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Nova School of Business and Economics

Spring Semester 2012

Applied Corporate Finance
Asahi Glass Case: Implementing EVA

Professor: Jos Neves Adelino
Graders: Carla Peixoto and Andr Fernando

Group 12:
Filipa Gomes #440
Guilherme Ribeiro Pereira #474
Marta Cachola #437
Nuno Vasconcellos e S #494
Teresa Cortez #395

Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 2
Executive Summary
Asahi Glass Company (AGC) is a Japanese-based multinational manufacturer of flat
glass, chemicals, electronics and displays and other materials. In 1998, Mrs. Shinya Ishizu
was appointed the CEO of this global company, ranked as the sixth largest among all the
Japanese companies. As soon as he occupied the chair, Mrs. Ishizu started implementing
some drastic changes in the companys structure and corporate governance with the purpose
of making AGC an international and globalized entity.
The Japanese market and culture is a particular one, which makes the implementation
of changes really hard and complex. As far as corporate governance is concerned, the
Japanese culture revealed that the bank with the strongest relationship, also known as the
main bank, had an active role in the company, closely monitoring and intervening in case of
financial distress. With the deregulation of the capital markets and the crisis in the early 90s,
these systems gradually disappeared giving more relevance to credit rating agencies and less
to banks. Subsequently, the focus of corporate governance shifted towards
internationalization and opened the circle to outsiders, which was exactly the case of AGC.
By combining Ishizus goals and the shift in the Japanese corporate governance culture, AGC
saw a makeover in its business strategy with the creation of in-house companies, a reform
in its corporate governance structure and an introduction of a new management performance
measure system.
The new compensation scheme was based on Economic Value Added (EVA) that
evaluates employees, at large, accordingly to their value creation contribution to the overall
company. More broadly, EVA represents the portion of free cash flows after a capital charge
is deducted. An EVA-based performance measurement system can become very complex,
since the computation of its components (NOPAT, capital employed and cost of capital)
requires adjustments. The difficulties in measuring EVAs components at market values,
associated with the inconsistent accounting standards represent the main challenges when
implementing EVA. At AGC, the EVA system presented an extra handicap since the
incentives scheme was designed based on an EVA calculated with a single Cost of Capital
and Tax Rate for the whole firm. These types of compensation mechanisms should have a
slice and dice approach that consists in evaluating managers according to their regions and
business units ability of creating value.
After aligning all the companys strategic reposition with the EVA-based
compensation system, AGC would consist in an interesting and appealing investment. The
new management performance measurement plan would properly reduce agency problems,
limit the companys risk exposure, prevent managers short-run goals, and efficiently allocate
resources within the company. Bottom line, employees would more easily perceive the value
that they are creating and, at the same time, maximizing shareholders value would become
their forthcoming goal.
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 3

Executive Summary............2
Problem Statement..............................................................................................4
Corporate Governance Systems in Japan & Main-bank Relationships..................................4
Corporate Governance Systems in Japan........................................................................4
Main-bank Relationships............................................................................................4
Organizational and Cultural Changes.....6
The Changes and inherent boosters........6
The obstacles...7
Economical Value Added (EVA)...............................................................................................8
EVAs Components....9
EVA versus NPV....9
EVAs Uses....9
Advantages of EVA Performance Measurement Systems....10
Challenges when Implementing EVA..11
The EVA Systems in Asahi Glass....11
How did AGC implement EVA systems?........11
Measuring EVA at AGC...............................................................................................11
AGCs Challenges when Implementing EVA Systems....14
Recommendations AGC: Buy or not to buy?........................16
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 4
Problem Statement
Asahi Glass Companys founder Toshiya Iwasaki frequently used the moto Never
take the easy way out, but confront difficulties to describe the corporate culture he had built.
Almost a century later, President and CEO Shinya Ishizu saw himself forced to cope with it as
he was confronted with the need to modify the companys structure and culture, in order to
adapt it to the ever-changing globalized world. Several reforms needed to be implemented,
comprising corporate governance procedures (e.g. non-executive employees appointed to
executive positions), global business units organization and the implementation of a new
management system for resource allocation and performance measurement based on
Economic Value Added (EVA). Still, a quite significant resistance from senior management
and some employees was felt, as they did not understand the potential benefits it would bring.
Ishizu had to ensure their support in order to pursue the aim of making AGC a relevant global

