1. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan Agenda Workshop –any group problems ? –Exercise: 4.3, 4.11, 7.10 Lecture –last session –this session CKM: 4,5,6,7 2* Ghemawat NEXT

2. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan Value Performance Measures EXTERNAL/ MARKET BASED how the market values the performance MVA: MVE-BE delta MVA Market/Book TSR:Div.+P1-Po/Po Exh.4.3 INTERNAL to evaluate and measure SVA: FCF/WACC EVA:I#(ROIC-WACC) CFROI

3. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan CKM ch.4 Metrics What metric for what purpose ? The stockmarket (TRS,MVA) is an output measure, but it also reflects the general index and the industryindex and gives no insight - so what specificly drives the marketvalue for the company? Intrisic value calculated on DCF, but it is longterm and abstract - so what drives cashflows ? Financial indicators as ROIC and growth, but they are lagging measures and can be shortterm Valuedrivers that drive ROIC and growth - these are leading indicators ! Market share, R&D

4. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan CKM ch.4 To create TRS you need to surpass market expectations - accelerate the treadmill MVA measures the speed of the treadmill together they provides insight in the dynamics of the company’s performance the marketimplied expected performance can and should be calculated in 3 parts:current operations, analysts forecasts next 3 yrs, rest cashflow valuation pays respect to timing, to risk (in the discount rate) and to the capital needed to generate it - earnings does not !?

5. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan 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 ! ?

6. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan 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 –motivating

7. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan CKM ch.6 3 horizon growth analysis current core business extension of above + new business options on future business Valuedriver is a performance variable with impact on the result of the business such as production effectiveness or customer satisfaction KPI is the metric for value drivers must be directly linked to value creation both financial and operational KPIs should cover both long-term growth as well as operating performance

8. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan CKM ch.6 3 phases in defining the KPIs identification prioritization (sensitivity & potential) institutionalization (e.g. in a scoreboard) Managing individual performance - match the metric with the role and the task (re exh.6.7)

9. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan CKM ch.7 M&A and JV Make or buy ? Time competitors and reactions immaterial assets/ goodwill-competence M&A -JV whole/ partial overlap/ extension superior/ equal infinity/ period M&A premium 20-35% sellers joy buyers shareholders often sceptic

10. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan CKM ch.7 M&A and JV succes rate below 50 settlement in –cash –paper –contingent due diligence

11. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan Ghemawat & del Sol: Commitment Sustainable superior returns require commitment commitment in firm specific or usage specific resources usage flexible resources ease the problem of commitment under uncertainty the commitment is a process that can be adapted or abandoned to feedback adaptation often spells the difference between failure and succes under turbulence/ uncertainty hence the relation between commitment and flexibility becomes important

12. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan Ghemawat & del Sol: Commitment

13. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan Ghemawat & del Sol: Commitment Resources are specific or non-specific i.e. flexible to the firm and to the usage this gives the Resource Specificity Matrix the firm-specific are the more sticky i.e. strategic commitment therefor goes west-east flexibility goes southeast-northwest look-out for firm-specific commitments (D and B) as they are the startegic ones and for the usage-flexible of these (B) as they incorporates value in the option to adapt and for the impact of timing in D –delay or lock-in ?

14. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan Ghemawat & del Sol: Commitment

15. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan 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

16. Corporate Valuation 2001-3 Institut for Regnskab, IC Pontoppidan Ghemawat & del Sol: Strat.val. 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