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2 - THE VALUE OF THE NEW BUSINESSES FROM THE DIGITAL ECONOMY CASE STUDY FROM E-COMMERCE (Autosaved).docx

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Abstract. This paper aims to challenge the
conventional wisdom in economics by
studying the development of unicorn
compani...
1. Introduction
This article is a minor extension of the authors research [1] on the enterprise value and its
determinants...
cite digital innovation, the search for growth and sector convergence as the most prominent
topics on their agenda (Rennie...
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  1. 1. Abstract. This paper aims to challenge the conventional wisdom in economics by studying the development of unicorn companies as the most successful and fastest-growing start-ups. Romania is now on the map of the International Unicorn Club, with two young Unicorns in technology since 2018. The purpose of the paper is to analyze mergers and acquisitions and trying to answer the research question: What is the value of control in mergers and acquisitions? the research design and methodology. The work to be discussed in the paper is the importance of choosing one valuable objective of the company, in the context of the theory of the value maximization as the single important objective of a company. a concise summary of the findings. between 150 and 250 words. Keywords: value, revenue, target, e- commerce, control, M&A, EBITDA. THE VALUE OF THE NEW BUSINESSES FROM THE DIGITAL ECONOMY: CASE STUDY FROM E- COMMERCE Mădălina Viorica MANU The Bucharest University of Economic Studies, Council for Doctoral Studies (CSUD), Bucharest, Tache Ionescu Street, no.11, floor 1, room 8102, Romania E-mail: mvmadalina@yahoo.com Vlad BRĂTĂŞANU The Bucharest University of Economic Studies, Council for Doctoral Studies (CSUD), Bucharest, Tache Ionescu Street, no.11, floor 1, room 8102, Romania E-mail: vlad.bratasanu@gmail.com Ilie VASILE The Bucharest University of Economic Studies, Council for Doctoral Studies (CSUD), Bucharest, Tache Ionescu Street, no.11, floor 1, room 8102 E-mail: vasile.ilie@fin.ase.ro Management & Marketing Challenges for the Knowledge Society (20xx) Vol. x, No. x, pp.xxxx
  2. 2. 1. Introduction This article is a minor extension of the authors research [1] on the enterprise value and its determinants, in order to understand the ways to increase it or maximize the company value, while considering the theory of value maximization as the single important objective of a company. This paper starts from professor Jensen (2002) theory that it is impossible to maximize in more than one dimension according to, the criterion for deciding when implementing organizational change should be the increase in the long-term market value of the firm, i.e. ‘the sum of the values of all financial claims on the firm, including equity, debt, preferred stock, and warrants’. (Jensen 2002) In the actual economy, Romanian companies fight hard to find their way to success (or survival), in the absence of one valuable objective of their entire activity, while other start- ups or established firms manage to evolve rapidly, independently or within an international large and successful group. In 2009, eMAG was a small e-commerce company focused on IT, with a monthly revenue of less than 2 million euros, but with a dream to cross borders with technology and to be a platform where people could buy anything. The company mission was to build a service that the customers would love (Naspers 2019). The largest retailer online in Romania [2] now is part of the Naspers group, since October 2012 and became profitable in the second half of the 2018 financial year and a major driver of the revenue improvement; eMAG delivered a solid performance, with gross merchandise value (GMV) growth with both the retail and marketplace businesses, improved profitability year on year, boosted by increased gross profit margins and cost control (Naspers 2018). In 2018, the Romanian e- commerce company has become the 2nd Unicorn in Romania, after UiPath [3]. The first Romanian unicorn The objective of UiPath, , is to enhance customer experience. Created in 2015 on the foundation of the 10-year old Romanian software outsourcing company [4], UiPath began orienting resources into training and orchestrating software robots back in 2012, and one year later the company initiated its first RPA journeys, with Sutherland and Dell. (UiPath 2019) The purpose of the paper is to analyze the mergers and acquisitions, in order to challenge the conventional wisdom in economics by studying the development of unicorn [5] companies as the most successful and fastest-growing start-ups (Butuzova 2018). UiPath has raised more than $400 million from tier one investors: Series A in April 2017 with 200 customers at a valuation of $140 million, then another $153 million in March 2018 at a valuation of $1.1 billion. Closed in November 2018, UiPath’s Series C financing totals $265 million at a valuation of $3 billion; it was led by CapitalG and Sequoia Capital. (UiPath 2019) 2. Problem statement This paper is about companies that We argue that Romanian companies find success when their are facing difficulties in the abs Digital transformation remains top of the agenda as companies use M&A to add innovative capabilities, improve customer engagement and stays relevant in a changing market; renewables and network assets remain the most attractive acquisition targets and digitization can influence transaction strategies in developed countries. 48% of the executives surveyed
