20131020 第6回valuation勉強会

Valuation in FED

2013/10/20(Sun) 1

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•  勉強会に参加したきっかけ

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Contents

•  Part1 Foundations of Value

•  Part2 Core Valuation Techniques

•  Part3 Intrinsic Value and the Stock Market

•  Part4 Managing for Value

•  Part5 Advanced Valuations Issues

•  Part6 Special Situations

Review of previous studied contents

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Contents







What is value In the context of valua3on and

in your life ?

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What is Value?

•  Value is defining dimension of measurement in a market economy.

•  Value is a particularly helpful measure of performance because it takes into account the long-term interests of all the stakeholders in a company,not just shareholders.

•  Competition among value-focused companies also helps to ensure that capital,human capital,and natural resources are used efficiency across the economy,leading to higher living standards for everyone.

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(P3)

Fundamental principles of corporate finance

Companies create value by investing capital to generate future cash flow at rate of return that exceed their cost of capital. (P17)

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Two core principles of value creation

•  The combination of growth and return on invested capital(ROIC) relative to its cost is what drives value. –  Companies can sustain strong growth and high returns

on invested capital only if they have a well-defined competitive advantage.

•  Conservation of value –  Anything that doesn't increase cash flow doesn't create

value. –  M・M theory

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(P4)

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Growth and ROIC:Drives of Value

Return on investment capital

Revenue growth

Cash flow

Cost of of Capital

Value

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Contents







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Part2 Core Valuation Techniques

6. Framework for Valuation 7. Reorganizing the Financial Statements 8. Analysand Performance and Competitive Position 9. Forecasting Performance 10. Estimating Continuing Value 11. Estimating the Cost of Capital 12. Moving from Enterprise Value to per Share 13. Calculating and Interpreting Results 14. Using Multiple

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Framework for DCF-Based Valuation

EXHIBIT 6.1 Model Measure Discount factor Assessment

Enterprise discounted cash flow Free cash flow Weighted average

cost of capital Works best for projects, business units, and companies that manage their capital structure to a target level.

Discounted economic profit Economic profit Weighted average

cost of capital Explicity highlights when a company creates value.

Adjusted present value Free cash flow Unlevered cost of equity Highlights changing capital structure more

easily than WACC-based models.

Capital cash flow Capital cash flow Unlevered cost of equity

Compresses free cash flow correctly because capital structure is embedded within the cash flow.Best used when valuing financial institutions.

Equity cash flow Cash flow to equity Levered cost of

equity Difficult to implement correctly because capital structure is embedded within the cash flow. Best used when valuing financial institutions.

(P104)

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Home Depot:Enterprise DCF

Forcaset year Free cash flow($ million)

Discount factor(@ 8.5%)

Present value of FCF

(& million)2009 5,909 0.922 5,448

2010 2,368 0.850 2,013

2011 1,921 0.784 1,506

2012 2,261 0.723 1,634

2013 2,854 0.666 1,9022014 3,074 0.614 1,889

2015 3,308 0.567 1,874

2016 3,544 0.522 1,852

2017 3,783 0.482 1,822

2018 4,022 0.444 1,787Continuing value 92,239 0.444 40,966Present value of cash flow 62,694

Midyear adjustment factor 1.041 Value of operations 65,291

Value of excess cash -Value of long-term investments 361Value of tax loss carry-forwards 112Enterprise value 65,764

Less:Value of debt (11,434)Less:Value of capitalized operating leases (8,298)Equity value 46,032

Number of shares outstanding(December 2008) 1.7 Equity value per share 27.1

Forecasting performance

Estimating Continuing Value

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Enterprise valuation of a multibusiness company

Unit A Unit B Unit C Corporate center

Value of operations

Nonoperating assets

Enterprise Value

Value of debt

Equity Value

Exhibit6.3 P106

Value of operating units

200

30

560

125

200

225

520

40

360

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Contents







Part3 Intrinsic Value and the Stock Market

15 Market value tracks return on invested capital and growth 16 Markets value substance, not form 17 Emotions and mispricing in the markets 18 Investors and managers in efficient markets

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Research Findings

•  Valuation levels for the stock market as a whole clearly reflect the underlying fundamental performance of companies in the real economy.