Corporate Governance Systems in Japan & Main-bank Relationships
Corporate Governance Systems in Japan
Japanese corporate governance is highly characterized by its conservative tradition
and long-term focused relationships, commonly know as insider type system as illustrated
by Appendix 1. Besides the maximization of shareholder value, Japanese companies are
focused mainly on all stakeholders involved Appendix 2 and this is highly reflected in the
corporate governance models.
As we can see in Appendix 3, the number of outside directors on the board of
directors was considerably lower in Japan, making the focus of decisions on insider
stakeholders rather than external shareholders Appendix 4. Nevertheless, the main bank
relationship evidences that a major portion of the Japanese corporate governance system was
in the hands of the creditors instead of the shareholders. Deriving from the traditionally
conservative Japanese culture, these relationships would generate rather long term
continuance of firms and seniority of its stakeholders. Short term profit was not a main
driver in this setup, thus management and employees were likely to become more stable. This
is well illustrated in Appendix 5 where the contrast between Japan and courtiers like UK and
USA is very significant, being job security more important than dividends for Japanese
companies. This system was, in fact, historically linked with lifelong employment system and
seniority promotion. There were, however, some drawbacks to this governances nature,
namely due to its closeness concerning the share of information and lack of transparency in
Main-bank Relationships
In Japan during the 60s and 70s, banks were the main financial providers for
companies in general; capital markets were still undeveloped and too regulated. Among the
banks providing the financing there would be one that maintained the strongest relationship
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 5
with the company, thus, being called as the main bank. Generally, the main bank had
several roles besides being the core financial provider; it would monitor the companys
financial performance and it would also intervene if necessary when there were signs of
financial distress.
The relationship with the main bank would often be reinforced through a cross-
shareholding agreement, which is indeed the case of AGC. In this relationship both parties
hold small minority interest stakes in each other and generate special agreement on decision
voting and selling their shares. AGC was part of the Mitsubishi Group and its main bank
was, not surprisingly, the Bank of Tokyo-Mitsubishi, which owned 3.8% of AGC (seven
largest shareholder), and AGC owned 0.9% of the Financial Group. According to AGCs
CFO this ownership relation was extremely important as he said: the main bank used to act
as the stable shareholder, which understood AGCs business and supported our management.
In this way it was generally accepted that the bank would actively participate in the corporate
governance of the firm and would selectively intervene when needed. There were cases when
senior bank executives were invited as executive or non-executive board members,
reinforcing the influence of the main bank, for instance, in the companys strategic
Nevertheless, having the major lender as a participant in the decision-making process,
it can obviously arise some problems regarding conflict of interests. It is in the main interest
of the bank that AGCs business is as safe as possible and this could bias their decision when
considering the risks of projects. This risk is partially absorbed by having the bank as a
shareholder, but since the ownership stake can be proportionally lower than the value of loans
provided, this shareholder position might be negligible in comparison with the lender
However, when Japan suffered the severe economic downturn in the early 90s, these
cross-shareholding agreements and tight relationships suffered a major hit. Banks were selling
their equity holdings in order to compensate for the losses. At the same time, with the
deregulation of capital markets and its take-off, companies initiated their flow search with the
open markets and started a divesture process of cross-holding shares. Since these shares yield
returns as close to 1%, investors were not interested in having the company tied with such
low-yielding assets. Here we can see a change in the corporate governance style, as the main
bank relationship and cross-holding agreements collapse, the focused starts slowly shifting
from inside out.
With the higher resort to capital markets, a new necessary cost emerges: credit ratings.
In comparison with the main bank relationship, the latter has several advantages in these
terms. Having the main bank monitoring responsibilities and stakes in the company as a
shareholder and lender gives some kind of flexibility and better credit terms than the funds
being provided by an outside party that evaluates the company with an external perception.
There were significant agency costs savings in the previous relationship with banks that were
subsequently aggravated with the new credit rating systems that resulted from being listed.
Both the credit rating entities and rated companies were inexperienced with ratings in the
Japanese market, resulting in higher costs during the whole rating process. Being dependent
on the capital markets might bring extra volatility to the business since external factors can
deteriorate lending conditions in the markets, reducing the flexibility once provided by main
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 6
banks. In the previous system, since banks were treated as insiders they were better
equipped to evaluate the credit worthiness of the company.