  3. 3. cite digital innovation, the search for growth and sector convergence as the most prominent topics on their agenda (Rennie 2017). 3. Literature review Wruck, Jensen, and Barry (1991) give example of a small non-profit firm that almost destroyed itself while trying to maximize over a dozen dimensions at the same time; Cools and van Praag (2000) are the first to formally test the proposition that multiple objectives handicap firms; in a test using 80 Dutch firms in the 1993-1997 period, the authors conclude: "Our findings show the importance of setting one single target for value creation" (Jensen 2002). Throughout our 100-year history, we have grown by investing in, acquiring and building leading companies with sustainable competitive advantages. We continue to back new business models to fuel our growth and increasingly, we look for opportunities to address big societal needs in markets where we see the greatest growth potential. These include all major markets in the world. Where we see a company with promise, we move quickly to expand and scale it. (Naspers 2019) The shift to a “knowledge society” and “the rise of knowledge work” previewed by Peter Drucker are now facts. Discontinuities, such as the knowledge technologies, the changes in the world's economy, a society of organizations and the knowledge society changed the structure of the economy (Drucker 1969). Advances in technology have improved access to real-time market information and business analytics, improving communication and the integrated management of their operations; improved telecommunications, information management software and personal computing decreased significantly firm’ costs, enabling the creation of efficient business models, while skills and talent remain a critical resource in the digital economy. Although digital services can substantially expand the reach of businesses, they require massive investments in infrastructure (OECD 2015). The next evolutionary step after knowledge economy is the network economy, where the knowledge is shared across various networks, to gain economic of scale in a wider scale. “The gradual evolution of network economy would create a well interconnected economic order, which would then begin to concentrate on the passion of individuals, gradually leading to a Passion based economy.” (Cluett 2016) “Disruptive innovation” describes how new entrants target the bottom of a market and then relentlessly move up, ousting established providers; they “begin by successfully targeting those overlooked segments, gaining a foothold by delivering more suitable functionality— frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously” (Christensen 2018). Companies such as Uber or Amazon disrupted entire industries. The technology giants (such as Apple, Google and Facebook) have achieved world domination (Picture 1) by investing heavily in developing new products and services leading to an explosion in innovation and faster growth and disrupting established companies. The large technology companies benefit from globalization, accessing new markets and any promising small company that could compete is quickly absorbed up by its larger rival. For example, the top 10 companies in the world is now dominated by technology companies, as in picture 1. (Johnston 2018)
  4. 4. Picture 1. The global rise of the ITC companies in 2018 Source: authors representation Innovations that harness new technologies or business models or exploit old technologies in new ways are emerging and the most disruptive enterprises do not gradually displace the incumbents, but reshape entire industries, swiftly obliterating whatever stands in their way. High-tech and innovative unicorns are drivers of development and their high capitalization is indeed justified. The potential and growth opportunities of such companies are the main drivers of their overestimated values. Investors are gazing at startups, which have not been incorporated yet but still have a big potential for growth (Butuzova 2018). The number of Unicorns is increasing. The Asian unicorn startups [6] wait for global business opportunities to turn themselves into a unicorn’s den (Picture 2). Picture 2. The International Unicorn Club as in September 2017 Source: (Johnston 2018) 0 100 200 300 400 500 600 700 800 900 890 768 680 592 545 526 496 488 380 375 43 21 44 25 15 21 64 20 133 148 Value (US$ bn.) company age
  5. 5. In picture 2, most of the 222 companies fall under E-commerce sector (17%), followed by Internet Software and Services (14%) and FinTech (11%). A Unicorn Club is a group of billion-dollar startups that are highly successful business ventures with a revolutionary trade brand tagged to their business operations. Most of such businesses exist in the USA, especially in San Francisco area. However, mighty Unicorn startups exist outside the USA too. The main business models of the Asian unicorn startups are: E-Commerce, Audience (website monetization through floating ads and leads like Google), SaaS (user paid cloud-based software services) and Enterprise (companies that sell and provide services for larger scale software). (GreenHouse 2018) In 2005, eBay bought a small, marginally profitable communications company called Skype for $3.1 billion, but Skype was worth only $1.7 billion and the company had to take a $1.4 