BCG Value Mgmt Framework.ppt

1、BCGS VALUE MANAGEMENT FRAMEWORKAN OVERVIEW FOR MBA STUDENTS,By Rawley Thomas Director of Research,The Boston Consulting Group 200 South Wacker Drive Chicago, Illinois 60606 312-627-2618 Thomas.RawleyBCG.com,WHAT GETS MEASURED GETS DONE,Traditional Valuation Techniques Versus BCGs Valuation Framework

2、,Traditional Valuation Techniques Forecast nominal cash flows by estimating P subtract debt to determine equity valuation Test model values against actual stock prices for thousands of firms for 10-40 years across many countries; refine, refine, refine,MANY ASSETS FOLLOW THE SAMEUSEFUL OUTPUT PATTER

3、N AS A CAR .,Constant Dollar Level Annuity,Economic Life,Likely Actual Output,Output Decline with Straight Line Depreciation,ISSUES WITH TRADITIONAL RETURN MEASURES,(*) Economic depreciation = amount of annual sinking-fund payment earning COC required to replace assets ($357 = 0.1/1.114 - 1)(12,000

4、- 2,000),Investment profile of a new plant,Subsequent annual measurement,Yr 1Yr 6Yr 12 Income843843843 Depreciation714714714 Cash flow1,5571,5571,557 Cash invested12,000 12,00012,000 Book capital11,2867,7163,432 ROCE (%)7.510.924.6 ROGI (%)131313 CFROI (%)101010,ROCE= Income/book capital ROGI= Cash

5、flow/ cash invested CFROI= (Cash flow - economic depreciation(*)/cash invested,Yr 1Yr 6Yr 12 NOPAT(1)843843843 Book capital(2)11,2867,7163,432 Cost of capital(3)x10%x10%x10% Capital charge(4)1,129772343 EVA(1-4)(286)71500 Cash flow(6)1,5571,5571,557 Cash invested(7)12,00012,00012,000 Cost of capital

6、(8)x10%x10%x10% Capital charge(9)1,2001,2001,200 Economic dep.(*)(10)357357357 CVA(6-9-10)000,VALUE-ADDED MEASURES REFLECT RETURN,COST OF CAPITAL AND SIZEReturn on New PlantMeasured Over Time,(*) Economic depreciation = amount of annual sinking fund payment earning COC required to replace assets ($3

7、57 = 0.1/(1.114 - 1)(12,000 - 2,000),Investment profile of a new plant,Tracking the Sample of 1970 Companies through time,Tracking the Sample of 1980 Companies through time,Tracking the Sample of 1987 Companies through time,Note the averages -7.00 on Corporate Tax Rate Correlation between Inflation

8、and Tax Rates: 0.00%,CFROI Actual,R2 = 0.76,TO SMOOTH ECONOMIC CYCLES, BUT INCORPORATE STRUCTURAL SHIFTS, BCGS VALUATION MODEL ASSUMES CURRENT CFROI LEVELS FADE TOWARD THE 5-YEAR PAST MEDIAN OF THE DISCOUNT RATE SAMPLE AT A 10% RATE,Annual CFROIs,5-Year Past Median CFROIs,BCGS VALUATION MODEL ANTICI

9、PATES THAT THE GROSS ASSET GROWTH RATE OF ALL COMPANIES IN THE USA FADE TOWARD THE LONG TERM ECONOMY AVERAGE,Annual GDP Growth Rates,3.2 % Compounded Annual Growth Rate in GDP from 1950-1996,Unlike CFROIs, where clear trends are evident, there does not appear to be a clear trend in growth rates for

10、the economy. Consequently, a long term average smooths out the annual fluctuations with no loss in investor anticipated trend.,Price = Discounted Present Value of Expected Future Net Cash Flows,THE INVESTORS DISCOUNT RATE IS THAT RATE WHICH EQUATES THE PRESENT VALUE OF CASH FLOWS FROM BCGS VALUATION

11、 MODEL TO THE MARKET VALUE OF DEBT AND EQUITY,Market Value of Debt and Equity of S May Represent a Proxy for Other Effects,Discount Rates Based on 1996 Discount Rate Sample of 279 S&P Industrials,R2 = 0.91,CFROI Effects,CFROIS NORMALLY EXCEEDTHE MARKET DERIVED DISCOUNT RATES1996 DISCOUNT RATE SAMPLE

12、,CFROIs,Market Derived Discount Rates,Differences,Politics/Policies Change,CFROIS NORMALLY EXCEEDTHE MARKET DERIVED DISCOUNT RATES,Even though many economists believe that all returns must converge, in a healthy capitalist economy, CFROIs on hard assets will exceed investor required returns on finan

13、cial assets most of the time, because: Continuous new entrepreneurial innovations prevent CFROIs from converging completely to promised financial returns (imperfect arbitrage) and Entrepreneurs must be rewarded with greater returns to assume the greater dispersion and higher risk of loss associated

14、with CFROIs on illiquid hard assets compared to financial returns on marketable, liquid financial assets,Producer Price Index % Change,GNP/GDP Deflator % Change,Inflationary Expectations,0.0% Base Rate 1950-1980 2.6% Base Rate 1981-1996,Inflationary Expectations based on 0-2.6 base rates follow actu

