FINANCIAL MANAGEMENT

CASE REPORT 2

IDENTIFYING VALUE CREATORS

Denis Vassilyev 201105020 Temple Uwalaka 201105018

04/16/2012

OVERVIEW In the given case we are supposed to prepare a comparative financial performance analysis for companies within different industries and different geographical regions in terms of value creation. From a financial perspective, value is said to be created when a business earns a return on capital that exceeds the cost of capital. For that analysis we are offered to use several methods which could show controversial indicators. In that case will try to identify which method is more effective and fair in circumstances described in the case. There are fourteen companies, two for each industry to analyze. ANALYSIS BY INDUSTRY In this section, we will take a peep in the value creation of companies within an industry and see how they are faring. COMPUTER HARDWARE-PERSONAL COMPUTERS INDUSTRY in the computer industry, Apple and Acer were the two companies that were given. One important thing here is that apple is an American Company whereas, Acer is a Taiwanese company. It is like Asian versus America. Looking at their data and financial analysis, it is obvious that Apple is a growing company that holds lots of promise in the future, while Acer is a mature company that is losing its grip on the market. Between 1996 and 1997, Apple posted a net loss but improved on that from 1998 to 2000. Within this period, Acer posted profits as their net income. It started with 111 in 1996 and went to 204 in 2000. But even though they posted profit, their Economic Value added was not impressive in comparison to that of Apple. They had a negative EVA throughout those years showing that even though they posted nice net profit, but they did not make or add value to the stakeholders. Conversely, the opposite was the case for Apple. They posted net loss but had positive Eva. They commenced with a negative 794 but closed in 2000 with 758. Apples market value added also skyrocketed to 11,186 ousting even the best of Acers 'which was 3,165they achieved in 1999. Currency ratio which tells us about a companys ability to pay its current debt (liquidity), Apple had a superior currency ratio 2.81 as against Acers 1.24. It shows that Apple is pretty comfortable and a better value creation company between the two.

6.0000 4.0000 Net income(x 1000) - Apple 2.0000 0.0000 1996 -2.0000 -4.0000 -6.0000 -8.0000 1998 2000 Net income(x 1000) - Acer EVA (x 1000) - Apple EVA (x 1000) - Acer EPS - Apple EPS - Acer Value to capital - Apple Value to capital - Acer

TELECOMMUNICATIONS INDUSTRY American (AT&T) and Asian (SingTel) companies are compared. Given financial data reveals that AT&T is successfully creating wealth, since EVA is constantly growing from 1996 to 1999. However, it decreased significantly from 17,077 million in 1999 to 108 million in 2000. AT&Ts net income is quite stable, ranging from 5,746 to 3,428; that means they keep creating value for their customers. AT&Ts EPS gradually declines that shows they retain capital to reinvest in business, thus creating long term value for their shareholders. Value to capital indicates that the balance between market equity value and book value of equity capital, or real value of the company declined year by year. SingTel EVA, on the contrary to EVA of AT&T was never negative within the given period, however in the year 2000 plummeted to 20 million. Net Income is more stable than AT&Ts and EPS are settled as 0.1 for the whole period. Its value to capital has the same down sloping trend as AT&T does. It declines from 9.45 to 4.2 or almost twice. Taking into consideration the analysis described above and the estimated cost of capital for both companies (9% for AT&T and 10% for SingTel - SingTel, probably, has lower credit rating) makes up to come up with idea that AT&T is better in overall value creating.

150.0000

100.0000 Net income(x 1000) - AT&T Net income(x 1000) - ST 50.0000 EVA (x 1000) - AT&T EVA (x 1000) - ST EPS - AT&T 0.0000 1996 1998 2000 EPS - ST Value to capital - AT&T Value to capital - ST -50.0000

-100.0000

FOOD COMPANIES Coca-Cola (America) and Nestle Malaysia Bhd (Asia) are two companies that we are considering in the food industry. Coca-Cola has a better head to head in most of the financial analysis. Notably, Nestle has a higher currency ratio and that is basically where they may be said to trade better than Coca-Cola. But the latter is head and should high in all other aspect of their comparable data. In market added value, Coca-Cola started with 124,783 in 1996 and closed with 141,621 in 2000. They also posted a handful of 101 in 2000 as EVA. Although this is smaller to 1,841 they posted in 1996, but it is better than Nestls 69 in EVA and 1,051 in MVA. This point only to one thing and that is; Coca-Cola creates a better value for their stakeholders as against little value creation by Nestle. The Beta analysis which also shows the leverage of the companies points to the fact CocaCola is doing better in leverage also. Coca-Cola has a better of .75 whereas, Nestle has .46.Nestle posted a profit in 2000 unlike Coca-Cola that had a profit which was lower to that of the previous year. The market value, net profit, gross profit is all unstable for the two companies. The move up and down making it even difficult to predict industry. But one thing is certain, in 1999 and 2000; the food industry had a lower market value as both companies had little or nothing in their market value. Furthermore, the share price for Coca-Cola is higher than that of Nestle. The share price for Coca-Cola started with 52.63 in 1996, it hit a great high of 80.44 in 1998 and ended with 60.94. conversely, Nestls share started with 8.1 in 1996 which also is its great high and

ended with 4.87.This size of this two companies is another problem to really evaluate them, but from the data here, it is glaring that Coca-Cola is creating more value than Nestle but we must say that Nestle is not doing bad that much. It is an even running but Coca-Cola has the edge and are doing better.

