Institut for Regnskab, Tom Hansen Corporate Valuation , p. 1 Agenda Workshop any team/group problems ? Exercise: 4.3, 4.11, 7.10 Lecture last session this session ·CKM: 4,5,6,7 ·2* Ghemawat NEXT

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 2 Value Performance Measures EXTERNAL/ MARKET BASED how the market values the performance MVA: MV(debt & equity)- Booked (debt & equity) Delta MVA Market/Book TSR: Div.+(P1-P0)/P0 INTERNAL to evaluate and measure EVA or EP: IC*(ROIC-WACC) DCF

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 3 CKM ch.4 Metrics What metric for what purpose ? The stock market (TRS, MVA) is an output measure, but it also reflects the development in general index and industry index and gives no insight - so what drives the market value of the company? DCF is an intrinsic value, but it is longterm and abstract - so what drives cash flows? Financial indicators as ROIC and growth, but they are lagging measures Value drivers that drive ROIC and growth -these are leading indicators ! Market share, retention, c. satisfaction, R&D, etc.

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 4 CKM ch.4 To create TRS you need to surpass market expectations MVA measures the current market expectations together they provides insight in the dynamics of the company’s performance cashflow valuation pays respect to timing, to risk (in the discount rate) and to the capital needed to generate it - earnings does not !?

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 5 CKM ch.5 Cash is King The value-LEVEL(market-to-book) - at a given point of time - is linked to the ABSOLUTE level of performance (growth & ROIC) Value-CHANGES are linked to the RELATIVE (to market expectations) performance Cash is king ! ?

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 6 CKM ch.6 Making value happen Making value happen requires metrics ·how value is created ·how the market values the company mindset: how much managers care in ·thinking ·acting 6 area’s aspiration and targets managing the portfolio organizing insight into key value drivers managing business units managing individual performance

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 7 CKM ch.6 Making value happen 1. Aspiration and targets Statement of intent / strategy ·Strategy formulation and communication Targets ·The measures should be linked to value creation (DCF & Economic Profit) ·The targets should be set according to strategic position, context & strategy BSC from last time

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 8 CKM ch.6 Making value happen 2. Managing the portfolio What is the competitive advantage of the company? Performance improvement ·The 6 step restructuring hexagon from last time 3 horizon growth analysis ·current core business ·extension of above + new business ·options on future business

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 9 CKM ch.6 Making value happen 3. Organizing Structure (who reports to whom) Decision right (who can make decisions) People (who holds key jobs) Coordination (how do things get communicated and done) Beliefs (peoples beliefs about potential in market / company) Values (what people think is important) Leadership style There is no right approach to organization, but organization is critical to making value happen (aspiration and strategy translates into disciplined execution through organizing)

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 10 CKM ch.6 Making value happen 4. Insight into key value drivers “Value driver” is a performance variable that has impact on the results of a business (costs or perceived value) Value drivers should be directly linked to shareholder value creation (Growth or ROIC) Should use leading and lagging measures (financial and operational) Value drivers should cover both short and long term value. 3 phases in defining the KPIs Identification Prioritization (Sensitivity & potential) Institutionalization (e.g. in a scoreboard) BSC from last time.

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 11 CKM ch.6 Making value happen 5. Managing business units Business units must have a clear strategy for creating value Targets should be set with a clear link to specific value drivers Performance reviews.

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 12 CKM ch.6 Making value happen 6. Managing individual performance Rewards should be given to behavior that creates overall shareholder value Therefore rewards should be related to key value drivers for which the individual is accountable.

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 13 CKM ch.7 M&A and JV M&A premium 20-35% to sellers buyers shareholders often skeptic Reasons to buyer failure: Purchasers pay to much. ·Overoptimistic appraisal of market potential ·Overestimation of synergies ·Overlooking problems ·Overbidding ·Poor post-acquisition integration

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 14 Ghemawat & del Sol: Commitment Resources are specific or non-specific i.e. flexible ·to the firm and to the usage The firm-specific resources are the more sticky, i.e. strategic resources. The use of firm-specific resources request commitment Usage-specific resources are specific to the product / market Sustainable superior returns require investments in firm-specific resources. ·hence the relation between commitment and flexibility becomes important Let us look at the Resource Specificity Matrix

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 15 Ghemawat & del Sol: Commitment

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 16 Ghemawat & del Sol: Commitment Commitment goes west-east Flexibility goes southwest-northeast Look-out for firm-specific commitments (D and B) as they are the strategic ones And for the usage-flexibility of these (B) as you here have the possibility to adapt (to changes in products and markets) ·usage flexible resources ease the problem of commitment under uncertainty, as adaptation often spells the difference between failure and success under turbulence/ uncertainty And for the impact of timing in D ·delay or lock-in ?

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 17 Ghemawat & del Sol: Commitment Usage-flexible vs. usage-specific resources

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 18 Ghemawat & del Sol: Strat.val. of investment under competition Framework integreting competive strategy framework with DCF with 3 steps ·positioning re competitive advantage –lower cost or greater benefit to users ·sustainability re competitive dynamics –scarce and proprietary »imitation and substitution threats scarcity »hold up and slack threats the appropriation ·flexibility re options to revise under uncertainty

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 19 Ghemawat & del Sol: Strat.val. of investment under competition looking at the numerator, not the denominator in the DCF formula where the alternative NOT is the do-not- invest cashflows the flexibility could be to expand the plant re the Nucor example

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 20 NEXT 7. October Workshop Dialog and coaching Exercise 8.5, 8.6 Lectures CKM, chapters Aggarwal