HOW FIRSTGROUP’S NEWLY APPOINTED CHAIRMAN COULD MAXIMIZE SHAREHOLDERS VALUE

Aviva’s chairman John McFarlane was chosen to be the new firstgroup’s chairman. He replaced Martin Gilbert who has previously led the company for almost 20 years. The appointment of Aviva chairman John McFarlane ended a six-month search for a replacement for Martin Gilbert. And McFarlane became the group’s chairman since 1 January 2014

 

John Mc Farlane

McFarlane arrived at the company in a state of turmoil where in 2013 firstgroup’s experienced a significant downfall on profit and their share prices plummeted which caused the company to plead its shareholders for £615m in an effort to reduce its debts and avoid a credit rating downgrade.

Shareholders began to lose trust on the company as dividend payments were suspended and dismissed the plan from shareholders to sell greyhound in order to be able to pay the debt. This is now an essential job for McFarlane to restore shareholder’s trust and to deliver sustainable long-term value for shareholders.

There are some significant actions that must be taken by McFarlane to maximizing shareholders’ value :

1.      Carry only assets that maximize value.

First, value-oriented companies regularly monitor whether there are buyers willing to pay a meaningful premium over the estimated cash flow value to the company for its business units, brands, and other detachable assets. Such an analysis is clearly a political minefield for businesses that are performing relatively well against projections or competitors but are clearly more valuable in the hands of others. Yet failure to exploit such opportunities can seriously compromise shareholder value.

On this occasion Mcfarlane could sell firstgroup’s assets in United States, Greyhound Bus company. Even though greyhound’s profit has steadily climbed, with this action firstgroup would be able to recoup part or even all of their debt and in addition could focus on profitability by reducing capital spending and inventory levels.

2.      Return cash to shareholders when there are no credible value-creating opportunities

Value-conscious companies with large amounts of excess cash and only limited value-creating investment opportunities return the money to shareholders through dividends and share buybacks. Not only does this give shareholders a chance to earn better returns elsewhere, but it also reduces the risk that management will use the excess cash to make value-destroying investments—in particular, ill-advised, overpriced acquisitions.to invest in the business.

Firstgroup are noticeably holding the dividends because of the need for cash to pay for their debts, which definitely does not send the correct signals for the sustainability of the company. Actions that needs to be done by McFarlane in the future could be to sell one of their assets and deliver the dividends that were suspend to the shareholders. This is crucial since holding the dividends would only spark more turmoil and controversy within the company and also there are no credible value-creating opportunities at the moment since company are now are focusing on paying their debt load. So it is mandatory for McFarlane to return the cash to shareholder.

3.      Provide investors with value-relevant information.

Better disclosure not only offers an antidote to short-term earnings obsession but also serves to lessen investor uncertainty and so potentially reduce the cost of capital and increase the share price. McFarlane has to provide corporate performance statements to shareholder separating out cash flows and accruals, providing a historical baseline for estimating a company’s cash flow prospects and enabling analysts to evaluate how reasonable accrual estimates are and then classify accruals with long cash-conversion cycles into medium and high levels of uncertainty. This also provides a range and the most likely estimate for each accrual rather than traditional single-point estimates that ignore the wide variability of possible outcome and finally details assumptions and risks for each line item while presenting key performance indicators that drive the company’s value. In reality executives in well-managed companies already use the type of information contained in a corporate performance statement.