Corporate finance, both an academic field with thorough research behind it and a very important practice for corporations around the globe, is more than it seems. Of course theory supports many of the crucial activities of corporate finance, but after all, the actual needs of corporations and the business environment shape the approach that will be followed in real life. First and foremost, we should acknowledge the fact that corporate finance decision making directly or indirectly affects every facet of modern corporate management and all business functions inside a corporation. This is the main reason why as a field, it carries the responsibility to increase – maximize the shareholder value. Increasing the value for the shareholders thereof entails the further evolution and growth of a corporation to an extent that it will be able at some point in time, to pay the excess cash generated as dividends to its shareholders.
As the primary objective of corporate finance is to serve the shareholders’ best interests, this cannot be done without a long-term perspective. It should be noted here, that managers who fail to understand this element and try to boost their cash flows and earnings temporarily by deliberately acting irresponsibly or even illegally are destined to lead their businesses to failure rather than growing them and making them profitable.
Fundamentally, the long-term perspective of corporate growth lies at the optimization of two main decisions. The first is the financing decision. The financing decision is responsible, for the company to access the right form of capital like equity, debt or hybrid instruments and at a reasonable cost. Financial solutions vary, and there is a big range of different forms and combinations of equity and debt capital. For instance, a company could obtain credit financing through bank loans, notes payable, or bond financing. Many times, the same the industry where a company operates, defines the most suitable form of financing. Also, the time horizon, the geography, the business environment and the overall economic climate, further determine what arrangements of capital will optimize the capital structure of the company. On the equity side of things, Equity financing is a more relaxed type of capital when it comes to cash flow obligations, but depending on the level of dilution (if any) can alter the returns realized by the shareholders. Equity capital could be public or private and combined with other elements of the company’s business strategy, could literally skyrocket a company’s growth potential. Apparently, all forms of capital are important and depending on several business-specific factors and the proper combination of them and timing can make the difference.
The second decision is the investment decision. A company raises capital in order deploy it in a profitable manner. That means that the funds raised should achieve a higher rate of return than the cost of capital or hurdle rate. Capital budgeting decisions outline a company’s strategic direction by mainly identifying those investments and projects that a firm must undertake. Those new investments must add positively to the overall value of the firm. Poor investment decisions could have serious financial and operational consequences that could continue for many years. To avoid this, financial theory has provided numerous financial models and techniques which safeguard the several estimations and forecasts that take place inside the capital budgeting process.
In today’s business environment, corporate finance covers many aspects of the financial management practice. The decisions of financing and investing, can become really specialized and technical and here is when professional corporate financiers and corporate finance advisers come into play. The involvement of these professional firms could range from minimal to a very sophisticated one that could unlock a company’s potential or indicate opportunities that enhance the existing business platform.
Typical transactions that are mainly driven by professional firms involve:
Public listings and multi-listings on stock exchanges, Pre-IPO capital solutions, bond issuances, raising seed capital for younger companies which are in a growth phase, development capital or expansion capital for larger ones, business sales or purchases of existing companies or assets, mergers and acquisitions, private placements, debt issuances, Leveraged buyouts and management buyouts, capital restructurings and older debt replacements, refinancings, capital raising or co-investing with private equity, venture capital, and other hedge funds, real estate or infrastructure funds, Financing new projects and specialized investment vehicles for joint ventures etc.
Financial evolution, has faced several positive developments through the years. The most significant characteristic is that the professional practice and the innovative spirit of corporate finance professionals combined with the theoretical evolution of corporate finance techniques, has created the foundations for a new age of financial solutions that adapt to the real needs of corporations. Moreover, corporate finance has as primary objective to maximize shareholders’ value but is even more than that. Its socioeconomic role is also very important. Healthy corporations that grow in a structured way and generate sales, produce new competitive products or services and employ more people, have a positive impact on society and economy.