something to smile about? - Euromoney Institutional Investor PLC

More documents

Recommendations

Info

LEAD STORYVALUE CREATIONThe valuecreation equationThe mantra of shareholder value gained sway years ago. Butwhich companies have embraced the concepts behindmanaging for shareholder value? And how do you measure itanyway? Working with global consultant Stern Stewart, CF hasendeavoured to find out. Tabitha Neville reports.Business journalists,from their first dayon the job, are told toleave their prejudicesat the door ofthe office. Justbecause a reporter’scar isn’t workingdoesn’t mean he can lay into Ford nexttime its results are released.Nevertheless it was with a certaindegree of schadenfreude that I spoke toChaith Kondragunta, co-managingdirector of Stern Stewart Europe, twoweeks before we published this issue.He calls me to talk about CF andStern Stewart’s survey of the top 25companies in Europe, the US, andJapan. At the same time, I’m on hold onmy mobile phone to Vodafone, theworld’s largest mobile telecomcompany. Having switched over to theirnetwork a week before, I’m already onmy third call to customer service.“You should have asked them abouttheir poor MVA performance,” jokesKondragunta.“I don’t think customer serviceworry about such things,” I reply.“No, but their management will.”The schadenfreude resulted from therevelation that Vodafone is ranked 25in CF’s survey of the top 25 corporatesin Europe by market value added (MVA)performance.To be fair, coming bottom of a top 25poll is still something of an achievement– they beat many othercompanies, of course. But Vodafone’slack of attentiveness in customer serviceseemed – to me at least – to be areasonable metaphor for a negativeMVA figure of 142,865 – well belowWhat is...»MVAMathematically MVA isthe difference betweenmarket value –calculated as the sum ofthe market value ofequity, debt and themarket value ofoutstanding stockoptions – and thecompany’s investedcapital – the cashinvestors, both equityanddebt-holders,contributed to thecompany’s operations. Ahigh MVA indicates thecompany has createdsubstantial wealth forshareholders. MVA isequivalent to the presentvalue of all futureexpected EVAs. Apositive MVA indicatesthat investors expect thecompany to generatesignificant amounts ofEVA in the future. Acompany with a negativeEVA but positive MVAcan mean one of severalthings: the marketexpects it to turnaround;that it may be a potentialtakeover candidate; orthat it is following abusiness cycle.»EVAEconomic value added(EVA) is an estimate oftrue “economic” profit,or the amount by whichearnings exceed or fallVivendi Universal’s negative MVA of37,963, which is ranked at 24. Kondraguntadoesn’t seem surprised byVodafone’s ranking. “The only surprisewould have been if Vodafone hadn’tbeen at the bottom of the list.”As global consultants, Stern Stewarthelps companies develop a systematicshort of the requiredminimum rate of returnthat shareholders andlenders could get byinvesting in securities ofcomparable risk. In itssimplest form it’s acompany’s trading profit– net operating profitafter taxes paid (NOPAT)minus a capital chargefor both debt and equity.Stern Stewart has madechanges in thecaluculation of profitand capital to make theresult more realistic. Itcapitalises investmentsin intangible assetsplacing them on thebalance sheet wherethey belong.22 cf March 2004 corporatefinancemag.com
Top 25 Japan (by market value)Company Name Industry MVA Market Value Capital EVA NOPAT ROCE1 NTT DoCoMo Inc Communications 56,603 95,349 38,746 915 3,310 8.54%2 Takeda Chemical Inds Pharmaceuticals 20,097 30,871 10,774 1,512 1,834 19.52%3 Toyota Motor Transport Equipment 19,277 132,370 113,092 2,784 6,683 6.74%4 Canon Electrical Machinery 15,386 30,337 14,950 658 1,515 10.24%5 East Japan Railway Land Transport 7,993 30,335 22,343 1,074 1,690 7.46%6 Tokyo Electric Power Electric Power and Gas 7,662 84,747 77,085 246 2,149 2.65%7 Nissan Motor Transport Equipment 6,742 49,083 42,341 2,082 3,306 7.84%8 Sony Electrical Machinery 6,570 37,262 30,692 (1,446) 813 2.54%9 Honda Motor Transport Equipment 5,385 47,738 42,353 1,856 3,076 8.14%10 KDDI Communication 3,736 22,612 18,877 (468) 670 3.41%11 Chubu Electric Power Electric Power and Gas 2,972 40,111 37,139 431 1,315 3.46%12 Kansai Electric Power Electric Power and Gas 2,570 40,886 38,316 365 1,294 3.30%13 Kyushu Electric Power Electric Power and Gas 626 23,434 22,808 197 747 3.12%14 Tohoku Electric Power Electric Power and