VALUATION - Equity-Research
VALUATIONMEASURING ANDMANAGING THEVALUE OFCOMPANIESFOURTH EDITIONMcKinsey & CompanyTim KollerMarc GoedhartDavid WesselsJOHN WILEY & SONS, INC.
VALUATIONMEASURING ANDMANAGING THEVALUE OFCOMPANIES
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VALUATIONMEASURING ANDMANAGING THEVALUE OFCOMPANIESFOURTH EDITIONMcKinsey & CompanyTim KollerMarc GoedhartDavid WesselsJOHN WILEY & SONS, INC.
➇This book is printed on acid-free paper.Copyright 1990, 1994, 2000, 2005 by McKinsey & Company, Inc. All rights reserved.Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.No part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, scanning, orotherwise, except as permitted under Section 107 or 108 of the 1976 United States CopyrightAct, without either the prior written permission of the Publisher, or authorization throughpayment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web atwww.copyright.com. Requests to the Publisher for permission should be addressed to thePermissions Depart ment, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030,201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permissions.Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their bestefforts in preparing this book, they make no representations or warranties with respect to theaccuracy or completeness of the contents of this book and specifically disclaim any impliedwarranties of merchantability or fitness for a particular purpose. No warranty may be createdor extended by sales representatives or written sales materials. The advice and strategiescontained herein may not be suitable for your situation. You should consult with a professionalwhere appropriate. Neither the publisher nor author shall be liable for any loss of profit or anyother commercial damages, including but not limited to special, incidental, consequential, orother damages.Designations used by companies to distinguish their products are often claimed astrademarks. In all instances where John Wiley & Sons, Inc., is aware of a claim, the productnames appear with initial capital or all capital letters. Readers, however, should contact theappropriate companies for more complete information regarding trademarks and registration.For general information on our other products and services, or technical support, pleasecontact our Customer Care Depart ment within the United States at 800-762-2974, outside theUnited States at 317-572-3993 or fax 317-572-4002.Wiley also publishes its books in a variety of electronic formats. Some content that appears inprint may not be available in electronic books. For more information about Wiley products,visit our web site at www.wiley.com.Cloth edition: ISBN-10 0-471-70218-8; ISBN-13 978-0-471-70218-4Cloth edition with CD-ROM: ISBN-10 0-471-70219-6; ISBN-13 978-0-471-70219-1University edition: ISBN-10 0-471-70221-8; ISBN-13 978-0-471-70221-4Workbook: ISBN-10 0-471-70216-1; ISBN-13 978-0-471-70216-0CD-ROM: ISBN-10 0-471-70217-X; ISBN-13 978-0-471-70217-7Web spreadsheet: ISBN-10 0-471-73389-X; ISBN-13 978-0-471-73389-8Instructor’s Manual: ISBN-10 0-471-70220-X; ISBN-13 978-0-471-70220-7Printed in the United States of America.10987654321
About the AuthorsThe authors are all current or former consultants of McKinsey & Company’s corporate finance practice. Collectively they have more than 50 yearsof experience in consulting and financial education.McKinsey & Company is a management-consulting firm that helps leadingcorporations and organizations make distinctive, lasting, and substantial improvements in their performance. Over the past seven decades, thefirm’s primary objective has remained constant: to serve as an organization’s most trusted external advisor on critical issues facing senior management. With consultants deployed from over 80 offices in more than 40countries, McKinsey advises companies on strategic, operational, organizational, financial, and technological issues. The firm has extensive experience in all major industry sectors and primary functional areas, as well asin-depth expertise in high-priority areas for today’s business leaders.Tim Koller is a partner in McKinsey’s New York office. He leads the firm’sCorporate Performance Center and is a member of the leadership group ofthe firm’s global corporate finance practice. In his 20 years in consultingTim has served clients in North America and Europe on corporate strategyand capital markets, M&A transactions, and value-based management. Heleads the firm’s research activities in valuation and capital markets. He wasformerly with Stern Stewart & Company, and Mobil Corporation. He received his MBA from the University of Chicago.Marc Goedhart is an associate principal in McKinsey’s Amsterdam officeand a member of the leadership group of the firm’s corporate finance practice in Europe. Marc has served clients across Europe on portfolio restructuring, capital markets, and M&A transactions. He taught finance as anv
viABOUT THE AUTHORSassistant professor at Erasmus University in Rotterdam, where he alsoearned a PhD in finance.David Wessels is an adjunct professor of finance at the Wharton School ofthe University of Pennsylvania. Named by BusinessWeek as one of America’stop business school instructors, he teaches courses on investment bankingand corporate valuation at the MBA and Executive MBA levels. David is alsoa director in Wharton’s executive education group, serving on the executivedevelopment faculties of several Fortune 500 companies. David, a formerconsultant with McKinsey, received his PhD from the University of California at Los Angeles.
