Driving Shareholder ValueManaging for the New MillenniumDr. Roger A. MorinGeorgia State University, Distinguished Professor of FinanceChairman & CEO Utility Research International

FI 8360Lecture #2 RoadmapWhy Value Value Value and Capital MarketsThe Value ManagerValuation Frameworks: DCFNPV, FTE, FCF, APV, etc.

Why Value Value?

Economic Value n E(Ct) Present Value = ------------- t=0 (1 + k)t

Future value corresponds to future and uncertain business cash flows, Ct. So we discount expected cash flows Cash flow and RiskBecause business cash flows occur over many future periods, we locate them in time, then discount and add them all.TimingBecause business cash flows are risky, investors demand a higher return: the discount rate, k, contains a risk premium.Risk

Corporate Value infinityValue = Cash Flowt t=0 (1 + Cost of Capital)t

Shareholder value analysis focuses on the factors that investor use to value companies:Cash FlowsLong-Term Expected Performance Risk

What is VBM?A Way of ThinkingA Process for Planning and ExecutionA Set of Tools

So What is So Different?Drivers of Value

Cash FlowSustainabilityAsset UtilizationGrowthVALUEoldnew ??newer

Investor Perspective

VBM Links All Management Decisions to the Maximization of Shareholder ValueValue-Based ManagementStrategyFormulationCorporateDevelopmentIncentiveCompensationFinancial Policies& PracticesPerformanceMeasures &Inf. systemsEmployee & InvestorCommunications

VBM plays a significant role in each stage of the management processFinancial Policy AssessmentBusiness PlanningResource AllocationPerformance ManagementPortfolio Assessment

Evolution of VBMNumber CrunchingStrategizingIntegrating Mid 80sMid 90s2000 - RHS Balance Sheet Finance Raiders Valuation Models LBOs Divestitures Junk Bond Mkt

LHS Balance Sheet Internal Operations Strategy Evaluation Financial Approach to Strategic Planning Holistic, Integrated Investor Perspective Common Language Shared Culture Executive Compensation Performance Evaluation

Benefits of VBMBetter PayBetter DecisionsBetter MoraleBetter Performance

Whats In It For Me?Your stake in the company becomes more valuableOpportunity to learn new skillsJob creation

Challenge to Create ValueCurse of competitionCurse of beating market expectations

Potential Rewards

Growing Pressures From Sources Of DisciplineProduct marketGlobalization, technology, deregulation, digital economy, Market for corporate controlThreat of takeoversCapital marketsCreditors, shareholdersMarket for skilled managers

Origination of Value MovementVBMChanging EconomicsCompetitionTechnological InnovationInformation AvailabilityRuthlessCapital Markets Speed-driven, Customer drivenMarkets

Institutional PressuresDemonstrated ability to improve performanceIncreasing attention on competitive advantage and competitive strategyAccountabilityInternal control mechanismsActivist boards and investorsBusiness scorecards

Demise of Accounting MetricsAccrual accounting undependableAccounting latitudeRisk excludedInvestment requirements excludedDividend policy excludedTime value of money excludedEPS growth vs value unrelatedFocusing on short-term earnings growth jeopardizes ability to create long-term valueAccounting model vs Economic model

Decision-Making in a Corporate Tower of Babel

Capital Budgeting: NPV, Cash FlowPerformance Evaluation: ROE, ROIInvestor Relations: EPS, growthIncentive Bonus: ROE, CashStrategy: ????

The Agency ProblemManagers act in their own self-interest (corporate jets, country clubs, perks, etc.)Shareholders do not have the influence or finances to govern issues such as election of board membersBoard members tend to be largely responsive to management; top managers are often board membersManagers time horizon may be short-term, due to compensation modeManagers tends to have lower risk tolerance than owners due to compensation mode

How to reduce the agency problem

Large ownership positionsCompensation tied to shareholder returnThreat of takeoversCompetitive labor markets for corporate executivesVBM

Contributions of VBMEnhance value for shareholdersEnhance your companys competitive position in:Product marketsMarket for corporate controlCapital marketOptimize all stakeholders interestsBetter pay, better performance, better morale, better decisionsManage assets betterClose the gap between operations, strategy, financeThink, act, get paid like an ownerCommunicate more effectively with investors

mindset, culture, permeates across all facets of mgt.IPPs, NUGs, EWGs, LDCs, customer choice, microgeneration44 horsemen of corporate apocalypse- personal life vs corporate life: cash vs accrual accounting

- small firm -------.> big firm: cash to earnings1920