In Search of Shareholder Value: Managing the Drivers of Performance (2nd Edition)

Rating:
Summary: Mr. Black - I stand by my judment, Your book is unscientific
Review: Dear Mr. Black, as You did critize my review of your pamphlet, I hereby reply, that I stand by my former judgement. My former review does NOT accuse You of 'selling yourself' to SAP, nor does it question the features of SAP-products, or PWC. However, the scientific content of Your book was so low, that it had to be contradicted. These are my main points of criticism: (1) It does not catch the microeconomic logic behind EVA/CFROI: The concept of microeconomic producers rent. EVA is based on a static concept of economic rent, CFROI on a dynamic concept of economic rent.

(2) EVA implies linear simulation, CFROI non-linear simulation (e.g. experience curve effects).

(3) CFROI can be more easily aligned mit Real Options for strategic decisions.(e.g: the experience-curve-effect is a system dynamics modell for a dynamic Cournot/Nash-Oligopoly, which includes a Real Option for capacity extension during the growth phase of an homogenous product one produces with a substitutional technology with an S-shaped path for performance improvements ). If you try to align EVA with Real Options, you run the danger of creating unrealistic scenarios, which violate the laws of oligopolistic theory .

(4) EVA encourages managers to milk a business as it is based on linear depreciation concepts,nominal values,undervalues growth options, and implies linear simulation.

(5) In my 1998 edition there were indeed many mathematical errors (e.g. On the last past text page there was a formula with missing brackets). Your definitions of EVA and CFROI were grossly simplified, and can lead novices to misunderstandings.

(6) Your book fails to mention, that VBM requires consolidated financial statements for the last 5 years, and it does not explain, how to filter the relevant data. E.G: To use VBM in a senseful way, you must factor out transfer pricing, tax shelter effects, accounting distortions by cost budgeting techniques, the shelter effect of financial leverage e.g. Copelands 'Valuation' covers those topics without shocking novices with overly complex formulas - but your book totally ignores these topics.

(7) Some pictures in Your book have got a striking similarity with some charts in earlier editions of Copelands 'Valuation', but You did not have the courtesy to thank Copeland/McKinsey.

(8) You do not warn the reader about the dangers of VBM: Milking a business. If EVA/economic profit had an effect on industrial productivity, we would expect the UK to have the highest productivity in the world, because economic profit was invented by british companies such as BTR and Hanson in the late 1960's. The opposite is true !! In the 1970's the british industry collapsed - because economic profit + primitive linear simulation methods encouraged british managers to milk their companies, keeping prices high and deffering investments, until their assets/market share shrank below minimum-efficient scales.
A chart in Copeland 'Valuation' shows, that in the 1970/1980#s british productivity stagnated both in absolute and relative terms - while german and japanese companies manged to catch up.
Michael Gould "Corporate Level Strategy" ( a Boston Consulting Group publication which dates back to 1994) describes in much detail, how your 'financial controll style' encouraged BTR and Hanson to withdraw from high technology, to burn out assets and employes, to defer any investment in quality, research and education. Poorly applied Economic-Profit-Models were not the only reason for Great Britains industrial decline, but they did reinforce other problems: notoriously confrontational labour-relations and a poor level of professional education. If a CEO milks his company, cutting down investment in education/new machinery, his labour union will retaliate and do the same,asking for higher wages.

Summary: Your book has no scientific value and proposes a grossly simplified approach to VBM, that leads to desastrous, strategic mistakes. Poor Economic-Profit-Models achieved in no more than two decades, what 6 years of incessant bombing by the German Luftwaffe in world war two did NOT achieve: The total desindustrialisation of Great Britain. An industrial heritage created over a period of 100 years was sold off for a few years of high shareholder value.

Does that mean, that VBM is nefarious ? No, it does not.
VBM has got a future, if you ask real experts to simulate CFROI with system dynamics models and Real Options. CFROI, real options and system dynamics were first applied by the Boston Consulting Group back in the early 1970's - about 30 years ago. Therefore I stand by my judgement: Your book is dangerous and not scientific.

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Summary: An Author comments !
Review: I couldn't help but look at some of the reviews, admittedly rather a long time after the 2nd edition now. The book is really designed as a primer on the subject, and also to maintain the links between what is going on in the equity market, and what is going on internally inside the corporates. As such we steered a path between making the book overly complicated and hence off-putting, and between making it overly simple. It was never designed to sell SAP software, as one reviewer suggested, and indeed, its overall position in the PwC offering was less clearcut than it should be. Perhaps to remind readers that it originated from the old PW company might explain rather more. The descriptions and analysis of the models are reasonably correct, including that of the CFROI model - at least judging by the materials I had to hand. The critique on the replacement value of assets and the corresponding weakness of the EVA model is a valid point, made elsewhere, but also picked up in the book I believe. Yes the book has been used extensively by PwC people, but by no means exclusively so. Yes, we did go on to develop a VBM offering out of it, but again not exclusively around the book - though it helped. The combination of the approach (Valuebuilder, which is not for sale), capital markets, consultancy and corporate governance issues remains very useful, and rather distinct from a number of other offerings in the market. So, do continue to buy it and read it !!