Organizational and Cultural Changes
Shinya Ishizu was a visionary, who realized the importance of launching Asahi Glass
to a different competing dimension. From the moment he was appointed CEO in 1998, he
started modifying the companys structure and culture, aiming to make it internationally
relevant, facing market globalization. Several restructures had to be made in order to improve
operational performance, coordination at all levels, quick decision making and accounting
The Changes and inherent boosters
AGC had a tri-polar organization, enclosing three main regions: Japan/Asia, Europe
and U.S. Due to concerns regarding financial risk, senior management decided to provide
managing autonomy to each regional operation, within these three areas. Nevertheless,
customers (e.g. automobile and electronic) were increasingly becoming global and requested
a single, consistent service worldwide (e.g. price for supplies). Thus, a global assessment of
the company was needed. In order to efficiently manage and optimize the value for each
business, as we may detain from the cases exhibit 7a, in 1998 the company decided that
subsidiaries performance assessment was to be made as a part of AGC group. Furthermore, a
Shrink to Grow strategy was implemented in order to deal with weak domestic performance
and Asian economic crisis. This strategy consisted on allocating resources to the several
business units on a selective and focused manner.
A year later, the company decided to implement an EVA-based measurement system,
with the purpose of assessing each business units performance. Managers and executives
bonuses were connected to these measures, thus creating the proper incentives for them to
seek a value added approach.
Following EVAs introduction, AGC chose to extend the changes and included the
resource allocation process in the companys three-year mid-term planning cycle. The criteria
chosen for the resource allocation were the suitability of each SBUs investment and FCF
projections with the companys strategy, along with the value input to the total value of the
In 2002, a new initiative entitled Look Beyond was announced. The purpose was to
enhance shared value and to improve the three-year planning cycles, by providing long-term
direction. To fulfill these aims, three major restructures had to be made: creation of in-
house companies, corporate governance reform and definition of group corporate and
business operating functions.
The first step was the creation of four in-house companies, which resulted from the
split of AGC into smaller units, globally: the Flat Glass Company, the Automotive Glass
Company, the Display Company and the Chemicals Company. SBU and subsidiary SBU
supplemented them, as displayed in the cases exhibit 7b. Previously, AGCs operations were
geographically organized. With this restructure, they became organized per product lines,
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 7
fostering international coordination and enabling AGC to supply important global customers.
Besides, two non-Japanese executives were chosen to manage the first two of these
companies, forcing many employees to learn English. The goals were to foster independency,
delegating authority, enabling quick decision making to allow the board to focus on strategic
matters. Ishizu incited employees to closely communicate despite the country differences,
sharing knowledge and experiences with one another.
On a corporate governance scope, it was observable a reduction of the Board of
Directors from 20 members to 7, of which two were independent members and four executive
officers. The aim was to separate execution and oversight of management. AGC was a
pioneer in this topic in Japan, since companies usually did not appoint external directors or, at
best, had just one sitting on the Board. Furthermore, this reform along with the in-house
companies creation allowed the narrowed board to cope with few important strategic issues.
In 2003, with the purpose of reducing succession issues, AGC established a four-
person nominating committee. Their role was to control the executive succession process.
Due to the presence of the two independent directors, presidents were no longer responsible
for choosing their successors.
In order to be able to manage all the previously mentioned changes, AGC created
group corporate functions and business operating functions (in-house companies and
SBUs). The formers were entailed of supervising each of the latters, offering a common
management platform and strategically allocating resources according to the value creation
demonstrated by each business unit. As in-house companies and SBUs were charged with
business operating function, they became more autonomous, having the chance to maximize
