Enhancing the value of a multinational company

A question asked privately:

What can a multinational company do to enhance its value?

Mathematically, the value of equity P is determined by earnings E and the “fair” (in investors’ collective opinion) price-earnings multiple P/E:

P = E * (P/E)

To increase its earnings, a multinational can do two things:

  1. Move its production to an area where prices of requisite factors of production (be it land or labor) are low, and
  2. Sell its products in locations where they can fetch the highest price (which in most cases means North America, Western Europe, and/or Japan).

As to enhancing the P/E, recall that the Gordon model:

P = CF / (kg)

can be modified:

P/E = (CF/E) / (kg)

to show that the P/E ratio is determined by earnings quality (CF/E), cost of capital k, and expected growth rate g.  The greatest enhancement potential usually lies in reducing k through achieving optimal debt load and raising capital only in major developed markets, where both interest rates and transaction costs tend to be lower than either in minor developed markets or emerging markets.  Sometimes, a multinational can also show unusually (and consistently) high g achieved by expanding into new geographic markets.

Leave a Reply

Your email address will not be published. Required fields are marked *