Rating:
Summary: Keep it Simple
Review: I despair of acedemics intent on picking holes in the acedemic rigour of books on shareholder value. Businesses are run by business managers. They leave "trendy" financial concepts for the FD to trot out to the board, in vain and ad infinitum. Bridge the gap between those who run the business and the cerebral numerates who keep score and you will...create shareholder value...hurray. This book does just that.

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Summary: Public-Relations-Appetizer - no scientific value
Review: I do NOT recommend this PriceWaterhouseCoopers-publication, because it is an appetizer, which PWC use to sell their 'ValueBuilder'-Toolset, and they use their ValueBuilder-Toolset in order to sell SAP R/3-Software to their customer.

I know what I am saying, because I have got a degree in Business Administration and 6 years of experience as a consultant. Their book is superficial, and most mathematical formulas have been simplified, so that they are wrong. This book does give you an overview over Shareholder-Value-Methods and it might entertain a layman, but it does NOT - enable you to calculate SHV - enable you to design Value-Based-Management-Systems (VBM) - enable you to integrate VBM with ERP-Software such as SAP R/3

The book does not catch the underlying microeconomic logic behind shareholder-value-methods, its explanation of CFROI is wrong,and it does not warn you about the downsides of EVA: - the tendency to milk a business because EVA does not force a manager to reinvest assets at their replacement cost - EVA'distortion by inflation - its low correllation with shareholder value

It seems, that this book has been hastily scribbled together by a ghost writer, who stole most formulas und most charts from Copeland#s McKinsey-Handbook 'Valuation', but who did not have the courtesy to quote his source.

All in all, this book is worthless. Anybody with a serious interest in Shareholder-Value should read Copeland 'Valuation'.

Rating:
Summary: In Search of Shareholder Value: Managing the drivers of perf
Review: If you are a beginner in the area, or you want to start a financial analyst job in PWC, this book is the one. The book explains thoroughly everything about whats-on-what of values according to 'finance'. However if you want something more advance, try another book.

Rating:
Summary: Easy to read, well laid out for a complex subject
Review: Most people hate lots of numbers and formulas. This book handles them well. This book clearly describes the concepts of Shareholder Value. I think this book, and many of its SV kind, are great for corporate financial people who have (mostly) accurate accounting numbers.

But for investors looking in from the outside, SV becomes difficult to implement. For example, what truly is EBITDA? Cash Flow? Which one? These illusive investor numbers make the SV process hard to implement for those of us without access to the real corporate books. Or at least, the process of determining the correct numbers is more difficult than the SV process lets on... in the world where accounting numbers and forecasts can be made to be anything the CEO or CFO want.

All in all, this methodology has brought a revolution to the corporate financial world. Divisions can now be compared with more rigor. This book easily and clearly explains the logic. The authors care about their subject and it shows.

John Dunbar

Rating:
Summary: Easy to read, well laid out for a complex subject
Review: Most people hate lots of numbers and formulas. This book handles them well. This book clearly describes the concepts of Shareholder Value. I think this book, and many of its SV kind, are great for corporate financial people who have (mostly) accurate accounting numbers.

But for investors looking in from the outside, SV becomes difficult to implement. For example, what truly is EBITDA? Cash Flow? Which one? These illusive investor numbers make the SV process hard to implement for those of us without access to the real corporate books. Or at least, the process of determining the correct numbers is more difficult than the SV process lets on... in the world where accounting numbers and forecasts can be made to be anything the CEO or CFO want.

All in all, this methodology has brought a revolution to the corporate financial world. Divisions can now be compared with more rigor. This book easily and clearly explains the logic. The authors care about their subject and it shows.

John Dunbar

Rating:
Summary: A Great Shareholder Value Introduction
Review: Of the remaining Big Five consultancies, perhaps none know shareholder value as well as PriceWaterhouseCoopers (with which the authors are affiliated). "In Search of..." provides a terrific overview of the concepts, methods, and practices of shareholder value. As an independent consultant specializing in shareholder value, I would also recommend Young and O'Byrne's "EVA and Value-Based Management" for a more comprehensive treatment. However, for a sound introduction, its hard to beat "In Search of Shareholder Value."