Letter number 108 of December 2017

  • NEW

News : The new 2017 edition of the Vernimmen

We are pleased to announce that the fifth edition of The Vernimmen is now available from all good bookstores and on-line retailers.


With thousands of copies of the latest edition sold, Corporate Finance, Theory and Practice is one of the most popular financial textbook, thanks to its four unique features:


A balanced blend of theory and practice: authors hold academic positions at top ranking business schools and are also investment banker, private equity investor or sit on the boards of listed and unlisted companies.


A presentation of concepts that explain situations, followed by a discussion of techniques in a direct and succinct style.


Content enriched by the www.vernimmen.com website, which is one of the leading finance teaching sites worldwide.


Free monthly updates on finance through The Vernimmen.com Newsletters, with over 70,000 subscribers.


For this edition a new chapter was created. It is devoted to managing operational real estate and should help you to answer the frequently asked question: Should the company own or rent its operational building? This not of small importance and will be particularly helpful as companies following IFRS or US GAAP will soon be required to account for operational leases in the same way as financial leases are accounted for. The summary of this new chapter is available here.


We have also done a major updating job to create a tool that is accurate, reliable, comprehensive and relevant.  We have included the very latest accounting standards, most statistics and graphs are from end 2016, the latest innovations in financial practice are discussed and the latest financial theories are presented.


To make sure that you get the most out of your Vernimmen, each chapter ends with a summary, a series of problems and questions (832) (solutions provided). For those interested in exploring the topics discussed in greater depth, there is an end-of-chapter bibliography and suggestions for further reading, covering fundamental research papers, articles in the press and published books. A large number of graphics and tables (over 100) have been included in both the appendix and in the body of the text which can be used for comparative analyses.  There are over 3,500 entries in the index. 


To have a look on the contents of the 2017 edition of the Vernimmen click here and to buy the 2017 edition of The Vernimmen, click here


What they said about 2017 edition of The Vernimmen:


“I discovered finance with ‘The Vernimmen’ about 30 years ago. Since then the different versions have accompanied me throughout my career and throughout the world. Not only was the alignment of the successive editions looking good in my different offices but I must confess I have opened and cherished each of them. Whether an investment banker, a CFO in a universal bank or more simply a world banker…”

Bertrand Badré, Former Managing Director and CFO of the World Bank


“What sets the Vernimmen apart from other textbooks is its integration of practice and current affairs in a rigorous theoretical framework. Recipes and pontification are replaced by a scientific approach. And, thanks to the Newsletter, this is done practically in real time!”

Christophe Evers, Professor of Finance at the Solvay Brussels School, Executive Director of Texaf


“I always use the paper edition of the Vernimmen, which is clear and comprehensive, as a reference tool. The site is well designed, always up-to-date and also extremely useful for explaining financial concepts simply and intelligently to non-financial colleagues.”

Laurence Debroux, Member of the Executive Board / CFO of Heineken


 “Corporate Finance is a very useful reference book for students and practitioners, it will help both to understand the principles of the financial markets and their practical application in today's complex environment. The book's approach is both logical and sequential and presents some interesting cases that make study easier and more stimulating.”

Gabriele Galateri, Chairman of Generali, former chairman of Telecom Italia and Mediobanca, former CEO of FIAT


"Vernimmen provided people like me who were new to the world corporate finance a perfect mix of theory and practical examples to help them develop long lasting financial concepts. The book is a written manual for finance, explaining the fundamentals in a very thought provoking way, making it intriguing to delve into the complexities. This book is a must have in your personal library as you will refer back to it even after years."

Sharat Gangwani, Business Response       Analyst at Citadel LLC


“The “Vernimmen” is the perfect reference corporate finance book. I used it in my classes, looked back into it during my internships, use it again now to deep dive into corporate finance for my thesis and know I will keep interacting with it later in my career.”

André Geha, Graduate Student at MIT Sloan


“Vernimmen's Corporate Finance is an outstanding clear and complete manual, a wonderful merger of practice and theory. Its coverage of the market aspects of corporate finance distinguishes its content, but its treatment of all the material makes it essential reading for the student, financier or industrialist.”

Howard Jones, Senior Research Fellow in Finance at Saïd Business School, University of Oxford


“The Vernimmen: proof that an outstanding teaching approach and genuine accessibility are fully compatible with comprehensive and sharp analyses.”

