Corporate (Group)
Shareholder Value Analysis
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Template for: Corporate (Group) Shareholder Value Analysis
The purpose of this section is to analyze the shareholder
value of the corporation
The format on the template web page is a general and simplified format that
can be customized and used by most corporations (including companies without
shareholders). The overall concept is that money comes in to the corporation
from one or more sources and cash goes out as well. The goal is to identify net
cash flows by year and to appropriately discount those cash flows.
Alternatively, the shareholder value of each SBU can be computed individually
and the company can be viewed as the sum of the shareholder values of all
corporate businesses (plus the present value of the corporate investment
portfolio, if any).
Many corporations would be better off to think of their 'important'
businesses not just in terms of those with large revenues, high market share, or
relatively high number of employees, but in terms of shareholder value as
measured by a discounted cash flow analysis. Time and again, corporate
management will be surprised that many of the not-so-large businesses, which are
often buried in the combined financial statements, are the businesses that truly
increase shareholder value.
In the cash flow analysis presented on the template page, shareholder
value is computed as the sum of:
- the 10-year discounted cash flow from all operations;
- the residual value of the company, discounted, assuming the company is
sold at the end of the 10th year;
- the present value of the corporate investment portfolio.
A few notes regarding using the shareholder value method:
- The time horizon can be other than ten years - whatever time horizon is
appropriate for the industry.
- The discount rate should be a function of the industry, the projected
economic environment, and the timing of the cash inflows and outflows.
- A high discount rate ensures that the forecast for the first few years
will be weighted significantly more than the outer years when forecasts are
often over optimistic. The valuation will likely be more reliable.
- Different corporate strategies will result in different shareholder value
estimates. For example, changing the corporate business mix will generally
have a significant impact on shareholder value.
Notes and assumptions help to link the forecasted revenue and expense data
to reality and to a specific strategy. For example, "Divest Business
Unit Seven for $62 million by 7/1/02 and Acquire Business XYZ by 12/31/02 for
$50 million." The forecast may be right or wrong, but at least the
financial projections can be related to the business environment.
In practice, business managers should prepare at least two shareholder
value analyses based on different assumptions. For example, a
"rosy" scenario based on the successful acquisition of an innovative
start-up company with proprietary products, and a "conservative"
scenario based on a less successful strategy. Alternative strategies should be
weighed in terms of their impact on shareholder value (discounted cash flow).
Theoretically, there are an endless number of strategies that could be
pursued, each with its own implications for success and shareholder value.
Personal computers loaded with spreadsheet software have enabled financial
analysts to crunch numbers effortlessly. The key, however, is to link the
industry forecasts and the competitive position of the corporate businesses with
the financial input data fed into the spreadsheet calculations.
Shareholder Value Analysis Summary
If this is the first time the company is computing its shareholder value,
the results could be surprising. The most dramatic surprises often result
from different scenarios based on changing the business mix including selling
most or all of the corporate businesses. In those situations where the parts are
worth significantly more than the whole, executive management (and the board of
directors) must confront the reality that based upon the current strategy of the
businesses, corporate management and the corporate structure are a drag on
shareholder value. Rationalization for the company to remain intact is not an
unlikely outcome of this exercise.
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