One other consequence of the new structure was centralization of financial functions.
Financing, tax management and insurance tasks changed from being settled within each
region, to be consolidated, thus allowing for a significant cost reduction. Of these, tax
management was the most promising and a European tax manager was appointed the role of
global tax coordinator. Additionally, each in-house companys EBIT and operating assets,
and EVA, became its own responsibility. Senior management inducements were dependent
upon these performance measures.
Finally, AGC decided to extent the globalization to human resources management,
training senior and middle managers, most of which foreign, to lead the company in the
future. The aim was to decrease the percentage of Japanese employees from 30 to 6, within in
10 years.
The obstacles
The success of this restructure does not come without withdraws. There is a long road
to go between the carefully planned intentions of the process and the final outcome. Ishizus
first impression was that the company was quite comfortable with its lasting success and
expansion, benefiting from the oligopoly in which it stood and unable to realize the inevitable
change it hade to make to keep up the pace of global markets. Resistance and cultural change,
along with conflict of interests and accounting inconsistencies resume the main issues to deal
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 8
First of all, lays the problem of resistance. Although younger and oversees staff easily
embraced changes, senior management had a difficult time doing so and expressed resistance.
Even though the creation of in-house companies enhanced several improvements, it
also brought up the issue of geographic and cultural distance. The language barrier, along
with company size, and business dimension, created communication problems which
compromised the restructure process. Having foreign directors and co-workers was a
challenge for Japanese employees, who usually did not speak other language besides their
mother tongue. Moreover, managers worried about important investment decisions that were
left up to in-house companies, whose presidents may lack insights regarding AGCs
financial position and compromise the companys overall creditworthiness. More in-debt and
frequent communication was required. In addition, Japanese employees were feeling
disregarded, as the company tried to increase the number of foreign employees.
Conflict of interests with minority shareholders and local partners was another
problem that arose with Ishizus transformations. As they tended to seek their interests by
focusing on individual profit of each local company, they disregarded the company as a
whole. For this reason, AGC decided to buy out the interest they held, which is not a viable
long-term solution. Furthermore, in-house companies president hold the power of decision
on the capital structure and credit risk divisions, whereas, Ishizu was to answer for those
issues to the external market. Besides, being in-house companies responsible for their
EBIT, operating assets and EVA, led presidents bonuses to be determined taking into
account the annual operating profits, despite top management being evaluated for both short-
and long-term performance. Thus, deviation of interests could lead the companys capital
structure and compromise its credit ratings. Despite the mitigation efforts of restricting the
decision through the AGC group medium-term planning conference, the issue remained latent
and some claimed that the group corporate should be responsible for both asset allocation and
capital structure decisions. AGCs accounting system had not been standardized yet at the
time, which created inconsistency in decision-making and performance evaluation.
Consequently, resource allocation and attribution of incentives were not properly made.
Being the mentioned changes as important as they are, a first step should be taken
towards the change of corporate culture and the achievement of senior management support,
so that the other transformations may happen in a smoother way.
Economic Value Added (EVA)
Economic Value Added (EVA) is equivalent to the residual income that measures the
firms ability to generate profits in excess of the cost of capital employed to generate those
profits. The EVA can be also seen as the spread between the return on and cost of capital
multiplied by the capital employed. While a positive EVA means that the company has
generated excess profits required to remunerate investors for the capital that they have been
provided; a negative EVA reveals that the company has been devouring sources without
proving return to investors for their capital employed in the firm. These interpretations can be
better understood by looking at the following formula:

Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 9
EVAs Components
NOPAT: It stands for Net Operating Profits After-Taxes and it is a taxed version of the
EBIT. The costs incurred and the tax shields generated with debt are not reflected in the
NOPAT since it will be reflected on the after-tax cost of debt in the discount rate.

Cost of Capital: It is commonly represented by the weighted average cost of capital
(WACC), and it reflects the composite return expected by the firms investors. It includes
both the debt and the equity investors expectations, taking into account the CAPM and
market values.

Capital Employed: There are two methods to compute a companys capital employed: the
financing and the operating approaches. The first focus on the right side of the Balance Sheet
and defines the invested capital as the sum of shareholders equity and all interest bearing
debt. The second method, on the opposite, departures from the left side of the balance Sheet
and then make some adjustments. This means that it takes into account all the companys
assets and then deducts the short-term non-interest bearing debt.
EVA versus NPV
Using either the EVA or the NPV analysis when taking investing decisions, is
equivalent. Both methodologies provide the same result: invest in projects that yield a return
higher than the companys cost of capital. This result can be derived mathematically and
intuitively seen by looking at Appendix 6 and, hence, one can notice that the NPV of a
certain project is clearly equivalent to the PV of EVA of that same project. But when
considering compensation incentives and budgeting purposes, the story may differ. It is can
be easier for workers to perceive their function in a company by looking at the EVA than
through the NPV analysis. EVA is much more intuitive than the NPV, since it reveals the
value that is being created whether NPV shows how much a company is worth at some point
in time. People perceive easier flows than stocks. Bottom line, in order to maximize
shareholder wealth, companies should maximize the PV of future EVA.
EVAs Uses
EVA is commonly used as a management control system for performance
measurement and incentive compensation. Managers focused on earnings might take
misleading decisions since accounting earnings only deduct the costs incurred with debt and,
therefore, managers tend to invest in projects that yield only above the after-tax cost of debt.
With the EVA approach, one can notice that the company is able to create value if the
projects yield above the overall cost of capital. By explicitly separating the cost of equity of
the capital employed, EVA raises the bar and, therefore, promotes a more efficient allocation
of capital. Furthermore, we will analyze that the main decision when computing EVA is what
cost of capital should we use to evaluate each manager dependently on his country and
business unit.
Another possible measure that we could use, alternatively to the cost of capital, is the
return on net assets (RONA). Since RONA reflects the amount of capital used to generate
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 10
operating profits, it does not incorporate the return required by investors to provide such
capital. It can be easily seen by the following algebraic expression:

If managers incentives were design based on RONA, there are two types of sub-
optimal behaviours that could prevail: 1) For instance, assuming a cost of capital lower than
the RONA, managers will tend to engage in investments that yield a return between the cost
of capital and the RONA. This provides a positive NPV but it would under generate profits
for the company. 2) Another scenario is when the cost of capital is higher than the RONA. In
this case, if managers are evaluated based on improvements in the companys RONA, they
will tend to accept projects with a return higher than the RONA but lower than the cost of
capital, thus resulting in a negative NPV. In summary, more profitable companies may
underinvest and less profitable companies may overinvest. EVA-based systems such the one
used by Asahi Glass prevent these type of situations.
There are five ways by which companies, specifically managers, can improve EVA,
assuming a ceteris paribus analysis: 1) increase returns on existing capital through
maximizing operating profits or better asset utilization; 2) invest in new projects with a
positive spread (expected returns greater than the cost of capital); 3) divest projects with a
poor performance; 4) optimize the capital structure to reduce the cost of capital, thus
increasing the spread margin; 5) ultimately, extend the period over which the spread is
expected to be remain positive competitive advantage period.
Advantages of EVA Performance Measurement Systems
As far as managerial compensation is concern, companies often rely on packages
based on EVA. By doing it, companies should ensure that the implementation of an EVA-
based performance measurement system properly aligns managers and owners incentives,
limits the risk exposure, and, more importantly, that incentives managers in fact.
The main advantages of EVA compensation plans are: the avoidance of managers
common short-run goals; the direct link with shareholders value, reducing agency problems;
the unrestricting bonus level, meaning that there is no cap or floor on the bonus amount; and,
finally, the limited, at some point, accounting distortions.
Even though EVA systems may become complex, they can be adequately applicable
for the majority of the companies, even if they are established in less liquid or volatile
markets, and multidivisional firms. For instance, in international multidivisional companies,
as Asahi Glass, it is possible to compute different EVAs for each country branch and for each
division, in order to accurately evaluate those country and division employees. Having an
overall EVA, in this situation, can create some misleading and unwanted incentives.
A major benefit that these types of compensation systems can bring is the easiness at
which employees are able to perceive the value that they generating for the company. EVA
enables employees to realize how much value are they bringing to the table. An alternative
incentive scheme could be an equity-based one which links employees bonus with the
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 11
companys stock price. The issue with these types of mechanisms is that employees do not
objectively perceive how can they improve the stock price, and thus have a large bonus.
Finally, if companies have the resources and ability to implement complex systems,
the larger the breakdown in the bonus plan into financial value drivers (such as, asset
turnover, profit margin, etc), the more effective and realized the incentives become. This also
represents a lot more of implementation risk, since the firm would need a strong cost
accounting department that would define overhead allocation rates, set internal transfer prices
and align the performance metric with scope of decision.
Challenges when Implementing EVA
When implementing such a complex system as an EVA system, companies may be
confronted with several handicaps. Prior to the implementation, there is the difficulty of
calculating EVA that arises. Since EVA departures from accounting captions and then is
subject to some adjustments, the companys accounting standards should be in place. For
instance, AGCs business units across the world had different accounting standards that
represented an obstacle to the implementation of EVA.
Another issue regarding the EVAs computation is the fact that accounting figures are
reported at their historical cost, and EVA relies on market values. Since most times the
market value of assets in place are difficult to determine, as an alternative companies use
book values. Therefore, by using book values the EVAs reached do not reflect properly
investors opportunity cost and expectations. Miscalculations, such this one, might lead to
value destruction. Additional, in order to totally reflect investors market return opportunities,
EVA should also reflect any growth expectations. A proper way of address it is by
establishing incentives based on EVA improvements.