15、al inflation more closely, but avoid the sharp volatility of actual PPI and GNP/GDP annual inflation.,2.48,Note: the base rate is defined as the after-investor tax, after inflation required return on Government long term bonds.,BCG CALCULATES INFLATIONARY EXPECTATIONS BY SUBTRACTING TAX PREMIUMS AND

16、 A BASE RATE FROM LONG TERM GOVERNMENT BOND YIELDSUSA - 1950-1997,MARKET DERIVED NOMINAL EQUITY RATES COME FROM MARKET DERIVED REAL EQUITY RATES PLUS THE COMPOUNDED EFFECT OF INFLATIONARY EXPECTATIONS,Market Derived Nominal Equity Rate,9.17,6.53,2.48,Market Derived Real Equity Rate,Inflationary Expe

17、ctations,THE EQUITY RISK PREMIUM HAS DECLINED TO THE 2-3% RANGE,Risk Premium Differences,Market Derived Nominal Equity Rate,Nominal Long Term Government Bond Rate,2.66,RISK CONCEPTS AND MEASUREMENT,CAPM,Market Derived,Investors seek to avoid price volatility relative to the market.,Investors seek to

18、 avoid losses from unanticipated major events.,Major Events Bankruptcy (Leverage) Unanticipated Inflation Government Intervention Government Ownership Voting Rights on Key Changes Asset Age,Arbitrage Pricing Theory (APT) postulates other risk factors: Interest Rates Oil Prices Price/Equity Book Size

19、,NAIVE BELIEFS INCORRECTLY ASSUME COSTS OF DEBT AND EQUITY DO NOT VARY WITH CAPITAL STRUCTURE .,Cost of Equity,Cost of Debt, After-Corporate-Tax,Weighted Average Cost of Capital After-Corporate-Tax,Note: NOT Based on Valid Theory or Empirical Evidence,BCG EMPIRICAL WORK CONFIRMS INCREASING REAL COST

20、S OF DEBT AND EQUITY, ACCORDING TO TRADITIONAL THEORY,Equity,Weighted Average,Debt After-Tax,Source: BCG Database and Empirical Research on 63 Value Line Industries - 1995,To our knowledge, no one has published empirical results like these because of the significant inaccuracies in the traditional e

21、stimation procedures typically used. BCG eliminates much of these inaccuracies through our fading CFROI valuation model. Even with these inaccuracies eliminated, these cost of capital curves are probably not accurate enough for precise optimum capital structure work on individual firms. This is due

22、to remaining noise in the data and no size, entrenchment, and asset restructuring functions built into our current valuation model. However, these empirical results can be employed to avoid the misperception that costs of equity and total capital do not change significantly with changes in leverage.

23、 Rawley Thomas - Director of Research,Line of best fit based on minimizing absolute deviations of a power curve (to reduce influence of outliers) and constrained to pass through results for Sample F,6.03+35.14(D/C)2.42,2.38+2.69(D/C)1.86,PRELIMINARY HOLT DISCOUNT RATE RESEARCHMARKET DERIVED REAL COS

24、T OF EQUITYCORRELATION COEFFICIENTS1990, 220 Companies, 15% Fade of Cash Flows to Corporate Average,Note: Random sample of 220 nonfinancial industrial companies, drawn from over 6,000,Plant age and life (inflation adjustment factor),Plant life,Dividend yield,Size (LN-current dollar gross investment)

25、,Debt/total capital at market,Industry risk (government intervention?),Company Beta (value line),Unlevered Beta,Note the small correlation with Beta. This small 1% R2 with Beta suggests re-evaluation of traditional risk concepts.,BOTH CFROI AND TSR FOLLOW STABLE PARETIAN DISTRIBUTIONSWITH INFINITE V

26、ARIANCES AND SIMILAR PEAKEDNESS .,Peakedness =1.49 12.1 standard errors away from 2 (Gaussian),Peakedness =1.45 8.8 standard errors away from 2 (Gaussian),Competitive pressures force returns down,Number of Firms,Investor pressures force returns up,KEY CONCLUSIONS The distributions here are 8.8 to 12

27、.1 standard errors away from Gaussian Normal. For these distributions, variance does not exist. Variance is infinite. Therefore, traditional CAPM measures of risk do not exist. These results suggest risk theory should be revised to reflect actual distributions and the possibility that investors seek

28、 to avoid the risk of loss in the fat tails of the distributions, not dispersion risk.,CONFLICTING PERFORMANCE SIGNALSCAN CAUSE PROBLEMS,Most managements use IRR or NPV for new projects and plans Most managements use accounting ratios (ROE, ROCE, RONA) or earnings growth for existing businesses The

29、two types of measures are fundamentally inconsistent and can lead to poor management decisions For consistency and economic validity, use a measure like total shareholder return to evaluate project and overall company performance,FOCUS ON CFROI REMOVED REINVESTMENT BIAS, ENCOURAGED ECONOMIC BEHAVIOR AND INCREASED VALUE,Percentage,Campbell Soup Co.,Year,ROCE,CFROI,TSR/index1008386127135151167167158227239269252,AGING PLANT TRAP,Percentage per year,Year,Nominal RONA hurdle rate,Forecast RONA,Real discount rate,Forecast CFROI,NEW PLANT TRAP,Percentage per year,Year,Old plant,RONA