This document summarizes key points from a valuation seminar in Japanese. It discusses various topics related to valuation including foundations of value, core valuation techniques, intrinsic value and the stock market, and managing for value. Some of the main points discussed include defining value, the relationship between growth, return on invested capital and value, discounted cash flow models, and how companies can create value through strategic portfolio management, performance management, mergers and acquisitions, and capital structure decisions.

1. Valuation in FED
2013/10/20(Sun)
1

2. 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
3

4. 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
5

6. What
is
value
In
the
context
of
valua3on
and
in
your
life
?
6

7. 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.
(P3)
7

8. 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)
8

9. 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
(P4)
9

10. Growth and ROIC:Drives of Value
Return on
investment capital
Cash flow
Revenue growth
Value
Cost of of Capital
10

11. 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
11

12. 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
12

13. Framework for DCF-Based Valuation
EXHIBIT 6.1 (P104)
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.
13

14. Home Depot:
Enterprise DCF
Forcaset year
Free cash flow
($ million)
Discount factor
(@ 8.5%)
2009
5,909
2010
2,368
2011
1,921
2012
2,261
2013
2,854
2014
3,074
2015
3,308
2016
3,544
2017
3,783
2018
4,022
Continuing value
92,239
Present value of cash flow
Forecasting performance
Estimating Continuing Value
0.922
0.850
0.784
0.723
0.666
0.614
0.567
0.522
0.482
0.444
0.444
Present value of
FCF
(& million)
5,448
2,013
1,506
1,634
1,902
1,889
1,874
1,852
1,822
1,787
40,966
62,694
Midyear adjustment factor
Value of operations
1.041
65,291
Value of excess cash
Value of long-term investments
Value of tax loss carry-forwards
Enterprise value
361
112
65,764
Less:Value of debt
Less:Value of capitalized operating leases
Equity value
Number of shares outstanding(December 2008)
Equity value per share
(11,434)
(8,298)
46,032
1.7
27.1
14

15. Enterprise valuation of
a multibusiness company
Exhibit6.3 P106
225
30
40
560
200
520
360
125
200
Unit A
Unit B
Unit C
Corporate
center
Value of
Nonoperating
Enterprise
operations
assets
Value
Value
of debt
Value of operating units
Equity
Value
15

16. 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
16

17. 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
17

18. 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.
18

19. 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.
19

20. 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).
20

21. 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.
21

22. 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
22

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
23

24. 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

25. How companies can create value through
management?
25

26. 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.
26

27. What is corporate finance?
Asset Side
Capital market side
【2】Decision for finance
and capital structure
【1】Decision for
investment for
operation
•
•
•
•
financial evaluation for
project
allocation of resources
Arrange for project
portfolio
•
Decision for debt
equity ratio
Decision for finance
【3】Decision for payout
•
•
Decision for payout
ratio
Choose of payout and
share repurchase
野中郁次郎・楠木建(2013)『はじめての経営学』東洋経済
27

28. CEO, COO, and CFO
CEO
•
•
•
Mission, vision, Value
Final decision
leadership
COO
CFO
•
•
Management of whole
project operation
•
•
•
Decision for project
investment
Decision for finance and
capital structure
Decision for payout
Communication with
investor
野中郁次郎・楠木建(2013)『はじめての経営学』東洋経済
28

29. Who is the best owner?
29

30. 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.
30

31. 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

32. 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

33. 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.
33

34. Constructing the portfolio
P420
34

35. EG Corporation
Value created through restructurting
P424
35

36. 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

37. 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
37

38. How do companies can create value through
management?
38

39. 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
39

40. 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?
40

41. Value Creation Tree
Exhibit20.1 Value creation tree
P431
41

42. Short term value drivers
• Short-term value drivers are the immediate drivers of historical ROIC
and growth.
Sales 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
Operating cost
productivity
The drivers of unit costs, such as the component
costs for building an automobile or delivering a
package.
Capital
productivity
How well a company uses its working
capital(inventories, receivables, and payables) and
its property, plant , and equipment
42

43. Medium-term value drivers
• Medium-term value drivers look forward to indicate whether a
company can maintain and improve its growth and ROIC.
Commercial
health
Whether the company can sustain or improve its
current revenue growth.
The company’s product pipeline, brand strength,
customer satisfaction
Cost structure
health
Company’s ability to manage its costs relative to
competitors over three to five years.
Asset health
How well a company maintains and develops its
assets.
43

44. 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

45. Simple value driver tree:
Manufacturing
P435
45

46. Value Trees from four perspectives:
Temporary-help company
P436
46

47. Summary short term value tree:
Temporary-help company
P437
47

48. Summary medium term value tree:
Temporary-help company, new geographic markets
P438
48

49. Organizational support
• The following ingredients lead to more effective organizational
support for corrective action.
Buy in to
performance
management at all
levels
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.
Motivating targets
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.
Fact based
performance
reviews
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.
49

50. 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

51. Can M&A create Value?
51

52. Value creation framework
• Acquisitions create value when the cash flows of combined
companies are greater than they would have otherwise been.
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)
52

53. Acquisition Evaluation Framework
Value Created = Value of improvements – acquisition premium
53

54. 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

55. 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%.
55

56. Successful specific factors
for acquirer’s shareholder
Non important
factor
Strong operators are more successful
Low transaction premiums are better
Being the sole bidder helps
•
•
Important factor
•
•
•
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
•
•
56

57. 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

58. More difficult strategies for creating value
from acquisitions
• Roll-up strategy
• Consolidate to improve competitive behavior
• Enter into a transformation merger
• Buy Cheap
58

59. 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.
59

60. Sample framework
for estimating cost saving
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
Sales and Marketing
・Eliminating overcapacity
・Transferring best operating practice
・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
60

61. Automotive merger:
Estimating cost savings
61

62. 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.
62

63. 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.
63

64. 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.
64

65. 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.
65

66. 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.
66