The EVA Systems in Asahi Glass
How did AGC implement EVA systems?
Asahi implemented EVA in 1999, as a reference for performance evaluation, and
resource allocation. It was calculated according to the formula previously mentioned, where
group taxes were assumed to be 38% and the WACC for the group to be 8%. With this, Asahi
created a hurdle rate of 8% of return for their investments and decided to base the
managers incentives in creating opportunities that achieved higher returns than this.
Measuring EVA at AGC
At Asahi, EVA is used by taking into account a given cost of capital and tax rate as
the companys without considering the segmentation by both regional areas and In-house
companies that the AGC Group encompasses. Furthermore, we will identify this as a
drawback of EVA systems implementation at AGC. Moreover, in the referred in-house
companies there was a further division between products, for example, in the glass business
segment there are three different products: flat glass, automotive glass and other such as
techno glass.
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 12
First of all, we computed the EVA for the fiscal years of 2000, 2001 and 2002 having
into consideration the operating profit and the capital employed gathered from the
consolidated financial statements of AGC Group. In order to get the capital employed, we
summed the interest-bearing debt, given by the short-term bank loans, commercial paper,
current maturities of bonds and the total long-term liabilities, and the total shareholders
equity. As for the tax rate and the weighted average cost of capital (WACC), the values
considered were the ones referred in the cases Exhibit 10 for the AGC Group (Taxes=38%
and WACC=8%). As previously mentioned, EVA was calculated as follows:

The results of the consolidated AGC Groups EVA for the 3 years are shown in the
table below:

Table 1 EVA of the Consolidated AGC Group

In order to make an assessment of the EVA of 2000, 2001 and 2002 achieved before,
we decided to take a more segmented approach by going from product to business unit and
then to the AGC Group as whole.
For the glass business segment, we started by creating a weight structure based on the
values of sales of the various products per year based on the cases Exhibit 4. Given that for
the fiscal year of 2000, the values were not available the average of the other 2 years was
taken as a proxy. Having this done, we computed a weighted average of each products
WACC and tax rate in order to reach a WACC and a tax rate of the division for each year as
presented in the following table:

Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 13

Table 2 - WACC and Tax Rate of the Glass Division

The tax rates and the WACCs taken were the Flat Glass Co., the Automotive Co. and,
for the other products, we took ATG (Asahi Techno Glass). These values are given in the
cases Exhibit 10b and are considered as an average of the Flat Glass Asia, America and
Europe and Automotive Asia, America and Europe, respectively. It is reasonable to consider
this value as constant across time but it is an error of the Asahi management in the EVA
implementation that we had to take.
For the electronics and displays business segment, the same approach was taken but
this time with just 2 products: display and electronics materials. The tax rates and the
WACCs considered, which are again taken out of the Exhibit 10b from the captions Display
Co. and Electronic, respectively. The results are shown in the subsequent table:

