How companies are managed to create — or destroy — value.
McKinsey Part Three and all five appendices. Value-based management in practice: performance measurement, capital allocation, M&A, divestitures, capital structure, and investor communications.
Valuation: Measuring and Managing the Value of Companies (McKinsey)
McKinsey's Ralph case: a CEO who discovers that one-third of his business units are destroying value. How to identify them, what to do, and why most boards never see this analysis.
ROIC and economic profit as the core performance metrics. How to tie them to operating decisions at the business-unit level — and why stock price is a lagging and noisy indicator.
McKinsey's Home Depot vs. Wal-Mart: same earnings growth, very different value creation. The company with lower reported earnings but higher ROIC can be the dramatically better investment.
Value driver trees break ROIC into its operating components — then link each component to a specific team's decisions. The organizational mechanism for value-based management.
The capital allocation hierarchy: reinvest if ROIC > cost of capital, acquire only at walk-away prices, return excess capital. Why most companies fail at step three.
McKinsey's evidence: the majority of acquisitions destroy shareholder value. The conditions under which M&A creates value — and the premium trap that eliminates the upside.
The walk-away price is the maximum you can pay and still create value. Synergy valuation, accretion/dilution analysis, and why EPS accretion is not value creation.
A business that's worth more to someone else should be sold. McKinsey's value gap framework: measuring the discount to identify divestiture candidates and the mechanism for closing it.
The trade-off between the tax shield from debt and the cost of financial distress. McKinsey's empirical approach: what the evidence says about optimal leverage across industries.
McKinsey's Consumerco case: moving from an AA to a BBB credit rating to capture the debt tax shield. The quantification of distress costs and the optimal capital structure decision.
What to tell the market about your strategy — and what not to. McKinsey's guidance policy evidence: companies that communicate ROIC and ROIC-to-cost-of-capital earn higher multiples.
The mathematical proof that DCF and economic profit always yield the same value. The key value driver formula derived from first principles — McKinsey Appendices A and B.
Adjusted Present Value and why it separates the unlevered business value from the tax shield. The Hamada equation, levering and unlevering beta, and the APV = DCF proof.
Fourteen applied questions: identify value-destroying units, build an M&A walk-away price, construct a capital allocation hierarchy, and evaluate a divestiture decision.