Christian Mulliez, Executive Vice-President and Chief Financial Officer L’Oréal


“The book itself covers all the important techniques that a financial manager must have in his repertoire of tools. The exposition is clear and concise and, most importantly, relies on commonsense reasoning throughout. This is not a book with obscure formulae, yet is still rigorous and at the same time a model of clarity.”

Richard Roll, Joel Fried Professor of Applied Finance at UCLA Anderson

News : ICOs, the future of listing?

Everyone’s talking about ICOs but you can’t find this term in the dictionary. That’s no surprise as you should be looking in a glossary, like the Vernimmen glossary for example. An ICO or Initial Coin Offering is firstly a fundraising for a start-up, often a technology start-up and linked to blockchain, but not always. The name is a calque on IPO (Initial Public Offering) for marketing purposes[1] because in reality it’s not really like an IPO at all.

The general idea at the outset is to use blockchain[2] technology to raise funds. Start-ups seeking to raise capital will thus provide in exchange, not shares, but tokens issued using blockchain technology that it will be possible to exchange on specialised platforms after their issue. Up to here, it’s relatively simple since there are people who are thinking about exchanging financial securities using blockchain technology.

To date, over $2.4bn has been raised through ICOs (of which only $92m in 2016 and the rest in 2017).

The largest raisings were:







Decentralised data storage




Blockchain technology for the financial industry


EOS Stage 1


Blockchain infrastructure for decentralised applications




Crypto-currencies conversion protocol




New crypto-currency for the development of an online services ecosystem




Blockchain infrastructure for decentralised applications




Crypto-currency payment application




Smartphone games store based on crypto-currencies




Network super calculator




Architecture blockchain


Tokens can generally be subscribed, with payment not in euros or dollars, but by using established cryptocurrencies (bitcoin, ether, etc.); some tokens are quoted in dollars, others in one of the cryptocurrencies. This adds to the complexity in understanding ICOs but is in reality a mere flourish (which is absolutely not necessary) as in the end, those launching projects will be looking for standard currencies to cover their expenses.

Things start getting more complicated when we try to understand what tokens entitle their holders to.

There are in fact several categories of tokens depending on their characteristics, and this is where the problem comes in. So, you get:

  • utility tokens (the most widespread today) which give access to goods or services to be developed by the company which is raising the funds. This is similar to crowdfunding, as offered by Kickstarter for example;
  • equity tokens which resemble financial securities in that they give access to all or part of the company’s revenues and/or dividends;
  • community tokens (historically, the tokens that appeared first) which provide the possibility to their holders to participate in the governance of the project financed by the company, and finally;
  • asset tokens which represent rights in the underlying assets.

One issue is to consider if and how the practical characteristics of these tokens fall within the scope of existing regulation. This can be seen in the different positions taken by certain regulators who consider that some tokens (and not all) could be seen as similar to financial securities, or to derivatives, or to a payment service or finally to an investment fund. Now we know that in Europe at least, each of these activities is regulated and requires a status if it is to be carried out. 

It should be noted that this issue of qualification is essential for the accounting and tax treatment of revenues on amounts raised, both in terms of VAT and corporation tax (fundraising could be classified as sales or financing, which is not the same thing!).

It gets more complex when the functioning of these tokens is linked to smart contracts, i.e. when the execution of certain functionalities is automated as a result of a protocol on a cryptocurrency, mostly ether. 

A company that wishes to carry out an ICO presents the characteristics of its tokens in a document called a White Paper (the equivalent of a prospectus / information document for an IPO[3]). Historically, ICOs were a financing method limited to projects related to blockchain, either on one of the cryptocurrency protocols or on an application based on one of its protocols. The blockchain community was then requested to technically validate the project through a White Paper, whose sole purpose was to present the project and its technical specificities. Once again, the lack of standardisation gives the tokens issuer a lot of flexibility. Some White Papers are less than 10 pages long and are rather vague about the use of the funds, the business plan (generally there isn’t one), the rights offered by tokens, but also the origin of the funds or the identification of investors. Others are more comprehensive and bear a strong resemblance to real prospectuses.  

Issuers of tokens generally highlight the fact that the number of tokens issued is defined in advance and that no more can be issued, which creates a scarcity effect and possible speculation that pushes up the price of the token. To us, this seems more worrying than attractive. Highlighting, at the time of issue, the fact that there is a disconnection between the value of the tokens and an economic reality, is a dubious practice. Moreover, if the project is a success, this limit seems to us to be anti-economic, as a new fundraising could be beneficial, both for the company and for tokenholders. 