•  Companies with higher ROIC and those with higher growth are valued more highly in the stock market.

•  Over the long term(10 years and more), higher ROIC and growth also lead to higher total returns to shareholders(TSR) in the stock market.

•  Whether increasing revenue growth or return on capital will create more value depends on the company’s performance.

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Markets value substance, not form

•  Managers can go to great lengths to achieve analysts’ expectations of EPS or to smooth earnings from quarter to quarter.

•  Stock markets are perfectly capable of seeing the economic reality behind different forms of accounting information.

•  Since investors value substance over form, managers need not worry about whether their share are spilt into smaller shares, traded in one or many developed stock markets, or included in a large stock market index.

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Patterns in mispricing

•  Individual company share price deviate significantly from the company’s fundamentals value only in rare circumstances.

•  Market wide price deviations from fundamental valuations are even less frequent, although they may appear to be becoming more so.

•  Price deviation from fundamentals are temporary(typically three years).

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The implication of market efficiency for managers

•  Managers should focus on driving return on ROIC and growth to create maximum value for shareholders.

•  Managers need to understand their investor base, so they can communicate their company’s strategy for value creation effectively to different investor segments.

•  Managers should not be distracted from their efforts to drive ROIC and growth by any short-term price volatility.

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Contents







Part4 Managing for Value

•  Chap19 Corporate Portfolio Strategy

•  Chap20 Performance Management

•  Chap21 Mergers and Acquisitions

•  Chap22 Creating Value through Divestitures

•  Chap23 Capital Structure

•  Cahp24 Investor Communications

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How companies can create value through management?

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Managing for Value

•  Part4 looks at value creation from a management perspective.

•  At the heart of a company’s corporate strategy, its blue print for creating value lie decisions about what businesses it should own.

•  This chapter explains what makes the best owner for company and how the corporations that qualify as best owner may change over time.

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What is corporate finance?

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【1】Decision for investment for operation •  financial evaluation for

project •  allocation of resources •  Arrange for project

portfolio

【2】Decision for finance and capital structure •  Decision for debt

equity ratio •  Decision for finance

【3】Decision for payout •  Decision for payout

ratio •  Choose of payout and

share repurchase

Asset Side Capital market side

野中郁次郎・楠木建(2013)『はじめての経営学』東洋経済

CEO, COO, and CFO

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•  Mission, vision, Value •  Final decision •  leadership

CEO

•  Decision for project investment

•  Decision for finance and capital structure

•  Decision for payout •  Communication with

investor

CFO

•  Management of whole project operation

COO

野中郁次郎・楠木建(2013)『はじめての経営学』東洋経済

Who is the best owner?

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Better owner

•  To identify the best owner of a business in any given industry circumstances, you first have to understand the sources of value on which potential new owners might draw.

•  The most straight forward way that owners add value is through links to other businesses within their portfolio.

•  Better owner may have distinctive functional or managerial skills from which the new business can benefit.

•  Better governance refers to the way company’s owners interact with the management team to create maximum value in the long term.

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The best owner life cycle

•  At each stage of the company’s life, each best owner took actions to increase the company’s cash flows, thereby adding value.

ü  In the United States, most large companies either listed or owned by private equity funds.

ü  In Europe, government ownership plays important role.

ü  In Asia and South America, large companies are often controlled for several generations by members of their founding families, and family relationship also creates ownership links between different businesses.

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Constantly evolving portfolio of business

•  Applying the best-owner sequence, executives must continually look for and acquire companies where they could be the best owner,

•  Executives also must divest business where they used to be the best owner but that another company could now own better.

•  The research shows that the stock market consistently reacts positively to divestitures, both sales and spin-offs.

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Constructing the portfolio

1.  Determine the company’s current market value, and compare it with the company’s value as is.

2.  Identify and value opportunities to improve operations internally. –  By increasing margins, accelerating core revenue growth, and improving capital efficiency.

3.  Evaluate whether some business should be divested.

4.  Identify potential acquisitions or other initiatives to create new growth, and improving on value.

5.  Estimate how the company’s value might be increased through changes in its capital structure or other financial strategy changes.

