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Valuation in FED
2013/10/20(Sun) 1
自己紹介
• 名前
• 所属
• 勉強会に参加したきっかけ
2
3
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
4
5
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
What is value In the context of valua3on and
in your life ?
6
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
• 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
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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
• 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
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
• 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
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
23
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
24
How companies can create value through management?
25
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?
27
【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?
29
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.
31
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.
32
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.
36
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 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
44
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.
49
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.
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
50
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.
54
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.
57
More difficult strategies for creating value from acquisitions
• Roll-up strategy
• Consolidate to improve competitive behavior
• Enter into a transformation merger
• Buy Cheap
58
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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