billion charge against profits to account for the difference, and its stock plummeted. In November 2010, eBay sold 70% of Skype to a group of investors (including the original founders) for $1.9 billion, which meant that Skype as a whole was now worth about $2.7 billion. Then, in 2011, Microsoft bought Skype for a whopping $8.5 billion, even though Skype at the time was still losing money. Why was eBay so wrong in its initial estimates of Skype’s value? (Knight 2016) One of the most critical elements in M&A is the valuation of companies as the success of an M&A is closely related to determining the fair value of the companies. The Discounted Cash Flow Method in M&A determines a company’s current value according to its estimated future cash flows and is often used in the valuation of companies.Invalid source specified. Communication with stakeholders does not support the processes of knowledge management and innovation processes. Not treating communication with stakeholders as a basis for creating enterprise value suggests depreciation of communication in managing surveyed entities, especially that the basis of their functioning (external funding) is communication with stakeholders, e.g. clients or co- developers of innovative basic processes. Improving/modernizing methods/tools of communication with stakeholders is usually a cost for the surveyed enterprises than the source of development, e.g. in the long run (Wereda and WOŹNIAK 2018). In picture 4, Picture 4. Comparison of the evolution of the M&A number of transactions and value in Romania, between 2012-2017
  6. 6. Source: (CMS n.d.) 3. Method According to professor (Damodaran), the value of control should be inversely proportional to the perceived quality of that management and its capacity to maximize firm value, so the value of control will be much greater for a poorly managed firm that operates at below optimum capacity than it is for a well-managed firm. Table 1 Acquisition motive Value target firm as Control (of poorly managed firms) Value of Target Firm run optimally (industry averages) Value of Control = Value of firm, with restructuring - Value of firm, without restructuring Manager’s Interest Value of Target Firm: No additional premium Source: (Damodaran) The 100% stacked column (figure 1) Figure 2. A Pareto chart of the distribution of the stake 96% 97% 97% 98% 98% 99% 99% 100% 100% 2012 2013 2014 2015 2016 2017 The M&A Market in Romania no. of transactions value (bn. $)
  7. 7. Source: author's representation The pareto chart in figure 2 shows the importance of obtaining the control according to the distribution of the data by the stake obtained. In a local ranking of the companies (by address) dominated by retail companies (and the Romanian economy) and auto, in table 1, the only e-commerce company is the one we study. Table 2. Local top firms by turnover Name turnover (mil. Lei) turnover (mil. euro) activity AUCHAN ROMÂNIA SA 5200,00 1200,000 retail MEGA IMAGE SRL 4900,00 1100,000 retail DANTE INTERNATIONAL SA (known as EMAG) 3300,00 752,300 e-commerce RENAULT COMMERCIAL ROUMANIE SRL 3100,00 697,300 auto FARMEXPERT D.C.I. SRL 3000,00 671,500 pharma ELECTROCENTRALE BUCURESTI SA 1700,00 395,000 energy IBM ROMANIA SRL 906,7 206,100 ITC ROUMASPORT SRL 760,6 172,900 retail BRICOSTORE ROMANIA SA 696,1 158,200 DIY SIEMENS SRL 510,6 116,000 equipments C.N."IMPRIMERIA NATIONALA" SA 434 98,600 Printing JYSK ROMÂNIA SRL 415,2 94,400 retail AUTO ITALIA IMPEX S.R.L. 372,4 84,600 auto TRUST MOTORS SRL 368,8 83,800 auto RODBUN GRUP SRL 334 75,900 agriculture Source: (TopFirme 2018) Table 3. Stand Alone Valuation: Digital - Status Quo Year/ company 1997 (for Digital) 2017/Naspers 2018/Naspers (incl.
  8. 8. emag) EBIT (million $) 391.38 pre-tax operating margin (%) 3 revenues ($ million) 13,046 3105 3344 after-tax return on capital (%) 8.51 beta 1.15 1.63 after-tax cost of borrowing (%) 5 debt ratio (%) 10 Cost of Equity (%) = 6% + 1.15 (5.5%) Cost of Capital (%)= 12.33% (.9) + 5% (.1) 12.33 11.59 Source: authors calculations after (Damodaran n.d.), (Naspers 2018) 4. Results Despite the fact the company was not reporting profit,  The main body of the text should be in Times New Roman, 12 point, single spaced and fully justified. Please use normal capitalization within the text and do not use bold face for emphasis. Italics are acceptable. All headings should use initial capitals only, excepting for use of Acronyms.  You can include bulleted or numbered lists.  Figures and tables should be placed as close to their reference point in the text as possible. All figures and tables must have titles and must be referenced from within the text. Avoid colour diagrams as the journal will be printed in black and white.  A table example is presented in Table 1. The main body of the table should be in Times New Roman, 11 point, single spaced. (12 pt.) Table 1(Times New Roman, 11 pt, Italic, Single Spaced, Aligned Right) Example of table (Times New Roman, 11 pt, Bold, Single Spaced, Center) Title column 1 Title column 2 Main body Main body Main body Main body  An image example is presented in Figure 1. Images must be inserted as picture files (.gif, .jpg, .bmp, .pct, .png, .psd). You may be asked to supply the pictures as separate files. (12 pt.) Figure 1. Example of figure (Times New Roman, 11 pt., Bold, Single Spaced, Center)  Please use endnotes (not footnotes) only if necessary. Identify them in the text by consecutive numbers, in square brackets.