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Constructing the portfolio

34 P420

EG Corporation Value created through restructurting

35 P424

The myth of diversification

•  Our perspective is that diversification is intrinsically neither good nor bad: –  We haven’t found any evidence that diversified companies actually generate smoother cash

flows. –  We almost never find that the value of the sum of a diversified company’s business units is

substantially different from the market value of the consolidated company. –  We’ve never come across diversified companies that systematically used more debt than

their peers.

•  It depends on whether the parent company adds more value to the business it owns than any other potential owner could, making it the best owner of those business in the circumstance.

•  Substantially changing the shapes of a portfolio of real business involves a diversified company in considerable transaction costs of and disruption, and it typically takes many years.

–  Investors can diversify their portfolio at lower cost than companies.

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How do companies can create value through management?

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Performance Management

•  The overall value that a company creates is the sum of the outcomes of innumerable business decision taken by its managers and staff.

•  Performance management systems include –  long-term strategic plans –  short-term budgets –  capital budgeting systems –  performance reporting and reviews –  compensation frameworks

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The success or failure of performance

•  Do the senior management team members really understand the economics of the business unit oversee?

•  Can they negotiate performance targets that are both challenging and achievable?

•  Are trade-offs between the short term and the long term transparent?

•  Are managers sufficiently rewarded for focusing on long term value?

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Value Creation Tree

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Exhibit20.1 Value creation tree

P431

Short term value drivers

•  Short-term value drivers are the immediate drivers of historical ROIC and growth.

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Sales productivity

Operating cost productivity

The drivers of recent sales growth, such as price and quantity sold, market share, the company’s ability to charge higher prices relative to peers, sales force productivity

Capital productivity

The drivers of unit costs, such as the component costs for building an automobile or delivering a package.

How well a company uses its working capital(inventories, receivables, and payables) and its property, plant , and equipment

Medium-term value drivers

•  Medium-term value drivers look forward to indicate whether a company can maintain and improve its growth and ROIC.

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Commercial health

Cost structure health

Whether the company can sustain or improve its current revenue growth. The company’s product pipeline, brand strength, customer satisfaction

Asset health

Company’s ability to manage its costs relative to competitors over three to five years.

How well a company maintains and develops its assets.

Long term strategic value drivers and Organizational health

•  Long term strategic value drivers –  The ability of an enterprise to sustain its current operating

activities and to identify and exploit new growth areas.

•  Organizational health –  Whether the company has the people, skills, and culture to

sustain and improvement

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Simple value driver tree: Manufacturing

45 P435

Value Trees from four perspectives: Temporary-help company

46 P436

Summary short term value tree: Temporary-help company

47 P437

Summary medium term value tree: Temporary-help company, new geographic markets

48 P438

Organizational support

•  The following ingredients lead to more effective organizational support for corrective action.

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Buy in to performance management at all levels

Motivating targets

Companies that succeed at performance management instill a value-creating mind-set throughout the business. Their employees at all levels understand core levels of value creation.

Fact based performance reviews

Managers and staff responsible for meeting targets need to be involved in setting them, so they understand the targets’ purpose and will strive to deliver them.

The best way to record facts for performance reviews is on a scorecard incorporating the key value metrics from the value driver analysis.

Appropriate rewards Linking stock-based compensation to the specific performance of the company. Linking bonus as much to long term company.








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Can M&A create Value?

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Value creation framework

•  Acquisitions create value when the cash flows of combined companies are greater than they would have otherwise been.

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Value Created for Acquirer= Value received – Priced Paid

Value Created for Acquirer= (Standard Alone value of target) ＋Value of performance improvements) −(Market Value of target＋Acquisition premium)

Acquisition Evaluation Framework

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Value Created = Value of improvements – acquisition premium

Selected Acquisitions: Significant Improvements

•  The performance improvements were substantial, typically in excess of 50% of the value of the target.

•  Kellogg and PepsiCo paid unusually low premiums for their acquisitions, allowing them to capture more value.

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Empirical Results

•  Researchers have shown that acquisitions collectively do create value for the shareholders of both the acquire and the acquired company.

–  According to the McKinsey, the combined value of the acquirer and target increased by about 4% on average.

