The Value ManagerThe Value Manager

Chapter 2 ReviewChapter 2 Review

Mary SterbaMary Sterba

April 2, 2003April 2, 2003

Becoming a Value Becoming a Value ManagerManager

Focus on long-run cash flow Focus on long-run cash flow returnsreturns

Value-oriented view of Value-oriented view of corporate activities corporate activities

Becoming a Value Becoming a Value ManagerManager

Characterized by an ability to Characterized by an ability to take an outsiders view point - act take an outsiders view point - act on opportunities that create on opportunities that create incremental value. incremental value.

Develop and institutionalize a Develop and institutionalize a managing value philosophy managing value philosophy company widecompany wide

The process of becoming The process of becoming value-orientedvalue-oriented

1.1. Restructuring Restructuring 2.2. Developing a value-oriented Developing a value-oriented

approach after restructuring.approach after restructuring. - - establishment of priorities on value establishment of priorities on value

creationcreation

- performance measurement and - performance measurement and

- communicating with investors- communicating with investors

Restructuring HexagonRestructuring Hexagon

Value w/InternalImprove.

Total Potential

Value

Value“as is”

Current Market Value

Value w/ Improve.disposals

Value w/Growth

Improve.disposals

12

3

45

6

PerceptionsGaps

OperatingGaps

Disposal/New owners

New growthopportunities

Financialengineering

Maximum opportunity

Restructuring ActionsRestructuring ActionsArea Action

Consumerco Cut cost of salesReorganize sales forceIncrease advertising and R & DBuild marketing skills

Foodco Sell

Woodco Keep and consolidate; sell if in two years management cannot reach next level of performance

Propco Sell (destroyed value)

Finco Liquidate (destroyed value)

Newsco Sell (needless distraction)

Corporate Cut by 50%; decentralize remainder

New growth opportunities

To be determined

Financing Increase leverage to maintain BBB rating and capture tax benefit. (borrow $500 million)

Ralph’s six steps to Ralph’s six steps to manage valuemanage value

1)1) Focus planning and business Focus planning and business performance revenues around value performance revenues around value creationcreation

2)2) Develop value-oriented targets and Develop value-oriented targets and performance measurements performance measurements

3)3) Restructure EG’s compensation system Restructure EG’s compensation system to foster an emphasis on creating to foster an emphasis on creating shareholder value.shareholder value.

Ralph’s six steps to Ralph’s six steps to manage value (cont)manage value (cont)

4)4) Evaluate strategic investment decisions Evaluate strategic investment decisions

explicitly in terms of impact on value.explicitly in terms of impact on value.

5)5) Begin communication with investors Begin communication with investors and analysts about the value of EG’s and analysts about the value of EG’s plansplans

6)6) Reshape the role of EG’s CFO- blend Reshape the role of EG’s CFO- blend corporate strategy and finance corporate strategy and finance responsibilities togetherresponsibilities together

Economic ProfitEconomic Profit

Economic Profit (EP) is the spread between the return on capital and its opportunity cost time the quantity invested in capital.

EP = Invested x (ROIC – Opportunity cost of)

capital capital

Economic ProfitEconomic Profit

EP discounts the value of future EP discounts the value of future economic profit which would equal the economic profit which would equal the discounted cash flow value .discounted cash flow value .

Therefore, maximizing the Economic Therefore, maximizing the Economic Profit EG could maximize the Profit EG could maximize the discounted cash flow value. discounted cash flow value.

Assessing the value of Assessing the value of strategic investmentsstrategic investments

1)1) Capital spending tied closely to Capital spending tied closely to strategic and operating plans to ensure strategic and operating plans to ensure evaluation was realistic and fact based.evaluation was realistic and fact based.

2)2) Hurdle rates vary by division to reflect Hurdle rates vary by division to reflect the relevant opportunity cost of capitalthe relevant opportunity cost of capital

3)3) Acquisition proposals would be handled Acquisition proposals would be handled by a relevant operations manager and by a relevant operations manager and CFO- perform thorough valuation CFO- perform thorough valuation analysis based on cash flow returns. analysis based on cash flow returns.

Summary Summary

Managing value consists of 3 steps:Managing value consists of 3 steps:

1.1. Taking stock in value-creation- look for Taking stock in value-creation- look for restructuring opportunitiesrestructuring opportunities

2.2. Acting on identified opportunitiesActing on identified opportunities

3.3. Instilling a value creation philosophy in Instilling a value creation philosophy in the companythe company

What What

Questions Questions

Do You Have?Do You Have?