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CHAPTER 8 • IMPLEMENTING STRATEGIES: MARKETING, FINANCE/ACCOUNTING, R&D, AND MIS ISSUES 275

When using the approach, remember that firms normally suppress earnings in their finan-
cial statements to minimize taxes.
The third approach is called the price-earnings ratio method. To use this method,
divide the market price of the firm’s common stock by the annual earnings per share and
multiply this number by the firm’s average net income for the past five years.
The fourth method can be called the outstanding shares method. To use this
method, simply multiply the number of shares outstanding by the market price per
share and add a premium. The premium is simply a per-share dollar amount that a per-
son or firm is willing to pay to control (acquire) the other company. A pharmaceutical
company based in Tokyo, Astellas Pharma Inc., recently launched an unsolicited
takeover of biotechnology company CV Therapeutics Inc., based in Palo Alto,
California. Astellas offered $16 a share, or nearly $1 billion, which represented a 41
percent premium over CV’s closing stock price of $11.35 on the Nasdaq stock market.
The CEO of Astellas said, “We are disappointed that CV’s board of directors has
rejected outright what we believe is a very compelling all-cash proposal that would
deliver stockholders significant immediate value that we believe far exceeds what CV
can achieve as a stand-alone company.”
Business evaluations are becoming routine in many situations. Businesses have many
strategy-implementation reasons for determining their worth in addition to preparing to be
sold or to buy other companies. Employee plans, taxes, retirement packages, mergers,
acquisitions, expansion plans, banking relationships, death of a principal, divorce, partner-
ship agreements, and IRS audits are other reasons for a periodic valuation. It is just good
business to have a reasonable understanding of what your firm is worth. This knowledge
protects the interests of all parties involved
Table 8-14 provides the cash value analyses for three companies—Mattel,
Nordstrom, and Pfizer—for year-end 2008. Notice that there is significant variation
among the four methods used to determine cash value. For example, the worth of the
toy company Mattel ranged from $1,895 billion to $5,519 billion. Obviously, if you
were selling your company, you would seek the larger values, while if purchasing a
company you would seek the lower values. In practice, substantial negotiation takes
place in reaching a final compromise (or averaged) amount. Also recognize that if a
firm’s net income is negative, theoretically the approaches involving that figure would
result in a negative number, implying that the firm would pay you to acquire them. Of
course, you obtain all of the firm’s debt and liabilities in an acquisition, so theoretically
this would be possible.

Deciding Whether to Go Public
Going public means selling off a percentage of your company to others in order to raise
capital; consequently, it dilutes the owners’ control of the firm. Going public is not recom-
mended for companies with less than $10 million in sales because the initial costs can be
too high for the firm to generate sufficient cash flow to make going public worthwhile. One
dollar in four is the average total cost paid to lawyers, accountants, and underwriters when
an initial stock issuance is under $1 million; 1 dollar in 20 will go to cover these costs for
issuances over $20 million.
In addition to initial costs involved with a stock offering, there are costs and obliga-
tions associated with reporting and management in a publicly held firm. For firms with
more than $10 million in sales, going public can provide major advantages: It can allow the
firm to raise capital to develop new products, build plants, expand, grow, and market
products and services more effectively.

Research and Development (R&D) Issues

Research and development (R&D) personnel can play an integral part in strategy
implementation. These individuals are generally charged with developing new products
and improving old products in a way that will allow effective strategy implementation.