PrefaceThe first edition of this book appeared in 1990, and we are encouraged thatit continues to attract readers around the world. We believe that the bookhas succeeded because the approach it advocates is grounded in universaleconomic principles. While we continue to improve, update, and expand thetext as our experience grows and as business and finance continue toevolve, the fundamental principles do not change.The 15 years since that first edition appeared have been a truly remarkable period in business history, and managers and investors continue toface the opportunities and challenges that emerged from it. For us, theevents of the Internet boom and its demise have only strengthened our conviction in the core principles of value creation. This may seem illogical,given that one of the things we learned was that for some companies, duringsome periods of time, the stock market may not be a reliable indicator ofvalue. Paradoxically, this has only strengthened our conviction that managers attune themselves even more to the underlying value of their company and how it can create more value, because signals from the stockmarket may not always be reliable.This book’s message is simple: Companies thrive when they create realeconomic value for their shareholders. Companies create value by investingcapital at rates of return that exceed their cost of capital. These principlesapply across time and geography. This book explains the core principles, describes how companies can increase value by applying the principles, anddemonstrates the practical ways to implement the principles.We wrote this book for managers (and future managers) and investorswho want their companies to create value. It is a how-to book. We hope thatit is a book that you will use again and again. If we have done our job well, itwill soon be full of underlining, margin notations, and highlighting. This isno coffee-table book.vii
viiiPREFACEWHY THIS BOOKThis book began life as a handbook for McKinsey consultants. This beginning is reflected in the nature of the book. While it draws on leading-edgeacademic thinking, its purpose is practical application. It aims to demystifythe field of valuation and to clarify the linkages between strategy andfinance.We believe that clear thinking about valuation, and skill in using valuation to guide business decisions, are prerequisites for success. CEOs, business managers, and financial managers alike do not always understandvalue well enough. But they must understand it if they are to do their jobswell and fulfill their responsibilities.In this book, we hope to lift the veil on valuation by explaining, step-bystep, how to do it well. We spell out valuation frameworks that we use inour consulting work, and we bring these frameworks to life with detailedcase studies that highlight the practical judgments involved in developingand using valuations. Most important, we discuss how to use valuation tomake good decisions about courses of action for a company.This book will help business managers better understand how to: Decide among alternative business strategies by estimating the valueof each strategic choice. Develop a corporate portfolio strategy, understanding which business units a corporate parent is best positioned to own, and whichmight perform better under someone else’s ownership. Assess major transactions, including acquisitions, divestitures, andrestructurings. Improve a company’s performance management systems to betteralign an organization’s various parts to create value. Design an effective capital structure to support the corporation’sstrategy and minimize the risk of financial distress.INTELLECTUAL FOUNDATIONSValuation is an age-old methodology in finance. Its intellectual origins lie inthe present value method of capital budgeting and in the valuation approach developed by Professors Merton Miller and Franco Modigliani ( bothNobel laureates) in their 1961 Journal of Business article entitled “DividendPolicy, Growth and the Valuation of Shares.” Our intellectual debt is primarily to them, but others have gone far to popularize their approach. Inparticular, Professor Alfred Rappaport (Northwestern University) and Joel
PREFACEixStern (Stern Stewart & Co.) were among the first to extend the MillerModigliani enterprise valuation formula to real-world applications.STRUCTURE OF THE BOOKThe book is organized in four parts. Part One provides the fundamentalprinciples of value creation. Part Two is a step-by-step approach to valuing a company. Part Three applies value creation principles to managerial problems. Part Four deals with more complex valuation issues andspecial cases.Part One provides an overview of value creation. Chapter 1 makes thecase that managers should focus on long-term value creation, despite thecapital market turmoil of the past several years. In Chapter 2 we develop apicture of what it means to be a value manager through a detailed casestudy based on the actual experiences of a CEO who needed to restructurehis company and create a culture dedicated to managing for value. Chapter 3 summarizes the basic principles of value creation using both a simplecase example and a rigorous derivation of these principles. Chapter 4 provides the empirical evidence supporting the discounted cash flow (DCF)view of valuation.Part Two—Chapters 5 through 12—is a self-contained handbook forusing discounted cash flow to value a company. A reader will learn how toanalyze historical