One of the difficulties of ICOs lies in the valuation of the token. Depending on the characteristics thereof, its value depends on the use that is made of it, or of the revenues resulting from this use. For example, some tokens can entitle their holders to 1 gram of gold from a mining project or 1 tonne of sand from a quarry, but these examples are few and far between. On this point, White Papers are generally silent and do not enable investors to form an idea on the business model.

A significant proportion of projects launching ICOs originate in Russia (15% of funds raised, in second place behind the USA at 21%), which is not very reassuring given that Russia is not known for its strict governance. Additionally, over and above technological projects (market place, cryptocurrencies, etc.) which account for the majority of ICOs, start-ups that offer their tokens are in industries that are, how shall we put this, of a rather “questionable nature” (gambling, pornography).

It seems that ICOs are causing ideas on blockchains to move forward rapidly, and this for two reasons:

- practically half of start-ups concerned offer a special use of this technology (new cryptocurrency) or contribute to its ecosystem (credit card in cryptocurrency, exchange platform, wallet, etc.);

- the use of blockchain technology for financing companies is interesting[4]: it’s certainly a technology on which market places are going to rely (or which may replace market places!)

Although the idea is interesting, you’ll have noticed that at this stage we’re a bit dubious about the huge popularity of ICOs. We think that a certain number of standards need to be introduced in this area to avoid fraud because today, some ICOs are just cases of out-and-out theft. The US has already started to do so and the fact that other regulators are looking into this issue is excellent news. The Chinese have taken a more radical approach by simply prohibiting ICOs (but this may be because they have national ambitions to develop their own technology and/or they are afraid that it might become too popular among a population that is keen on gambling and speculation).

We note that listing is undoubtedly not suitable for young projects whose valuation is uncertain. Few companies carry out an IPO before they have been in existence for 3 years and have a tried and tested business model. If valuing the shares of a young start-up is practically impossible, valuing the tokens is equally so. Speculation on this type of product thus bears a closer resemblance to gambling than financing.

Here, complexity often plays the role of a smokescreen to conceal a project that is incomplete (or even completely crazy) or rights for buyers of tokens that are not clearly defined. We invite you to browse through a few White Papers so as to form your own idea. Here are a few useful websites:







Statistics : Value creation in Europe

This is one of our favourite graph in the Vernimmen that illustrates how strongly stock market indices are linked to value creation, at the global level.

The difference between the two top lines, ROCE –WACC, is the bottom line of the graph. It is computed for the 600 largest listed European companies, except financial groups. It goes up and down. Bars are the yearly level of the Eurostoxx600 Index which traces the fluctuations in the share price of the largest European listed groups.

It is striking to see how closely correlated the bottom line and the bars are.

Research : Human capital, a key factor in the financing of start-ups

With Simon Gueguen, Lecturer at the University of Cergy-Pontoise

Information asymmetries inherent in financing companies are particularly strong in the case of start-ups. Start-ups are often characterised by prospects that are difficult to assess and a small proportion of tangible assets. In these conditions, what criteria are used by investors to choose which start-ups to finance?

The article we look at this month[1] provides new answers. The characteristics of start-ups on which investors base their decisions can be classified according to three main criteria:

-          the quality of the start-up’s founders (initial human capital), measured by their past experience and their education;

-          the start-up’s traction, i.e. is client base (measured in dollars of sales and number of customers);

-          the identity of initial investors (those who invested in the start-up before new fundraisings).

The presence of a team of quality founders is important, especially in the first stages of the company’s development, when it is vital to position the start-up strategically, draw in new customers and new investors. Traction is an indicator of the potential of the original idea. Finally, the fact that established investors have already chosen to invest in the start-up could reassure new investors. But can these three criteria be ranked in order of importance?

Studies on this subject come up against a problem though because the three criteria are not independent (e.g. experienced founders are perhaps more likely to launch a start-up that attracts clients). So it’s difficult to assess their relative importance on the basis of real data. Bernstein et al. use an original approach – the randomised experiment. Their study field is the US internet platform AngelList[2], which sets up contact between start-ups and investors. It works like this: emails on start-ups are sent to specific investors when the latter have indicated an interest in the start-up’s sector or location. In the first message, information is only provided when the criteria exceed a certain threshold, e.g. the quality of founders is only indicated when they are graduates of Ivy League universities (although the amount that the start-up is seeking to raise is always indicated). Investors who want to know more just need to click on “View”.

