Corporate Value Creation & Drivers

Prepared by:

Hossam El DEIN FATHI MOHAMED NASSEF

MIBA - ESLSCA 38 C

Presented to:

Dr. Hussein SEOUDI

ContentIntroduction

Value Definition

The Stakeholder Theory

The Stakeholders

Creating Value for the Stakeholders

Corporate valuation Model

Value-Based Management

Measuring Shareholder Value – The Metrics

Understanding the Drivers of Value

The Four Fundamental Value Drivers

References

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 & Stakeholder Theory

"A stakeholder in an organization is any group or individual

who can affect or is affected by the achievement of the

organization's objectives."

The Stake (1/2)

we consider a private company that produces goods

and/or services from facilities based in one or more

communities assuming that each stakeholder group

exists and has some significance for the survival and

well-being of the company.

The Stake (2/2)

1. Investors “Stockholders”

2. Employees

3. Customers

4. Suppliers

5. 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 holders however

decisions made by managers not by stockholders, and

maximizing shareholders wealth is not the same as individual

managers maximizing their own satisfaction

•The value of operations is the present value of all the future

free cash flows expected from operations when discounted at

the weighted average cost of capital and could be calculated as

follow:

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 from

operating assets and include items such as investments in

marketable securities and non-controlling interests in the

stock of other companies and its value is usually close to the

figure reported on the balance sheet.

Measuring Shareholder Value The Metrics

The concept of shareholder value and how this can be

created and sustained this has, in turn, led to the

development of a number of “value metrics”, the most

significant 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 Value

The process of value driver definition has three phases

1. identification

2. prioritization

3. Institutionalization

An overview of value drivers’ analysis

Value drivers’ tree from different prospective

Breakdown of Corporate Value

The Four Fundamental Value Drivers

1. 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 the Value 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 Invested Capital (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 university

2. Damodaran, Aswath - Investment Valuation 2nd edition

3. Valuation measuring and managing the values of companies 3rd

edition

4. Creating Value through financial Management by Matt H. Evans

5. 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 15

8. Dr Hussein Saudi Presentation for corporate valuation