performance, forecast free cash flows, estimate the appropriate opportunity cost of capital, identify sources of value, and interpret results. As further guidance to the practitioner, we walk through thevaluation of a company (Heineken) from an outside perspective, using publicly available information. We also show how to use multiples of comparable companies to supplement DCF valuation.Part Three applies the value creation principles to the issues that managers face. Chapter 13 provides a framework for evaluating corporate performance, incorporating both short-term financial performance and indicatorsof a company’s “health,” or its ability to create value over the long term.Chapter 14 explains how to align a company’s performance managementprocess with value creation. Chapters 15 and 16 explore creating valuethrough mergers, acquisitions, and divestitures. Chapter 17 will guide managers as they make capital structure decisions to create value. Finally, Chapter 18 examines ways companies can improve their communications with thefinancial markets.Part Four—Chapters 19 through 25—is devoted to valuation in morecomplex situations. We explore the challenges of valuing high-growth companies, companies in emerging markets, multibusiness companies, cyclicalcompanies, banks, and insurance companies. In addition, we show the way
xPREFACEuncertainty and flexibility affect value and the application of option pricingtheory and decision trees.WHAT’S NEW ABOUT THE FOURTH EDITIONWith the fourth edition, we continue to expand the practical application offinance to real business problems, reflecting the economic events of thepast decade, new developments in academic finance, and the authors’ ownexperiences. Most of the case examples and empirical analyses have beenupdated, and we have reflected changes in accounting rules. We have enhanced the global perspective in the book, with extensive examples anddata from outside the United States, including discussions of both U.S.and international accounting standards, as well as a chapter dedicated toemerging markets.We have substantially expanded or revised most chapters to add insights on practical applications. Among them: Do Fundamentals Really Drive the Stock Market? (Chapter 4), which describes the empirical evidence to support discounted cash flows, nowincludes a discussion of the emerging area of behavioral finance. Frameworks for Valuation (Chapter 5) has been expanded to provide amore detailed overview of the alternative DCF techniques, such asthe adjusted present value (APV) method. Forecasting Performance (Chapter 8) now includes practical tips onbuilding robust financial models. Estimating the Cost of Capital (Chapter 10) contains a new discussionon the market risk premium based on recent empirical work as wellas alternative models to the Capital Asset Pricing Model (CAPM) andpractical ways to estimate beta. Calculating and Interpreting Results (Chapter 11) includes a more detaileddiscussion of how to estimate the value of nonoperating assets and liabilities, such as unfunded pensions and stock options. Creating Value through Mergers and Acquisitions (Chapter 15) and Creating Value through Divestitures (Chapter 16) have added practical approaches to evaluating deals and estimating synergies. Valuing Flexibility (Chapter 20) incorporates a systematic approach tocomparing option pricing and decision trees as a way to valueflexibility. Cross-Border Valuation (Chapter 21) has been recast to account for thefact that most major European and Asian companies have adoptedInternational Financial Reporting Standards.
PREFACExiIn addition, the fourth edition has five new chapters, including: Thinking about Return on Invested Capital and Growth (Chapter 6) introduces return on capital and growth as the key drivers of value. Thischapter helps executives forecast ROIC and growth by providing historical evidence on the long-term performance of companies. Using Multiples for Valuation (Chapter 12) explores how to use multiples to draw additional insights about valuation from comparablecompanies, keeping the focus on DCF valuation. Performance Measurement (Chapter 13) explores the complexities ofmeasuring corporate performance, particularly the imperative to analyze a company’s long-term health on par with its short-term financial performance. Capital Structure (Chapter 17) provides a practical perspective on theimpact of capital structure on corporate value and explains how executives can use capital structure (including decisions about debt levels, dividends, and share repurchases) to support their corporatestrategies. Investor Communications (Chapter 18) grounds investor communications in rigorous analysis of a company’s value, its strategy story, andits current and potential investor base.VALUATION SPREADSHEETAn Excel spreadsheet valuation model is available on a CD-ROM or via webdownload. This valuation model is similar to the model we use in practice.Practitioners will find the model easy to use in a variety of situations:mergers and acquisitions, valuing business units for restructuring orvalue-based management, or testing the implications of major strategic decisions on the value of your company. We accept no responsibility for anydecisions based on your inputs to the model. If you would like to purchasethe model on CD, ISBN 0-471-70217-X, please call (800) 225-5945, or visitwww.WileyValuation.com to purchase the model via web download, ISBN0-471-73389-X.
