Value: The Four Cornerstones of Corporate Finance [Hardcover]

McKinsey & Company Inc. (Author), Tim Koller (Author), Richard Dobbs (Author), Bill Huyett (Author)

Book Description

Publication Date: November 9, 2010 | ISBN-10: 0470424605 | ISBN-13: 978-0470424605 | Edition: 1

An accessible guide to the essential issues of corporate finance

While you can find numerous books focused on the topic of corporate finance, few offer the type of information managers need to help them make important decisions day in and day out.

Value explores the core of corporate finance without getting bogged down in numbers and is intended to give managers an accessible guide to both the foundations and applications of corporate finance. Filled with in-depth insights from experts at McKinsey & Company, this reliable resource takes a much more qualitative approach to what the authors consider a lost art.

• Discusses the four foundational principles of corporate finance
• Effectively applies the theory of value creation to our economy
• Examines ways to maintain and grow value through mergers, acquisitions, and portfolio management
• Addresses how to ensure your company has the right governance, performance measurement, and internal discussions to encourage value-creating decisions

A perfect companion to the Fifth Edition of Valuation, this book will put the various issues associated with corporate finance in perspective.

Editorial Reviews

Review

'...marches the reader through the very practical issues that affect value.' (Financial Times, November 2010).

From the Inside Flap

From the team behind Valuation—the #1 bestselling reference on corporate finance—comes a decision-making guide for all executives to use as they create, manage, and sustain shareholder value.

Corporate leaders are regularly confronted with conventional wisdom and half-truths about value creation. They're given conflicting advice about what will or won't appeal to investors, often contradicting their own judgment about what builds lasting worth in their companies and the economy.

In Value: The Four Cornerstones of Corporate Finance, partners from the management consulting firm of McKinsey & Company describe the basic principles of value creation and their relevance. Internalizing these principles—or cornerstones—gives decision makers the independence and courage they need to challenge conventional wisdom, defy half-truths, and build thriving businesses.

The four cornerstones are:

• The Core of Value: a business's value is driven by its growth and return on capital, and resulting cash flows

• The Conservation of Value: value is created when companies generate higher cash flows, not by simply rearranging investors' claims on cash flows

• The Expectations Treadmill: movements in company share prices reflect changes in the stock market's expectations, not just underlying performance

• The Best Owner: the value of a business is not an absolute but, rather, depends on who is managing it and the strategy pursued

While there are many books that cover selected topics within corporate finance—often for specialized practitioners—it's the rare book that offers leaders a unifying viewpoint of business. Value is that book.

See all Editorial Reviews

Product Details

• Hardcover: 272 pages
• Publisher: Wiley; 1 edition (November 9, 2010)
• Language: English
• ISBN-10: 0470424605
• ISBN-13: 978-0470424605
• Product Dimensions: 6.3 x 1 x 9 inches
• Shipping Weight: 1.5 pounds (View shipping rates and policies)
• Average Customer Review: 4.6 out of 5 stars  See all reviews (18 customer reviews)
• Amazon Best Sellers Rank: #39,676 in Books (See Top 100 in Books)

Most Helpful Customer Reviews

10 of 10 people found the following review helpful

5.0 out of 5 stars Great book for managers AND investors January 26, 2011

By Brian Stolz

Format:Hardcover|Amazon Verified Purchase

Value is one of the best books I've read that cuts to the core of how businesses should operate. It focuses the reader on the four ways that value is created and guides us through both business and market implications for companies who create value versus those that focus on the wrong things. Messrs. Koller, Dobbs and Huyett cover a number of topics that any business leader or investor would find useful.

The first part of the book identifies the four pillars of value and helps to answer the following questions:
1) When is growth or return on invested capital more important? How does each increase value?
2) How do you identify activities that add value versus ones either diminish value or shift risk around?
3) How do you spot a company on the wrong end of the "expectations treadmill" and what are the implications?
4) How can you take advantage of the "Best Owner" principle? What are the implications for M&A?

In the second part of the book, the authors break down the stock market in aggregate. They help the reader understand how the market works, compare the link between interest rates and inflation with P/E performance over the last 100 years, model the stock market and explain where and why stock market bubbles occur. Next, they discuss the problems with earnings management and show what a poor job "consensus earnings" do at actually forecasting the future. Their message to managers is just don't do it.

In part three, the authors dive into value creation and discuss what drives return on capital. They break down return on invested capital by industry segment from 1965-2007 and provide the reader with insights into why some industries perform better than others. For investors, this segment is particularly interesting as the book explains that the ROIC advantages or disadvantages of specific industries tend to be sticky meaning we should expect those with an advantage to retain it barring any major structural shifts. The book then explores growth, discusses why growth is difficult to sustain and reviews how different types of growth are rewarded in the market.