For their study, Bernstein et al. took 21 (real) start-ups and themselves sent emails to investors, randomly deciding wat information to disclose (founders, traction, initial investors). A total of 16 981 emails were sent during the summer of 2013. When the emails were opened (around half) investors clicked on “View” in 16.5% of cases. The results of the econometric test are clear: the inclusion of information on the founders increases the number of views by 2.2 percentage points, while inclusion of information on the other two criteria has no statistically significant impact. Accordingly, it seems to be human capital that is the criteria of choice for investors. Moreover, Bernstein et al. note that the top performing and most experienced investors react strongly to information on the founders. They conclude that this is probably a good selection criterion even if this has not been formally proved.

This study uses an original approach to show the importance of human capital in the initial phases of a start-up’s development. It is an essential criterion of choice for investors. We remind readers that this experiment covered young start-ups. As the company develops, non-human capital becomes essential for new investors who are keen to gain a certain control which means that it is important that long-term prospects do not depend too heavily on the presence of the founders.



[1] S.BERNSTEIN, A.KORTEWEG et K.LAWS (2017), Attracting early stage investors: evidence from a randomized field experiment, Journal of Finance, vol.72-2, pages 509 to 538

[2] Founded in 2010, this was the platform that helped Uber to raise funds 


Q&A : 2 questions regarding the scope of consolidation

A holds 42% of B whose shareholders' balance consists of investors each holding between 1.6% and 14.5% of the share capital.

A is represented on the board of directors by 5 directors out of 12. There is no shareholder agreement or agreement between A and B. A 2/3 majority is required for key decisions: budget, significant investments, and acquisitions.

Is A in a situation of exclusive control, joint control or in significant influence over B, in view of the consolidation rules set out in Chapter 6 of the Vernimmen?

Answer: A cannot make decisions alone, A only has blocking power. A is not in exclusive control.
There is no shareholders' pact; several combinations of shareholders are possible to reach the majority with A or without A. There is therefore no joint control of A on B.
A simply has a notable influence on B, which it will have to consolidate using the equity method.


Second question: A holds 49.5% of X of which the remaining 50.5% are held by B.
A is represented on the board of X by 2 directors and B by 3. The decisions of the board of directors are taken by a simple majority except for the approval or the modification of the budgets or the business plan, for the investments and the financing, for the acquisitions or disposals not envisaged in the business plan, and for appointments and dismissals of officers, decisions for which A's agreement is required.

Is A in a position of joint control or significant influence over X?

Answer: The decisions for which A's agreement is required are the most important decisions for a company. They can only be taken if A and B agree. Therefore A and B are in joint control over X.


Regularly on the Vernimmen.com Facebook page[1] we publish comments on financial news that we deem to be of interest. Here are some of the comments published over the last month.

The misfortune of Altice

Its share price collapsed by 22.6% on Friday lowering its market capitalization from €21.9bn to €16.9bn. All this for quarterly results 1.8% below expectations both in terms of sales and EBITDA.

Excessive do you find? Remember that for a highly indebted company like Altice - its net bank and financial debt totals €50.1bn, or 5.3 times the 2017 EBITDA - the leverage effect also applies in value. The 22.6% fall in the value of Altice's equity corresponds to a fall of only 7% in the value of its enterprise value. This is because the value of the debt remains constant, which increases, at the level of equity, the decline in the entreprise value.

Salvator Mundi

Imagine that Leonardo da Vinci sold his work to Louis XII and his wife Anne of Brittany (who had ordered it to celebrate the taking of Milan) for €100,000 at the time, which does not seem expensive given his already high reputation at the time.

Capitalized at 1.64% per year, exchanged for US$, you find at the end of 507 years (one estimates the date of realization of the work between 1506 and 1513), . . . $ 450 million, i.e. the price paid yesterday.

First conclusion: at $450m, and even if we did not participate in the auction that started at $70m, the buyer does not seem to be a bad deal for the only one of the 15 paintings by Leonard de Vinci that is not in a museum.

Second conclusion: Be wary of long-term capitalizations that ignore wars, revolutions, inflationary flares, changes of tastes and other scourges.
Third conclusion: Going to the Louvre in Paris and Abu Dhabi, you will see 5 paintings by the master, including the wonderful Madonna and Child with Saint Anne, and may be a sixth one soon if the mysterious buyer gives it to Le Louvre Abu Dhabi as the rumor has emerged. There is more in life than just finance!