The Role of the Concept of Shareholder Value in the Context of

Value Based Corporate Management

Dr. Dieter WeinmannHeidelberg, 19.03.2010

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Agenda

The Concept of Shareholder Value

Value Based Coporate ManagementShareholder Value Concept and

Value Based Management

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Agenda

The Concept of Shareholder Value

Value Based Coporate ManagementShareholder Value Concept and

Value Based Management

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Shareholder Value - I

• Is an indicator for all future payments of a company investment

• Is the Value of one share multiplied with the amount of shares

• Is the Value of the Company• Are the expected dividends of the company

for all shares

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Shareholder Value - II

• If capital markets are efficient, Investors choose either those shares, that provide the highest return when having the same risk class or those shares, that provide the lowest risk when having the same return rate.

• So it is clear, that an investor chooses those shares, from which the highest accumulated payments in the future can be expected.

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Shareholder Value III(Alfred Rappaport, 1995)

Target

Valuation Field

Value Generator

Steering Possibilities

Gaining Value/ Shareholder

Value

Internal/ external Share-Stakeholder

Value benefit

Net Cash-Flow Discount Rate Capital

structure

Capital CostsCapital assetsSales growth, Profit margin,

Tax Rate

Prognosis horizon

Business internal/ external

Investments Financing

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Agenda

The Concept of Shareholder Value

Value Based Coporate ManagementShareholder Value Concept and

Value Based Management

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Value Based Coporate ManagementStakeholder

• The Stakeholder of a company are the Management and the investors/capital provider

• In the past the external shareholders/ stakeholders wanted the managment to maximize the share value

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Value Based Coporate ManagementMotivation of the Management

• The Owner(-Group) of a company is interested in keeping the company alive

• If paid with a fix salary, the Management is interested in satisfying their own prefences, but the owners are interested in maximizing the profit Principal-Agent-Theory

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Principal-Agent-Theory

• Ownership and Management is separated

• Owner(-Group) is/are the Principal

• Management is the Agent

• Usually the Agent has an Information-Advantage, because he/she

has a deeper insight into the company

• Because everybody maximizes his/her own utility, it is likely, that the

agent acts against the interests of the Principal

This is called „Moral Hazard“

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Value Analysis for Corporate Restructuring

2

-1,5

4

0,5

-13

2,5

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Agenda

The Concept of Shareholder Value

Value Based Coporate ManagementShareholder Value Concept and

Value Based Management

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Shareholder Value Concept andValue based Corporate Management

Separating Enterprise Value and Shareholder Value:

For internal calculation of the Enterprise Value, there is much more information available than at the stock market for the shareholder value.

Often differences between internal calculated value and stock market value

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Critics for the Concept of the Shareholder Value:

Methodical:- It is not possible to determine exactly the

Enterprise Value and Shareholder Value including the capital costs, because the capital market is inefficient

- Problems with the Motivation for the Management (Agent), to act like the owners would like them to

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Critics for the Concept of the Shareholder Value:

- The success-values in accounting can be manipulated in several ways (e.g. for company-political reasons for getting a loan or for getting a good position in a company ranking, etc.)

- The traditional Market Value Methods expect, that the payments of the past, also last in the future and do not consider the environment and development of the company, which could lead to other payments

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ConclusionPro Shareholder Value:

SV is a good tool for evaluating strategies

Prerequisites:• Right to interact of Shareholders• Right for information of Shareholders• Salary for Managers correlated to SV• Organizational Model has to be compatible

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ConclusionCon Shareholder Value:

• The Concept of the Shareholder Value is not able to paint a

complete picture of a company

• SV fosters short-term thinking

• SV destroys the consensus between Management and

Employees

• Quoting Rappaport, SV is for long-term strategies

• Investments are often paying off in the long run, but then the

management has already changed

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Thank you

for Your Attention!

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BackUp

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Determination-problems of the Shareholder Value – I

- every future-prognosis is unsecure- uncertainty increases, with the amount of

time

- „constant-growth-model“ is also not realistic

today … ??

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Determination-problems of the Shareholder Value – II

- In the Concept of the Shareholder Value, only the maximization of payments is considered.

- Values that aren‘t quantifiable, aren‘t considered at all

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Shareholder Value Concept andValue based Corporate Management

Managers are mostly paid in relation to the shareholder value.

What consequences are to be expected?

Good or bad?

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Shareholder Value - II

Shareholder Value = Total Company Value – Value of external capital

Dividend Discount Model (DDM):

= Present Value, Market Value

= Discount Percentage

= Dividend in period t (including Liquidation in period T)

T

tt

tT

T

e

D

e

D

e

D

e

DMVPV

12

2100 )1()1(

...)1(1

tt MVPV

tD

e

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Shareholder Value - IIIEasy calculation of the Market Value

with the model of Gomez and Weber:

Calculating with the „never-ending“ Operating Free Cash-Flow (OFCF):

= never-ending Operating Free Cash-flow

= Discount Percentage

e

OFCFnyValueFinalCompa n

n 1

nOFCFe

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Shareholder Value - IVOperation Free Cash Flow:

Operating Profit+ writedowns+ Increasement of reserves= Operating Cash-flow before taxes (EBIT)

- Income-Tax= Operating Cash-Flow after taxes

- Increasement of working capital- Netto-investments in assets= Operating Free Cash Flow