something to smile about? - Euromoney Institutional Investor PLC

LEAD STORYVALUE CREATIONThe valuecreation equationThe mantra of shareholder value gained sway years ago. Butwhich companies have embraced the concepts behindmanaging for shareholder value? And how do you measure itanyway? Working with global consultant Stern Stewart, CF hasendeavoured to find out. Tabitha Neville reports.Business journalists,from their first dayon the job, are told toleave their prejudicesat the door ofthe office. Justbecause a reporter’scar isn’t workingdoesn’t mean he can lay into Ford nexttime its results are released.Nevertheless it was with a certaindegree of schadenfreude that I spoke toChaith Kondragunta, co-managingdirector of Stern Stewart Europe, twoweeks before we published this issue.He calls me to talk about CF andStern Stewart’s survey of the top 25companies in Europe, the US, andJapan. At the same time, I’m on hold onmy mobile phone to Vodafone, theworld’s largest mobile telecomcompany. Having switched over to theirnetwork a week before, I’m already onmy third call to customer service.“You should have asked them abouttheir poor MVA performance,” jokesKondragunta.“I don’t think customer serviceworry about such things,” I reply.“No, but their management will.”The schadenfreude resulted from therevelation that Vodafone is ranked 25in CF’s survey of the top 25 corporatesin Europe by market value added (MVA)performance.To be fair, coming bottom of a top 25poll is still something of an achievement– they beat many othercompanies, of course. But Vodafone’slack of attentiveness in customer serviceseemed – to me at least – to be areasonable metaphor for a negativeMVA figure of 142,865 – well belowWhat is...»MVAMathematically MVA isthe difference betweenmarket value –calculated as the sum ofthe market value ofequity, debt and themarket value ofoutstanding stockoptions – and thecompany’s investedcapital – the cashinvestors, both equityanddebt-holders,contributed to thecompany’s operations. Ahigh MVA indicates thecompany has createdsubstantial wealth forshareholders. MVA isequivalent to the presentvalue of all futureexpected EVAs. Apositive MVA indicatesthat investors expect thecompany to generatesignificant amounts ofEVA in the future. Acompany with a negativeEVA but positive MVAcan mean one of severalthings: the marketexpects it to turnaround;that it may be a potentialtakeover candidate; orthat it is following abusiness cycle.»EVAEconomic value added(EVA) is an estimate oftrue “economic” profit,or the amount by whichearnings exceed or fallVivendi Universal’s negative MVA of37,963, which is ranked at 24. Kondraguntadoesn’t seem surprised byVodafone’s ranking. “The only surprisewould have been if Vodafone hadn’tbeen at the bottom of the list.”As global consultants, Stern Stewarthelps companies develop a systematicshort of the requiredminimum rate of returnthat shareholders andlenders could get byinvesting in securities ofcomparable risk. In itssimplest form it’s acompany’s trading profit– net operating profitafter taxes paid (NOPAT)minus a capital chargefor both debt and equity.Stern Stewart has madechanges in thecaluculation of profitand capital to make theresult more realistic. Itcapitalises investmentsin intangible assetsplacing them on thebalance sheet wherethey belong.22 cf March 2004 corporatefinancemag.com