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2. The capital investment strategy - invest for a longer-term return

Investment could be in the form of infrastructure, a new railway or often it is in the form of research and development, the pharmaceutical sector being a prime example. There will be a long timescale but, for the likes of pharma, the rich cash flows are limited to the protected period of any patent. With today's proper concern for the environment, there may be considerable terminal cash spend on decommissioning (dismantlement is a word IFRS uses) and reinstatement.

3. The acquisition strategy - investing cash, or better still little or no cash but rather issuing shares, to acquire businesses which may be a bargain or which you can turn around

Undervalued companies do come onto the market for several reasons: owners wishing to, or having to, raise funds by disposing of them - often at depressed values - or the present owners not understanding the company's value.

Acquisitions may not be undervalued and in fact can be overvalued, but you can still make money if you really are a better operator. There are sales opportunities due to your brand, marketing, distribution skills or costs savings to be made through synergies.

4. Acquisition 'run-out' strategy

This is an investment strategy, but with a definite time limit. An example is the purchasing of an old oil refinery from an oil major, where the activity, scale of operation and geographical location does not now fit in with the oil major's strategies. The book amount or value of the refinery will be very low or even nil. The oil major will be happy to get what cash it can for the facility, hopefully relieving itself of decommissioning and pension liabilities as well.

As long as the purchaser does not overpay and can operate the plant efficiently, it may squeeze out more cash than the oil major could.

The model (Table 8.16) clearly shows no new investment in fixed assets, with sales declining but costs declining more quickly, thus margins and positive operating cash flows increase and permit increased dividends to be paid.

TABLE 8.16 Acquisition -'run-out' strategy

Acquisition -'run-out' strategy

Trading strategy - acquire and dispose of companies

This was maybe easier in the past, as there were many more smaller entities to acquire, shake up and sell on. Today, it is more likely that 'trading companies' means acquire and break up. This can work where a diverse group lacks focus (ie where one division drags others down), for example by consuming cash which could be more profitably invested elsewhere.

6. The extractive strategy

This strategy depends on gearing up an existing mundane-type business and extracting the borrowing by way of dividend and then more when selling into a hopefully appreciative market.

This does depend on having financiers to fund you. After extracting the dividend the company is highly geared and will have to generate sufficient cash to pay the interest on the loan as well as paying down the loan (Table 8.17). This may be possible with the superior management skills that the acquirers claim they bring to the company.

TABLE 8.17 Money-extracting strategy

Money-extracting strategy

7. Invest and sell on a promise strategy - beauty is in the eye of the beholder (or the deceived or delusional!)

There will be a short-term time horizon or it may well be long term if the money you make is invested in other tangible investments. Examples abound, for example the e-businesses - great new ideas.

Money is to be made by selling out when on a high (rather obvious), but the point is that such businesses can wither within months - what is Linkedln, Twitter or Facebook without its subscribers? It is highly unlikely that all will desert at one time - but who knows?


- Cash is the vital element.

- You could centre financial strategy on cash, and that is why this chapter has the most cross-references to other aspects of finance and financial reporting.

- Cash is vital, but you also have to understand business from an asset/liability perspective, an accrued profit or loss position and future position forecasts and budgets.

Revision and learning pointers

A checklist of essential understanding - do you know:

- where cash appears in financial statements;

- what working capital is and how its components interact;

- statements of cash flows?

Looking at your own statements of cash flows or ones to which you can relate, do the cash flows tie in with your understanding of the known strategies?

Does your company have a specific cash-flow-focused strategy and is it being followed?

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