Gas 600 22,510 21,910 319 852 3.71%15 Toshiba Electrical Machinery 155 21,722 21,567 (507) 455 2.05%16 Itochu Wholesale (817) 25,317 26,134 (194) 616 2.27%17 Mitsui Wholesale (935) 35,421 36,356 (176) 675 1.87%18 Mitsubishi Wholesale (1,013) 41,283 42,297 (134) 861 2.04%19 Nippon Steel Steel Products (1,155) 22,259 23,414 (245) 441 1.84%20 Nippon Telg. and Tel. Communication (1,580) 113,082 114,662 (277) 4,796 4.14%21 Marubeni Wholesale (2,481) 23,778 26,259 (128) 492 1.68%22 Sumitomo Wholesale (2,844) 28,639 31,483 (350) 479 1.71%23 Fujitsu Electrical Machinery (6,209) 20,101 26,311 (1,309) 190 0.73%24 Hitachi Electrical Machinery (10,567) 37,477 48,043 (1,778) 593 1.21%25 Matsushita Electrical Electrical Machinery (12,622) 26,789 39,411 (953) 642 1.62%Market value as of 31 March 2003Capital as of 31 March 2003, year-end operating capitalExchange rate as of 31 March 2003, EUR per JPY 0.00776, source BloombergExcludes banks, insurance and other financial institutionsSOURCE: STERN STEWARTfocus on creating shareholder valuethrough its MVA/EVA (see box)performance ratios. The firm was theperfect choice to help CF create aranking of top performing companies.Both MVA and EVA are value-basedmetrics, which have grown inpopularity as traditional accountingmetrics have been proven to be unreliable.MVA is the difference between themarket value of a company (both equityand debt) and the capital entrusted toit. Put simply it is the differencebetween ‘cash in’ (what investors havecontributed) and ‘cash out’ (what theycould get by selling at today’s prices).CFOS LEADING JAPANNTT DoCoMo Keiji TachikawaTakeda Chemical Hiroshi TakaharaToyota Motor Fujio ChoCanon Toshizo TanakaEast Japan RailwayMasatake MatsudaTokyo Electric PowerShigemi TamuraNissan Motor Carlos GhosnSony Nobuyuki IdeiThe true aim of a company should be tomaximise MVA rather than the value ofthe company – as this can be easilyachieved by investing increasingamounts of capital.EVA essentially reflects the differencebetween a company’s achievednet operating profit (NOPAT) in anygiven year and the net operating profitit needed to achieve in that year inorder to compensate shareholders forthe cost of capital.Show me the moneyFinance executives have been spoutingplatitudes about shareholder value forHonda Motor Takeo FukuiKDDI Tadashi OnoderaChubu Electric PowerTakatoshi FujitaniKansai Electric PowerHiroshi MorimotoKyushu Electric PowerMichisada KamataTohoku Electric PowerYasumasa MakutaToshiba Tadashi OkamuraItochu Sumitaka Fujitaas long as most business consultantscan remember. As a consequence ofthis familiarity, there is a sizeablecontingent of detractors – not leastbecause many companies only appearto pay lip service to it.The faith that the market had inshareholder value, and the methods ofachieving it, has taken a severe beatingover the past five years. Corporate governancescandals, endless downgradesand executives massaging figures dominatedthe headlines and underminedconfidence further.But the happy consequence of theserather distasteful events has beenMitsui Tasuku KondoMitsubishi Ichiro MizunoNippon Steel Akira ChihayaNippon Telg. and Tel.Toyohiko TakabeMarubeni Nobuo KatsumataSumitomo Motoyuki OkaFujitsu Hiroaki KurokawaHitachi Takashi MiyoshiMatsushita ElectricalKunio Nakamuracorporatefinancemag.com March 2004 cf 23
Page 1 and 2: The magazine forthe internationalfi
Page 3 and 4: CONTENTSMARCH 200422 Lead storyThe
Page 6 and 7: conducted an internalinvestigation
Page 8 and 9: €6.4 billion or 40%. S&Ppoints ou
Page 11 and 12: Global consolidationefforts set to
Page 13 and 14: Follow-ons by Indian Issuers 01/01/
Page 15 and 16: Crudele strikes a chordwith Gibson
Page 17 and 18: ProxyMed recruitshealthcare veteran
Page 19 and 20: It is fair to say that France Telec
Page 21: TREASURER’SVIEWGetting to grips w
Page 25 and 26: Top 25 US (by market value)Company
Page 27 and 28: offered a cash dividend of €4.7 a
Page 29 and 30: MANAGING RISKFX FORECASTER OF THE Y
Page 32 and 33: What acorporateneedsThe modern corp
Page 34 and 35: Norbert Mayer, BMW: “Commercialpa
Page 36 and 37: Weatherfordchooses loanflexibility
Page 38 and 39: JT InternationalJT Internationalann
Page 40 and 41: Glasgow School of Art: part ofGlasg
Page 42 and 43: EMEA ECM SECTORSPREADS ‘03 & ‘0
Page 44 and 45: FXFORECASTS10-year benchmark long-b

something to smile about? - Euromoney Institutional Investor PLC

Create successful ePaper yourself

Delete template?

Save as template?