The book discusses the following concepts in great detail including portfolio theory (The Business Portfolio ch. 12), M&A (ch. 13), risk (ch. 14), capital structure (ch. 15) and investor communications (ch. 16). These sections all offer insight and pose questions that will make managers rethink how they address these topics. With portfolio theory, the authors explain how the best owner principle should drive what businesses a company operates. In M&A, the book takes a look at what makes a good versus bad acquisition. In risk, the reader gets help thinking through external risks and how to help manage these risks. Chapter 15 discusses capital structures and how companies should think through their debt-to-equity mix, identify the "savings" from debt versus equity, and discuss how to return excess free cash flow to investors. In chapter 16 the authors explore investor communications in detail and describe what types of activities are helpful versus those that do not add much value.

The book closes out with a final chapter, entitled Managing for Value, that provides the "so what" of the topics discussed. It provides guidance for how managers and boards should use the four pillars of value to help guide decisions and identify the right activities to undertake to maximize value creation.

I recommend that you read this book if you want to improve your decision making as a manager or board member. You should also read this book if you want to better identify activities that should create value as an investor.

6 of 6 people found the following review helpful

5.0 out of 5 stars Value Creation is a long-term battle for corporate leaders April 16, 2011

By Hubert Shea

Format:Hardcover

There is no universal agreement on how to create value for corporate owners and investors. According to three leading management experts from McKinsey & Company, value creation should exclude the adoption of financial engineering, leverage, and changing accounting techniques which create short-term and illusory impact on corporate financial performance (chapter 15) and do not add "real" value to corporate owners and investors in the long perspective.

This book introduces four key principles or cornerstones of lasting value creation, including the core of value, the conservation of value, the expectation treadmill, and the best owner. The first principle places great emphasis on twin drivers of value creation, namely ROIC and revenue growth. This book dispels the widely-held assertion that revenue growth can automatically increase ROIC. When all else being equal, companies trading at higher multiples are as a result higher returns on invested capital instead of putting a blind faith on pure revenue growth opportunities which can reduce ROIC (P.25).

The second principle is corollary to the first principle in which "business does not increase cash flows does not create value" (P.29). It is heterogeneous to the adoption of capital restructuring exercise (debt/equity or share repurchase) or changing accounting practices to shift ownership claims to cash flows because they do not change the total available cash flows. By illustrating the adoption of collateralized debt obligations (CDO) as an example, total cash flows received by CDO holders are less than as if they directly own the loans.

The third principle postulates that value is reflected in how investors (intrinsic, trading, mechanical, and closet indexes) (P.213) expect and assess future share performance. The adoption of total return to shareholders (TRS) (P.48) cannot be viewed as the most effective performance-measurement tool because it can be affected by industry movements and the broader market. Nor does this book recommend corporate leaders to think how to keep beating short-term high share-price expectations which may resort to misguided actions.

The last principle places great emphasis on how value can be created by owners who can generate the highest cash flows. Different owners (company founders, VC, PE funds, large company) can add value to business by possessing distinctive and replicable functional or managerial skills (P.56) in different owner life cycle. Besides key financial drivers such as ROIC and revenue growth, the best owners should have other performance metrics (i.e. sales productivity, commercial health, and strategic health) to monitor the short-, medium-, and long-term health of the business (P.227).

The 2008 financial turbulence has compelled the testimony that value creation of the business cannot rely on speculative financial engineering and changing accounting skills. Corporate leaders who can create business value understand how to identify and focus on the long-term drivers of value creation. This book is highly recommended to specialized practitioners in corporate finance and corporate leaders across different industries. Readers with fundamental knowledge about corporate finance will find this book very insightful because it contains real-world evidence which is easier to understand the subtleties of value creation and destruction. Appendix A and B also contain useful value math formula and earnings multiples information which are useful to mathematically-inclined readers.

1 of 1 people found the following review helpful

5.0 out of 5 stars Exceptional overview of fundamentals of Corporate Finance August 31, 2011

By Nicholas Assef

Format:Kindle Edition|Amazon Verified Purchase

In a world where it seems to be appealing to complicate this book stands out for its simplification of core principles of corporate finance- based on fact and analysis. Reading this book takes one back to the basics - not the hype that one often reads in the popular press. It is a very well reasoned piece on why conservative approaches to the development of many of the challenging issues that public companies face daily should be adopted. Personally I am a great fan of issues such as ROIC being favoured approaches to performance over metrics such as Total Shareholder returns. This book does an exceptional job of reinforcing just what long term corporate performance is all about - embedded in concepts such as Return on Invested Capital. Thoroughly recommended.