25.0000

20.0000

Net income(x 1000) - CC Net income(x 1000) - Nestle

15.0000

EVA (x 1000) - CC EVA (x 1000) - Nestle

10.0000

EPS - CC EPS - Nestle Value to capital - CC

5.0000

Value to capital - Nestle

0.0000 1996 1998 2000

AUTOMOTIVE COMPANIES The US based MNC Ford Motor and South Korean industry leader Hyundai Motor are compared. Ford Motor is comparatively larger than its rival. This becomes pretty clear after we compare gross turnover for two companies. 146,991 to 170,064 versus 13,755 to 19,988. However, since we are interested in value creating aspect this factor is of trivial importance. EVA (a swell as MVA) of Ford Motor is always a positive number within the period given. It increases from 1996 till 1998 and reaches a benchmark of 26,024. After that it decreases up to 6,802 in 2000. Net income is of the same pattern as EVA - it goes up until 1998 and goes down after. Since the pattern for both indicators is alike, we do compare the EVA and net income in 1996 and 2000. EVA in 1996 is 6,773 and 6,802 in 2000 - total increase. Net income in 1996 is 4,831 and 3,467 in 2000 - total decrease. From that we do an implication that risk of investment in Ford Motor decreased, even though profits decreased as well. For EPS we see that Ford Motor do connect its dividend payments directly to the level of net income. We also have noticed that P/E increased almost four times and this is the signal investors are expecting lower earnings growth in the future. Value to capital increases from 1996 to 1998 and reaches 2.6 times level, goes little down in 1999 and recovers to 2.8 times level in 2000. To us, this shows that the company is healthy enough and doing well in

creating value. Hyundai Motor has more fluctuating variables in its financial data. Net income of the company recovers after crisis of 1997 and 1998, and creates a positive value for its customers in 1999 and 2000. However, EVA of Hyundai Motor decreases over time and purely indicates that the risk of investment in the company has increased. Thus, as profits keep increasing and P/E declines (signals even higher profits in the future) and company tries to retain some capital (as we see from EPS chronology) it is very good value for potential investors. But the value to the capital went down in the course of time. The possible conclusion for that is that Hyundai Motor is a bit controversial in data and less stable than Ford Motor. Estimated cost of capital of Hyundai Motor is 1,5% higher - Ford Motor pay less for their debt. Finally, grounding on the analysis provided above, we think Ford Motor is creating greater value than Hyundai Motor.

30.0000 25.0000 Net income(x 1000) - FM 20.0000 15.0000 10.0000 5.0000 0.0000 1996 -5.0000 1998 2000 Net income(x 1000) - HM EVA (x 1000) - FM EVA (x 1000) - HM EPS - FM EPS - HM Value to capital - FM Value to capital - HM

REAL ESTATE COMPANIES Simon Property Group (SPG) (America) and Ayala Land Philippines (Asia) were the two companies that we are considering in the real estate industry. The estimated cost of capital for Simon is 10 and that of Ayala land is 6. This brings us to the issue of MVA and EVA. The Market Value Added (MVA) for Simon opened in 19996 with 2,083 and closed with 1,207 in 2000. But Ayala MVA opened with 5,763 in 19996 and closed with 434. The EVA for Simon is in red throughout the period we are looking at. While Ayala Started with an Eva of about 115 but also ended in the red (-27) in 2000. This means that Ayala had a great slump in 2000 in their value creation but were better value creators in comparison to Simon. The leverage for the two companies is also a pointer to the fact that Ayala create better

value. The beta analysis for Simon is a paltry 0.1 whereas; Ayala has 1.42 making it a better company in leverage. Even though, that the return on capital for Simon is 6.5 as against that of Ayala which is 3.62, the latter is creating superior value than the latter. It also exposes the fact that return capital really do not entail creating value. One may create higher value with even a smaller return on capital. Ayala created more value for their shareholders than Simon but the real estate industry performed badly within this period.
9 8 7 6 5 4 3 2 1 0 1996 -1 1998 2000 Net income (x1000) - SPG Net income (x1000) - Ayala EVA (x1000) - SPG EVA (x1000) - Ayala EPS - SPG EPS - Ayala Value to capital - SPG Value to capital - Ayala

