Integrated Management Project
FN02
Dr David Ewers
Same Time Session
April 13, 2015
© Henley Business School 2008
www.henley.reading.ac.uk
Reasons to Fail – Being Stupid !
• Disorganised
• Descriptive
• No understanding
• Integration of three areas
• Referencing
• Reviewer and Support
– Senior Management Support /Reviewer
• Have I fallen down any of these holes ?
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Reasons to Fail – being Clever !
• Disorganised
• Descriptive
• No understanding
• Integration of three areas - Help
• Referencing
- Help
• No Support
- Help
• Reviewer – Senior Management Support - Help
/Reviewer
• Have I fallen down any of these holes ? - Why
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SVA application:
CASE – Subject Integration
CFG – SD - GBE
CFG
•
SGR
•
OPM
•
CTR
•
RFCI/IFCI
•
IWCI
•
COC/WACC
•
Competitive Adv
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SD
GBE
4
Integration Linkage Sheet
MATRIX OF INTEGRATION
CASE
CG
Umbro
CF
SVA Metrics SD
GBE
SGR
OPM
CTR
IFCI/RFCI
IWCI
COC
COMP ADV
Value Y0
Value Y imp
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Traditional corporate finance theory
breaks down due to…
I.
Conflict of interest:


II.
The interests/objectives of the decision makers in the firm conflict with the interests of
shareholders.
Bondholders (Lenders) are not protected against expropriation by shareholders.
Asymmetric information:

Financial markets do not operate efficiently, and share prices do not reflect the underlying
value of the firm.
III. Contingent liabilities:

