If the observed market value is less than the intrinsic value, the capital markets might not understand the company’s strategy. Alternatively, investors might lack confidence in the ability of the management team to execute the strategy successfully. Dealing effectively with these communication and management capability issues should result in the creation of wealth for existing shareholders.KBA founder Denis Kilroy was able to put his theory into action when he became a director of Solagran. Numerous PR events, media briefings and investor roadshows saw the company's shareprice increase however it then fell to below what was considered to be the companies intrinsic value
It all went horribly wrong, in an effort to maintain market demand and shareholder equity the directors engaged in share buying by raising funds through a private equity, in this case the infamous OPES. Once OPES went belly up the collateral was called in and Kilroy & Co were left with virtually nothing.
Betting on the market has always been a mug's game, one only has to look back to see other parallels, as John Keynes once famously stated
Markets can remain irrational a lot longer than you and I can remain solvent.Clearly company management has no role to play in market valuations and accordingly managers should not be guided by shareholders opinions. Warren Buffett is quite clear on this, he never interferes with management
"If they need my help to manage the enterprise, we're probably both in trouble."The GFC has seen the collapse of many models and the model promoted by KBA was one of them.