TECHNOLOGY COMPANIES Again an American (Yahoo) company versus an Asian (PCCW) company. There are opposite trends for net income and EVA of Yahoo. Net income is growing (-2 to 71) and EVA is declining (-2 to -1,345), what indicates that risk on investment and thus the value for the investors went down. It is obvious that EPS are settled directly dependent on net income by the management, as it reflects the movement of net income proportionally. We do not take into consideration the high beta (2.37) as we do not know what is the size of a sample used to estimate beta, while beta depends on the size of a sample a lot, so it may be subjective. However, value to capital increased significantly. Thus, company became very risky. Net income and EPS data for PCCW indicates that management is retaining capital while declining profits. This in these circumstances means company investing too much capital in business. EVA of PCCW progressively plummets, so the risk for investment is sharply goes up. Value to capital plummeted too. However, estimated cost of capital indicates that credit rating of Yahoo is worse than credit rating of PCCW and thus Yahoo is less attractive to investors, than PCCW, and should be vice versa. This is, probably, because PCCW is situated in Hong Kong - one of the most attractive areas in the world for the investors. Our opinion - PCCW creates more value, than Yahoo does.

50 40 Net income (x1000) - Yahoo 30 20 10 0 1996 -10 -20 1998 2000 Net income (x1000) - PCCW EVA (x1000) - Yahoo EVA (x1000) - PCCW EPS - Yahoo EPS - PCCW Value to capital - Yahoo Value to capital - PCCW

ANALYSIS AMONG INDUSTRIES

In this section we will analyze the similarities and differences among industries. We will consider economic situation of the region and industry.

We combine the computer companies and technology companies to analyze it as one industry, since the difference is not significant. Looking at financial data provided it is easy to conclude that industry is experiencing bad times in the moment. The beta for all the companies is higher than one. That means that the security's price will move with the market and moreover it will be even more volatile. From this information we also conclude that the investment is high, which is confirmed by high estimated cost of capital and low and often negative EVA. It is becoming harder to create value to those companies as the risk of investment increases along with the risk of operating, strong competition and the lack of capital (for Acer, Yahoo and PCCW).

Looking at the Telecom and Real Estate industries it is safe to say that the companies from the telecom industry are creating value than did their counterparts from the Real estate industry. The data are explanatory to this regard. Both AT&T and Singapore Telecom

created value within along these years. AT&T had a negative value from 1996 to 19998: 86,297 for 1996, -46991 for 1997 and -47,291 for 1998 whereas, Singapore Telecom created value all year long. Singapore telecom Company started off with an EVA of 344 in 1996, hit a high of 606 in 1999 and closed with 20 in 2000. This evidence to the fact that these companies in the telecom industry created value for their stakeholders unlike the Real estate industry, the companies there (Simon Property Group Ayala Land) destroyed value within their industry. Simon posted dreadful minuses all years round without creating one bit of value. They commenced with -150 in 1996, -452 in 1997,-146 in 1998, -472 in 1999 and 461 in 2000 as their Economic Value Added (EVA) while Ayala Land posted a fairly better result. They had EVA of 115 that later came down to 1 and closed on the red. This shows that the real estate industry is witnessing a greater distress than their counterparts in the telecom industry. Furthermore, a peep into the Food Industry and Automotive industry will show another fascinating aspect of value creation. The food Companies (Coca-Cola and Nestle Malaysia Bhd) created more value than their automotive counterparts. The two food companies posted a Positive EVA throughout showing that they created value all year round. Some years were smaller but did not get to the point of value destruction and this is a good showing from the food industry. Conversely, The Automotive industry fared a little lower than the food industry in the sense that Hyundai motors posted -143 in 1997 and -152 in 1999. Ford Motors had the best Value creation as a single company because it posted a high numbers in both its EVA and MVA. But Hyundais MVA is worse because it has almost minus in all the years under review. The estimated cost of capital is also very high in Hyundai (10). These two industries are better off in comparison to the other industries as the two industry players here posted some positive numbers and data for their stakeholders. In a nutshell, these companies created value for their stakeholders even though the food industry has a better head to head. CONCLUSION The case is about value creation. The companies that were mentioned were picked from America and Asia showing two different markets. Although these companies are Multinational Companies, their success is mainly sequel to their home performance. The Asian Market being an emerging market should be given a great care and considered with care, since there is room for improvement and lesser competition. Talking about Value creation, we have enumerated some points in our coverage so far as we did industry by industry analysis cum the inter industry analysis. Having carefully looked at the industries, we found out that the food Industry is doing better in comparison to other industries and this the case, we believe that the food industry had a better run since both Coca-Cola and nestle Malaysia all posted a good result and created value for the stakeholders. Having said that, company wise, Coca-Cola had a higher value creation and stands out

among its peers. The Net income, EPS, MVA, EVA and even Beta are all in a positive stead. Their estimated cost of capital is also lower to that of companies of its size. We believe that Coca-Cola is the star company among these lots. Others companies that deserve a mention here are Nestle, Ford motors, Apple and Singapore Telecom. These companies had good value creation also But were outsmarted by Coca-Cola. But there is a concern for almost all the companies as they faced a lower value creation as the years go by.