory way and where growth has stagnated.
If, in addition, an owner cannot sell her or his holdings and get out of the investment, then the owner is locked into a living dead investment, which is among the worst things that can happen to an active investor.
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This is a device for regulating the price in conjunction with an acquisition of a business, especially when the annual financial statements cannot be used as a basis for the valuation. Early in the selling process, the seller and the buyer will agree that the price which the buyer is to pay is based on the company's status at a specifically designated point in time, the so-called locked box date.
The device means that the business's profit and loss statement and balance sheet are locked as from the agreed point in time. The valuation is then based on the company's financial position and business status at the locked box date. This means in turn that the price of the company and of the shares is also locked. The purpose is to simplify the process and the negotiations by locking important, variable parameters.
The consequences are that the seller loses any possible upside if the company does better than expected in the period between the locked box date and the point in time when the transaction closes (which can be several months later). The buyer, on the other hand, loses if the company performs worse.
If a long time passes between the locked box date and the closing of the transaction, the price (the total price) may be corrected by application of a market interest rate.
The device presupposes that there will not be any leakage to the existing owners, e.g., that there won't be any dividends or any repayments of loans or of other supplemental contributions the shareholders may have made.
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A contractual arrangement in which owners in a company agree not to sell their shares. An owner thus becomes locked in for a specific period. This can relate, for example, to the first three years in a new investment where there has been agreement not to sell the shares and to work together to create value in the company. An owner then cannot rock the boat!
It is also common to have a lock up in conjunction with a listing on a securities exchange. Existing owners then cannot sell their shares during, for instance, the first half year that the company is listed on the exchange. The purpose is to protect the market price so that earlier owners do not all sell out at the same time, which would lead to a strong initial sell pressure and thus to a lower price for the shares.
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A lowball offer is a price bid that is significantly lower than the price at which the seller expects to sell an asset. There is, of course, no definite numerical level for a lowball bid; it depends on the situation. In some cases, it is 90%, while in other cases, it may have to be 50% of the expected price to be regarded as a lowball bid.
A lowball offer is often a tactical negotiating gambit to find the absolute lowest possible price for an asset, and there is space for the seller to negotiate the price up. However, in some cases, the purchaser may find the asset severely overvalued and, therefore, unwilling to raise the price.
A lowball offer has its risks. Negotiations will become more complex, and it will take a longer time to reach a common understanding and successful agreement.
If the offer is too low and outside the ZOPA, the seller may find it frivolous and be offended. When trust is broken, there is no basis for further negotiations, and the potential deal is off.
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The term "lowflation" means a very low level of inflation at the border of deflation (~0-1%). See also "Inflation" och "Deflation".
Times of lowflation are in-between situations with an uncertain future and high risk. Investors and consumers wait and see before investing or making large purchases. This in turn leads to a continued downturn in the economic situation, even lower inflation and increased risk of deflation.
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