Table 3 WACC and Tax Rate of the Display and Electronics Division
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 14

After this step, we had the operating profit for each of the business segments (glass,
electronics and displays, chemicals and other) taken from the Exhibit 4 of the case. To get the
tax rates and the WACC of each business segments we took the values achieved in the Tables
2 and 3 for the glass and electronic and displays divisions, for the chemicals we took the
caption with the same name in the Exhibit 10 and for the other division we took a simple
average of the remaining captions (building material, ceramics, Asahi fiber and Ise chemical).
Having the operating profit and the tax rate of each business segment, we easily obtained the
NOPAT as it is presented in the previous expression. In order to obtain the capital employed
by division, the values could only be obtained by distributing the capital employed of the
consolidated firm according to weights. The most adequate proxy for the capital employed
amongst the captions available in the Exhibit 4 is the assets value since conceptually the
capital employed is higher when the assets are higher too. Therefore, we computed the
weights according to the assets value, used the results obtained to multiply by the cost of
capital of each of the divisions and got to the Economic Profit per division following the EVA
expression previously referred. The table with all the computations described is available in
the Appendix 7.
After getting the values for each division, it is possible to aggregate them by summing
the EVAs of each division per year and the results obtained are shown below as well as the
results of the EVA consolidated.

Table 4 EVA of the Consolidated and the Sum of the EVAs with Capital Employed weighted by Assets

The values obtained through the consolidated approach and through the segmented
approach seem to be quite similar and this might lead us to conclude that segmenting the
calculations does not bring much value to the EVA obtained. To make sure of this idea we
computed the values of the tax rate and WACC by aggregating the divisional results and then
compare to the 28% and 8% given in the case, respectively. To get the tax rate aggregated we
multiplied the tax rate of each division by its weight based on operating profits and then
summed them all up and achieved values of 38.13% in 2000 and 38.10% in 2001 and 2002,
which are a bit higher than the 38% assumed in the case. For the WACC, the procedure was
the same but using weights based on assets and the results obtained were 7.93% in 2000 and
2001 and 7.92% in 2002, which is slightly lower than the 8% cost of capital stated in the case.
AGCs Challenges when Implementing EVA Systems
There are several assumptions behind EVA, which needed to be taken into account
when performing the computation. It is possible to calculate it for the operations in a given
country, for a specific business area, or even for a specific business area in a given country,
and all these different calculations imply different assumptions. That is, if you want to
calculate EVA for Asahi Glass flat glass operations in Japan, you would have to calculate the
respective NOPAT, capital employed and WACC.
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 15
By reading the present case, one may acknowledge that Asahi Glass quite simplifies
the process of calculating EVA. That is, if they want to know what is their EVA in Japan they
look at the data mentioned above (without making any adjustments) and simply calculate it.
Thus, they would get the Japanese NOPAT and the capital employed, multiply the latter by
the groups WACC and then reach the EVA.
This would be fine, if they did not employ capital in a country and then sold some of
the products generated by that capital in a different one, or if different countries (and
businesses) did not have different WACCs. In a nutshell, if you employ capital in Japan to
produce a flat glass, sell it in Korea, for instance, and do not adjust the inputs, employed
capital in Japan would go up as well as the Korean NOPAT, which would reduce the Japanese
EVA and increase the Korean one.
With this, we intend to show how EVA can lead to wrong conclusions, and even may
give the wrong incentives if used to calculate a managers performance and bonus. When a
company does not use EVA carefully, which is the case of Asahi, it could lead them to accept
a project which could destroy value (with an expected return lower than the WACC) or it
could lead them to beneficiate a manager for an achieving, which merit was not his.
Summarizing what we have covered so far about the way Asahi uses EVA, we believe
that they are not paying full attention to what EVA means, and they do not really know what
are the inputs that EVA requires to give a plausible measure of performance. As a whole, we
believe that EVA can be very useful to assess the performance of a specific business area (as
it is relatively easy to calculate all the inputs needed for that) or even to evaluate the
performance of a given country (although non producing countries could be penalized as they
cannot control the capital employed to produce what they are selling). Basically, Asahi should
have different WACCs for different locations and business units, and it should adjust the
capital employed, according to the sales of each country.
To improve the way EVA is used by Asahi we would recommend some changes,
which would lead to never choosing a project that could destroy value, and that would award
managers according to their performance correctly.
These recommendations encompass both the right choice of WACC and the correct
allocations of capital employed:
1) When calculating EVA for a specific business unit Asahi should use a WACC
according to location where the capital is employed. As an example, when assessing flat
glass performance, Asahi should use the WACC appropriate for this industry, according to
the countries where flat glass is produced (as per in the cases exhibit 10), it should use the
capital employed that is respective to the production of flat glass and the NOPAT that is
originated from flat glass sales.
2) When calculating EVA for a specific country, Asahi should correct the employed
capital, according to the capital that was employed to produce the NOPAT in that country.
For instance, if a country does not have production, then it should use the capital employed in
the other countries that was necessary to produce what that country is selling. This way, every
countrys EVA calculation would weight the capital employed, according to the percentage of
NOPAT for that industry. The drawback for these non-producing countries is that they could
not manage the employed capital, as it would be given from the producing country, as thus
they could only improve EVA through NOPAT. This method would, however, be perfect to
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 16
assess the EVA of a producing country, if we reduced the employed capital by not
considering the percentage that was not sold in that country. On top of this, again, the WACC
should be calculated considering the place where the products were produced, and the
different industries.
Another issue not yet discussed is the foreign exchange rates. From what we read,
Asahi does not have a system to prevent losses from unexpected changes in these rates. This
might have implications on our suggestion for the computation of the EVA. If we import
employed capital from a country to another, we need to make it in the same currency to
calculate the EVA. This way, changes in the exchange rates would change some EVAs, even
if the operations of Asahi did not change. We believe this risk could simply be mitigated if
Asahi hedged their foreign exchange exposure, with financial products.