•  However, the evidence is also overwhelming that acquisitions do not create much if any value for the acquiring company’s shareholders.

–  Empirical study find that the value- weighted average deal lower the acquirer’s stock price between 1 and 3%.

•  It comes as no surprise to find conclusive evidence that most or all of the value creation from acquisitions accrues to the shareholders of the target company.

–  Since the target shareholder are receiving high premiums over their stock’s preannouncement market price- typically about 30%.

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Successful specific factors for acquirer’s shareholder

•  Strong operators are more successful •  Low transaction premiums are better •  Being the sole bidder helps

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•  Size of the acquirer relative to the target •  Whether the transaction increases or

dilutes earnings per share •  P/E ratio of the acquirer relative to the

target’s P/E •  The relatedness of the acquirer and

target, based on SIC

Important factor

Non important factor

Archetypes for value creating acquisitions

1.  Improve the performance of the target company

2.  Consolidate to remove excess capacity from an industry.

3.  Create market access for the target’s products.

4.  Acquire skills or technologies more quickly or at lower cost than they could be built in house.

5.  Pick winners early and help them develop business.

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More difficult strategies for creating value from acquisitions

•  Roll-up strategy

•  Consolidate to improve competitive behavior

•  Enter into a transformation merger

•  Buy Cheap

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Estimation of operating improvements

The analysis for estimating cost savings should be structured using the following four steps.

1. Develop an industry-specific business system.

2. Develop a baseline for costs as if the two companies remained independent. Make sure the baseline costs are consistent with the intrinsic valuations.

3. Estimate the savings for each cost category based on the expertise of experienced line managers.

4. Compare resulting aggregate improvements with margin and capital efficiency benchmarks for the industry, to judge whether the estimates are realistic given industry economics.

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Sample framework for estimating cost saving

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Function Example savings

Research and Development

・Stopping redundant projects ・Eliminating overlap in research personal ・Developing new products through transferred technology

Procurement ・Pooled purchasing ・Stndardizing products

Manufacturing ・Eliminating overcapacity ・Transferring best operating practice

Sales and Marketing

・Cross-selling products ・Using common channels ・Transferring best practice ・Lowering combined marketing budget

Distribution ・Consolidating warehouses and truck routes　

Administration

・Exploiting economies of scale in finance/accounting and other back-office functions ・　Consolidating strategy and leadership functions

Automotive merger: Estimating cost savings

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Estimating Revenue Improvements

Revenue improvements will come from one or more of four sources.

1. Increasing each product’s peak sales level.

2. Reaching the increased peak level faster

3. Extending each product’s life

4. Adding new products(or features) that could not have been developed if the two companies had remained independent.

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Evaluating the quality and accuracy of improvements estimates

•  According to McKinsey’s Merger Management, 86% of the acquires were able to capture at least 70% of the estimated cost savings.

•  In contrast almost half of the acquirers realized less than 70% of the target revenue improvements, and in almost ¼ of the observed acquisitions, the acquirer realized 30% of the targeted revenue improvements.

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How to pay: in cash or stock?

•  Research evidence shows that an acquirer’s stock returns surrounding the acquisition announcement are higher when the acquire offers cash than when it offers shares.

•  When the acquiring company pays in cash, shareholders carry the entire risk of capturing synergies and paying too much.

–  If the companies exchange shares, the target’s shareholders assume a portion of the risk.

•  When weighting whether to pay in cash or in shares, you should also consider what your optimal capital structure will be.

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Focus on value creation, not accounting

•  Stock markets pay no attention to the effects of an acquisition on accounting numbers, but react only to the value that the deal is estimated to create.

•  Many acquisitions are earnings accretive but destroy value.

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Market reaction to EPS impact of acquisitions

•  Financial markets understand the priority of creating real value over results presented in accounts.

•  In a study of 117 U.S. transactions larger than $3 billion that took place in 1999 and 2000, we found that earnings accretion or dilution resulting from deals was not factor in the market’s reaction.

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20131020 第6回valuation勉強会

Economy & Finance

part6 special

valuing financial

cahp24 investor

chap23 capital

long term

chap20 performance

estimating

capital structure