  9. 9.  between 5,000 and 10,000 words in length, including abstract, figures, references and appendices. Papers should be submitted as a .doc or .rtf attachment by email to office@managementmarketing.ro 5. References  References should follow the Harvard referencing style, which means that primary references in the text should be in the format (Bratianu, 2009; Bratianu and Orzea, 2011; Lefter et. all, 2011) and should then be listed at the end of the paper Antonescu, Mariana. "Are Business Leaders Prepared to Handle the Upcoming Revolution in Business Artificial Intelligence?" Quality-Access to Success, 2018: 15. Butuzova, A.S. "Capitalization of International Unicorn Companies: To What Extent Is Ii Reasonable?" Digest Finance 23, no. 1 (2018): 63-67. Christensen, Clayton cited by LANG, D and RUMSEY, C. "Business Disruption is here to Stay – What Should Leaders Do?" Quality-Access to Success, 2018: 35. Cluett, John. "Research proposal, Network Analysis Can Apply Divination, A Changing Paradigm." Edited by file:///D:/Downloads/NetworkAnalysisCanApplyDivinationAChangingParadigmMay 2016.pdf. 05 2016. file:///D:/Downloads/NetworkAnalysisCanApplyDivinationAChangingParadigmMay 2016.pdf (accessed 01 2019). CMS. "2017." n.d. https://cms.law/en/ROU/ (accessed 2019). Damodaran, Aswath. "Acquisition Valuation." n.d. http://people.stern.nyu.edu/adamodar/pdfiles/AcqValn.pdf (accessed 01 2019). Drucker, Peter F. The Age of Discontinuity. 1969. https://www.elsevier.com/books/the-age- of-discontinuity/drucker/978-0-434-90395-5 (accessed 12 2018). GreenHouse. The Unicorn Club outside the US – Emerging Unicorn Dens that Could Rule the Business World. 2018. https://greenhouse.id/unicorn-startups-business-world/ (accessed 01 2019). Jensen, Michael C. "Value Maximization, Stakeholder Theory and the Corporate Objective Function." Business Ethics Quarterly, 2002: pp. 235-256. Johnston, Stephen. Largest companies 2008 vs. 2018, a lot has changed. 2018. https://milfordasset.com/insights/largest-companies-2008-vs-2018-lot-changed (accessed 12 2018). Knight, Joe. "Valuation: The EBITDA Multiple Method." HBR Subscriber Exclusive, 2016. Naspers. 2018. https://www.naspers.com/about#nasperscompanies (accessed 01 2019). Naspers. Condensed consolidated interim report for the six months ended 30 September 2018. Cape Town, 2018. —. Strategy. 2019. https://www.naspers.com/about-us/strategy (accessed 02 2019). —. What I wish I’d known then. 2019. https://www.naspers.com/home/news/what-i-wish-i-d- known- then?fbclid=IwAR37PesHEpEMM7cGj7Ck2JakdfDa_rWYBMhpYvbPXkf1rV1IsIO NRrSTtGY (accessed 02 2019). OECD. "Addressing the Tax Challenges of the Digital Economy, Action 1 - 2015 Final Report." 2015. https://read.oecd-ilibrary.org/taxation/addressing-the-tax-challenges- of-the-digital-economy-action-1-2015-final-report_9789264241046-en#page70 (accessed 12 2018).
  10. 10. Rennie, Matt. M&A appetite rebounds with renewed economic confidence. EY, 05 2017. TopFirme. Top firme din Sector 6, Bucuresti dupa cifra de afaceri. 2018. https://www.topfirme.com/judet/bucuresti/localitate/sector%206/cifra-de-afaceri/ (accessed 12 2018). UiPath. Our Investors. 2019. https://www.uipath.com/company/investors (accessed 02 2019). —. We are UiPath. 2018. https://www.uipath.com/company/about- us?ads_adid=67082801428&ads_cmpid=1535965809&ads_creative=295539946928 &ads_matchtype=b&ads_network=g&ads_targetid=kwd- 379631421296&ttv=2&utm_campaign=UP189BRN&utm_content=brandbidMS&ut m_medium=ppc&utm_source=adwords&ut (accessed 01 2019). Wereda, Wioletta, and Jacek WOŹNIAK. "The Way to Organizational Excellence of Innovative Enterprises Through Communication with Stakeholders." Strategica - Challenging the Status Quo in Management and Economics. Bucharest: Tritonic Publishing House, 2018. 917. 1 etimm (2018) Current issue. Journal of Emerging Trends in Marketing and Management. http://www.etimm.ase.ro/?p=31 2 eMAG, founded in 2001, has now extended in Bulgaria and Poland, too. 3 4 DeskOver was started by Daniel Dines and Marius Tirca in Bucharest. 5 In the world of business corporations and conglomerates, the term Unicorn refers to those startup companies that have a total valuation of more than a billion dollars. 6 once called “dragons”

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