Recommendations AGC: Buy or not to buy?
The global expansion of the Asahi Glass Corporate Group trough the Worlds main
regions has been quite successful having big companies as costumers in Europe, Asia and
This expansion has led to employees dissatisfaction because of the change in the
recruitment policy from just Japanese workers to a more international approach and a goal of
reaching 30% of the employee base to be non-Japanese. This change in recruiting strategy
must be smoothened and properly presented by the management across the company, in order
to ease this transition.
The main issue that the management should handle is the implementation of EVA in a
more segmented approach per region and business division. Having different WACCs and
Tax rates per country and per In-house company would provide a chance for the management
to enhance their decision making process in whether to accept or reject projects as well as to
reward appropriately the employees. This framework of applying EVA could afford to create
ways of maximizing the value creation of the Asahi Glass Corporate Group by finding the
right strategies regarding production and selling locations as well as the right internal transfer
pricing. This decision should take into account the changes in the Accounting Standards that
are about to occur in some of the countries were the company is present.
All this effort in fulfilling this segmented EVA would have to be measured and
assessed in order to know the implementation costs and risks as well as the potential benefits
that it would create.
If all these changes in the EVA implementation were done, we would definitely buy
stock in Asahi as their strategic repositioning will allow them to maximize the full value
creation potential of each business unit and each region.
Applied Corporate Finance Asahi Glass Case
Group 12 Spring Semester 2012 17
Appendix 1 Insider and Open types of Governance

Appendix 2 Constituents of Corporate Governance

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Group 12 Spring Semester 2012 18
Appendix 3 Composition of Board of Directors in different Companies

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Appendix 4 Companies give priority to Stakeholders or Shareholders Interests?

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Appendix 5 Executives Choices on Dividend Policy versus Job Stability

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Appendix 6 Economical Value Added versus Net Present Value

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Appendix 7 EVA of each Business Segment with Capital Employed calculated
recurring to weights by Assets

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Group 12 Spring Semester 2012 23
Appendix 8 (Extra) EVA of each Business Segment with Capital Employed calculated
recurring to weights by Sales (not referred in the report)