AcknowledgmentsNo book is solely the effort of its authors. This book is certainly no exception, especially since it grew out of the collective work of McKinsey’s corporate finance practice and the experiences of its consultants throughoutthe world.Most important, we would like to thank Tom Copeland and Jack Murrin, two of the coauthors on the first three editions of this book. We aredeeply indebted to them for establishing the early success of this book, formentoring the current authors, and for their hard work in providing thefoundations that this edition builds on.Ennius Bergsma also deserves our special thanks. Ennius initiated thedevelopment of McKinsey’s corporate finance practice in the mid-1980s. Heinspired the original internal McKinsey valuation handbook and musteredthe support and sponsorship to turn that handbook into a real book for anexternal audience.We would also like to acknowledge those who shaped our knowledge ofvaluation, corporate finance, and strategy. For their support and teachings,we thank Tony Bernardo, Bob Holthausen, Rob Kazanjian, Ofer Nemirovsky, Eduardo Schwartz, Jaap Spronk, Sunil Wahal, and Ivo Welch.A number of colleagues worked closely with us on the fourth edition,providing support that was essential to the completion of this edition.André Annema, one of the longest serving members of our European corporate finance practice, led much of the analysis for three chapters: Do Fundamentals Really Drive the Stock Market? (Chapter 4) with assistance fromTerence Nahar and Fredrik Gustavsson; Creating Value through Divestitures (Chapter 16); and Cross-Border Valuation (Chapter 21). Bin Jiang,with the support of Carrie Chen, conducted the analysis for Chapter 6,Thinking about Return on Invested Capital and Growth, using the Corporate Performance database that she has been developing for McKinsey, andxiii
xivACKNOWLEDGMENTSwhich was inspired by Dick Foster. Nidhi Chadda assisted with Chapter 12,on Using Multiples for Valuation. Richard Dobbs co-wrote Chapter 13, Performance Measurement and Chapter 14, Performance Management, withsupport from Paul Todd, Vanessa Lau, and Joe Hughes. Werner Rehm cowrote Chapter 15, Creating Value through Mergers and Acquisitions. Chapter 16, Creating Value through Divestitures, draws on work by LeeDranikoff and Antoon Schneider. Régis Huc supported the analyses forC
The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisers. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more.
for equity valuation. But the analysis has typically been ad hoc. Drawing on recent research on accounting-based valuation, this paper outlines a financial statement analysis for use in equity valuation. Standard profitability analysis is incorporated, and extended, and is complemented with an analysis of growth. An analysis of operating
John Wiley & Sons, Inc. C1.jpg. EQUITY ASSET VALUATION. . 1 Introduction to Free Cash Flows 108 2 FCFF and FCFE Valuation Approaches 109 . 11 Valuation Indicators and Investment Management 231 12 Summary 233 Problems 236. CHAPTER 5 Residual Income Valuation 243. Learning Outcomes 243
Automated Valuation Models (AVMs) are computer-based systems which encompass all data concerning real estate in a particular area and are capable of producing more consistent valuation reports within a short time. Traditional valuation methods employed by valuers somewhat delay the valuation process. For
Callan Periodic Table of Investment Returns Returns Ranked in Order of Performance (as of June 30, 2019) Equity Cap Large-9.11% Equity Cap Large-11.89% Equity Cap Large-22.10% Equity Cap Large 28.68% Equity Cap Large 10.88% Equity Cap Large 4.91% Equity Cap Large 15.79% Equity Cap Large
AAPL UW Equity APPLE 情報技術 MSFT UW Equity MICROSOFT CORP 情報技術 AMZN UW Equity AMAZON.COM 一般消費財・サービス GOOGL UW Equity ALPHABET A コミュニケーション・サービス TSLA UW Equity TESLA 一般消費財・サービス GOOG UW Equity ALPHABET C コミュニケーション・サービス
Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the . valuation and financial instrument analysis, as well as much more. . Introduction to Valuation 1 A Philosophical Basis for Valuation 1 Generalities about Valuation 2
Wiley & Sons, 2003. Print. Fishman, Jay E., Shannon P. Pratt, and James R. Hitchner, PPC’s Guide to Business Valuations. Business Valuation Review. American Society of Appraisers. Business Valuation Update. Business Valuation Resources. A .pdf copy of the ASA’s Business Valuation Standards can be downloaded from the following
valuation services and terms for the 409a valuation report. Once this is signed and the invoice for the valuation services is settled, we can start running the report. Get your 409A valuation. Running the Report: 10-20 days After the data is provided an
