Corporate value creation and driversPresentation Transcript
Corporate Value Creation & Drivers
ContentIntroductionValue DefinitionThe Stakeholder TheoryThe StakeholdersCreating Value for the StakeholdersCorporate valuation ModelValue-Based ManagementMeasuring Shareholder Value – The MetricsUnderstanding the Drivers of ValueThe Four Fundamental Value DriversReferences
Introduction• Value creation has been expressed in the business writings as the main objective of Organizations• an organization must create value for its owners or shareholders whereas some insist that value must be created not just for shareholders, but for stakeholders
Value Definition Value is the capacity of a good, service, or an activity, or activities of an organization to satisfy a need, or provide a benefit to a person or legal entity.
The Stakeholder & StakeholderTheory "A stakeholder in an organization is any group or individual who can affect or is affected by the achievement of the organizations objectives."
The Stake (1/2)we consider a private company that produces goodsand/or services from facilities based in one or morecommunities assuming that each stakeholder groupexists and has some significance for the survival andwell-being of the company.
The Stake (2/2)1. Investors “Stockholders”2. Employees3. Customers4. Suppliers5. Society
Creating Value for the Stakeholders (1/3)• The model presented describes how a private firm may create value for each of its stakeholder groups.• It also describes the activities, practices or conditions that may destroy value for the stakeholders of a firm, or what value stakeholders may have to give up in their relationships with the firm.• The model does not make a normative statement, or defend a moral position; it simply lays out possible courses of action for managers if they want to create value for the stakeholders of the firm, or at least avoid actions that destroy value for them.
Creating Value for the Stakeholders (2/3)• The major benefit of this model is in identifying the activities and practices that may create value and those that can destroy value.• Another contribution of the model is in introducing a usually neglected dimension, time, when scholars study the stakeholder management issues.• Time is not a resource in the usual sense of the word, in that it cannot be accumulated, multiplied, or stored.• However, when managers are conscious of the benefits that can be provided along the time dimension, they may become more effective in creating value for the stakeholders.
Creating Value for the Stakeholders (3/3)• The value definition involves satisfaction of a need or provision of a benefit. Some activities of the firm may create benefits or rewards for one group (value creation), while reducing, or taking away, benefits from another group, or increasing risks for them (value destruction).• Therefore, we propose to study this process with respect to its dual character: value creation and value destruction.
Value Creation & Destruction• Value Creation: Benefits and rewards • Financial • Non Financial • Time• Value Destruction : Costs and risks • Financial • Non Financial • Time
Corporate valuation Model• It shows how corporate decisions affect stock holdershowever decisions made by managers not by stockholders, andmaximizing shareholders wealth is not the same as individualmanagers maximizing their own satisfaction• The value of operations is the present value of all the futurefree cash flows expected from operations when discounted atthe weighted average cost of capital and could be calculated asfollow:
Value-Based Management (1/3)• Value-Based Management is the systematic application of the corporate valuation model to all corporate decisions and strategic initiatives.• The objective of VBM is to increase Market Value Added (MVA)
Value-Based Management (2/3)• Corporate assets consist of: Operating assets Financial, or no operating, assets.• Operating assets take two forms: Assets-in-place (include the land, buildings, machines, and inventory that the firm uses in its operations to produce products and services) Growth options refer to opportunities the firm has to increase sales. They include opportunities arising from R&D expenditures, customer relationships, and the like.
Value-Based Management (3/3)• Financial, or non-operating, assets are distinguished fromoperating assets and include items such as investments inmarketable securities and non-controlling interests in thestock of other companies and its value is usually close to thefigure reported on the balance sheet.
Measuring Shareholder ValueThe MetricsThe concept of shareholder value and how this can becreated and sustained this has, in turn, led to thedevelopment of a number of “value metrics”, the mostsignificant of which are: Shareholder value analysis (SVA) Economic profit (EP) and economic value added (EVA) Cash flow return on investment (CFROI) Total business returns (TBR)
Understanding the Drivers of ValueThe process of value driver definition has three phases1. identification2. prioritization3. Institutionalization
An overview of value drivers’ analysis
Value drivers’ tree from differentprospective
Breakdown of Corporate Value
The Four Fundamental ValueDrivers1. Sales growth (g)2. Operating profitability (OP=NOPAT/Sales)3. Capital requirements (CR=Operating capital / Sales)4. Weighted average cost of capital WACC
Improvements in MVA due to theValue Drivers• MVA will improve if: WACC is reduced• operating profitability (OP) increases• the capital requirement (CR) decreases
The Impact of Growth• The second term in brackets can be either positive or negative, depending on the relative size of profitability, capital requirements, and required return by investors.• If the second term in brackets is negative, then growth decreases MVA. In other words, profits are not enough to offset the return on capital required by investors.• If the second term in brackets is positive, then growth increases MVA.
Expected Return on InvestedCapital (EROIC)• The expected return on invested capital is the NOPAT expected next period divided by the amount of capital that is currently invested• If the spread between the expected return, EROIC, and the required return, WACC, is positive, then MVA is positive and growth makes MVA larger. The opposite is true if the spread is negative.
References1. A model for corporate value creation by Rider university2. Damodaran, Aswath - Investment Valuation 2nd edition3. Valuation measuring and managing the values of companies 3rd edition4. Creating Value through financial Management by Matt H. Evans5. CIMA article :Maximizing Shareholder Value “ Achieving clarity in decision making”6. CIMA article :Understanding corporate value “managing and reporting intellectual capital”7. Financial Management Theory and Practice 12th edition chapter 158. Dr Hussein Saudi Presentation for corporate valuation