Significant social costs can be created as a by-product of share price maximization.
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The Market of Corporate Control
• The corporate control market is a market in which investors or management teams
buy and sell corporations and compete for control of a company.
• Narrowly defined, the corporate control market is a corporate takeover market in
which mergers, acquisitions, hostile takeovers, leveraged buy-outs (LBOs), and
management buyouts (MBOs) take place.
• A broader definition includes a variety of other organizational restructuring
events that are related to attempts by one team or another to retain or get control
of a company.
•
These events include divestitures, spin-offs, and initial public offerings (IPOs).
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The “forward looking” mindset
Historical
Now
“Performance”
Future
“Potential”
Profit
IBT
Book
Equity
Taxes
Dividends
Retained
Earnings
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Accounting
Economic
8
Estimating free cash flows: the Value Drivers.
=
+
=
=
Sales
Cost of good sold
Operating Margin
Depreciation/Amortization
EBITDA
Cash Taxes
Operating cash flows
CASH PROFIT GENERATION
INCREMENTAL CASH NEEDED
- RFCI: Replacement Fixed Capital Investment
- IFCI: Incremental Fixed Capital Investment
- IWCI: Incremental Working Capital investment
= Free Cash Flows to the Firm
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Where do I find the Value Drivers?
Sales Growth Rate (SGR)
Operating Profit Margin (OPM % sales)
Cash Tax Rate (CTR % of OPM)
Profit & Loss
IFCI (% incr sales)
IWCI (% incr sales)
Depreciation (% of sale)
RFCI (= depreciation)
Balance Sheet
Cost of Capital
WACC
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Free cash flows from planning period
Ye a r
1
%
Sales Growth Rate (SGR)
0%
Operating Profit Margin (OPM % sales)
0.0%
Cash Tax Rate (CTR % of OPM)
0%
IFCI (% incr sales)
0%
IWCI (% incr sales)
0%
Cost of Capital
0.00%
Depreciation (% of sale)
0%
RFCI (= depr)
0%
2
%
Inputs from past performance
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3
%
4
%
5
%
6
%
7
%
8
%
9
%
10
%
Projected into the future
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Free cash flows from planning period
Ye a r
1
£m
149.5
2
£m
0.0
3
£m
0.0
4
£m
0.0
5
£m
0.0
6
£m
0.0
7
£m
0.0
8
£m
0.0
9
£m
0.0
10
£m
0.0
Operating Profit
Less: Cash Tax
Profit After Tax
Add: Depreciation
Operating Cash Flow
Less: RFCI
Less: IFCI
Less: IWCI
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Fre e Ca sh Flow
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Sales Receipts
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2006
149.5
12
Free cash flows from continuing period:
the Terminal Value
Ye a r
Sales Growth Rate (SGR)
Operating Profit Margin (OPM % sales)
Cash Tax Rate (CTR % of OPM)
IFCI (% incr sales)
IWCI (% incr sales)
Cost of Capital
Depreciation (% of sale)
RFCI (= depr)
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1
%
0%
0.0%
0%
0%
0%
0.00%
0%
0%
2
%
3
%
4
%
5
%
6
%
7
%
8
%
9
%
10
%
Be yond
%
0%
0.0%
0%
0%
0%
0.00%
0%
0%
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From Business Value to share price
Free Cash Flow
Cumulative WACC
Present Value (Free Cash Flow)
Cumulative Present Value
Present Value of Terminal Value
Value of operating assets of the Firm
% Terminal Value
17.5
1.0780
16.2
16.2
0.0
1.078
0.0
16.2
0.0
1.078
0.0
16.2
0.0
1.078
0.0
16.2
0.0
1.078
0.0
16.2
0.0
1.078
0.0
16.2
0.0
1.078
0.0
16.2
0.0
1.078
0.0
16.2
0.0
1.078
0.0
16.2
0.0
1.078
0.0
16.2
#DIV/0!
#DIV/0!
#DIV/0!
Cumulative Present Value of Free Cash Flows
+ Present Value of Terminal Value
= Business Value
+ Cash and Marketable Securities
- Market Value of Debt
- Value of Equity Options
= Corporate Value
16.2
#DIV/0!
#DIV/0!
4.6
0.0
0.0
#DIV/0!
Value per share (144.6 million shares outstanding)
UMBRO actual share price 17/10/2007
#DIV/0!
£1.20
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0.0
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Integration Linkage Sheet
MATRIX OF INTEGRATION
CASE
CG
Umbro
CF
SVA Metrics SD
GBE
SGR
OPM
CTR
IFCI/RFCI
IWCI
COC
COMP ADV
Value Y0
Value Y imp
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Increases in CFG value supported
by SD and GBE
•
•
•
•
•
•
Sales growth may improve because of being able to use the distribution channels of each organisation to sell the products of
both
Reductions in operating profit margins may be possible because of being able to use production facilities more efficiently
Cash taxes may be saved by being able to plan the tax position of the new combined organisation. This area may be
particularly beneficial for certain types of cross-border deals
Fixed capital requirements may be lowered by being able to use available spare capacity for increased sales activity. There
may also be an impact on replacement capital requirements, a good example of this being the decision to merge by two high
street clearing banks. It may be possible to provide service to both sets of customers in the new organisation by cutting the
number of branches
Working capital requirements can be reduced if the two businesses have a profile of cash flows opposite in effect to one
another. There may also be potential benefits arising from better debtor, creditor and stock management
The cost of capital may fall if access is obtained to cheaper sources of finance.
• What are the most influential SVD/s and their value impact and the assumptions
needed to be supported by SD and GBE
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Integration Scenario Analysis
Scenarios
1. New Markets
2. More Green
3. Move to Indonesia
4. HQ to Move
5. More mkt %
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My IMP
• Title
• Description – abstract (200 words)
• Value Objective
• GBE Concepts utilised -
• SD Concepts utilised • CF Concepts utilised • CG Concepts utilised –
• Number of Integration Links
• Value Created by Project
• Management Reviewer
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My IMP Integration Linkage Sheet
MATRIX OF INTEGRATION
CASE
CG
Umbro
CF
SVA Metrics SD
GBE
SGR
OPM
CTR
IFCI/RFCI
IWCI
COC
COMP ADV
Value Y0
Value Y imp
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Questions and Action Plan
• 1
• 2
• 3
• 4
• 5
• 6
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