The Dynamics Of Shareholder Value

Roger W. Mills

Valuation methods, often presented as being new approaches and associated with measuring shareholder value in the USA, have been attracting considerable interest in the UK, continental Europe and elsewhere in recent times. These new methods focus attention on the present value of estimated future short-term and long-term cash flows and, in fact, the principles on which they are based are not new. They are well established in project finance and investment appraisal for evaluating major projects and acquisitions. However, what is different is their application in valuing the business as a whole, and their use in managing the business. Often this involves developing a new, or at the very least a modified set of performance measures, to replace the previous dominance of accounting performance indicators for managing the business. More broadly, and what is often not well appreciated, is the usefulness and adaptability of the approaches for evaluating difficult but important issues like joint ventures and intangible assets. These new methods have all the appearance of being only financial tools, but they really are multidisciplinary. They draw not only on corporate finance, but also strategy, marketing and scenario analysis and come in different forms, although most share one common feature - an emphasis on discounted cash flow analysis. To the extent that they encourage thought about the return one generates on investors' money, these new measures are welcomed by the financial community. A multitude of global business issues which can lead a management team to implement a shareholder value creation strategy include; mergers and acquisitions, strategy development, resource allocation, market and product innovation, incentive compensation, investor communications, value reporting and performance measurement. This book focuses on Strategic Value Analysis in terms of the theory and how it is used in practice. It shows the linkage with shareholder value creation, competitive advantage, the cost of capital, risk and terminal value. It develops the use of free cash flow and alternative measures, and also addresses more complex areas such as mergers, acquisitions and joint ventures. Furthermore, it considers valuation issues relating to emerging markets, new issues, intangibles, cross border considerations and the use of alternative valuation tools such as real options.

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