Value: The Four Cornerstones of Corporate Finance

Value is one of the best books I've read that cuts to the core of how businesses should operate. It focuses the reader on the four ways that value is created and guides us through both business and market implications for companies who create value versus those that focus on the wrong things. Messrs. Koller, Dobbs and Huyett cover a number of topics that any business leader or investor would find useful.The first part of the book identifies the four pillars of value and helps to answer the following questions:1) When is growth or return on invested capital more important? How does each increase value?2) How do you identify activities that add value versus ones either diminish value or shift risk around?3) How do you spot a company on the wrong end of the "expectations treadmill" and what are the implications?4) How can you take advantage of the "Best Owner" principle? What are the implications for M&A?In the second part of the book, the authors break down the stock market in aggregate. They help the reader understand how the market works, compare the link between interest rates and inflation with P/E performance over the last 100 years, model the stock market and explain where and why stock market bubbles occur. Next, they discuss the problems with earnings management and show what a poor job "consensus earnings" do at actually forecasting the future. Their message to managers is just don't do it.In part three, the authors dive into value creation and discuss what drives return on capital. They break down return on invested capital by industry segment from 1965-2007 and provide the reader with insights into why some industries perform better than others. For investors, this segment is particularly interesting as the book explains that the ROIC advantages or disadvantages of specific industries tend to be sticky meaning we should expect those with an advantage to retain it barring any major structural shifts. The book then explores growth, discusses why growth is difficult to sustain and reviews how different types of growth are rewarded in the market.The book discusses the following concepts in great detail including portfolio theory (The Business Portfolio ch. 12), M&A (ch. 13), risk (ch. 14), capital structure (ch. 15) and investor communications (ch. 16). These sections all offer insight and pose questions that will make managers rethink how they address these topics. With portfolio theory, the authors explain how the best owner principle should drive what businesses a company operates. In M&A, the book takes a look at what makes a good versus bad acquisition. In risk, the reader gets help thinking through external risks and how to help manage these risks. Chapter 15 discusses capital structures and how companies should think through their debt-to-equity mix, identify the "savings" from debt versus equity, and discuss how to return excess free cash flow to investors. In chapter 16 the authors explore investor communications in detail and describe what types of activities are helpful versus those that do not add much value.The book closes out with a final chapter, entitled Managing for Value, that provides the "so what" of the topics discussed. It provides guidance for how managers and boards should use the four pillars of value to help guide decisions and identify the right activities to undertake to maximize value creation.I recommend that you read this book if you want to improve your decision making as a manager or board member. You should also read this book if you want to better identify activities that should create value as an investor.

In summary, a lot of good insights in a small read. Really worth the time.The Four Cornerstones of Corporate Finance - VALUE by McKinsey & Company was written by three McKinsey consultants, Tom Koller, Richard Dobbs and Bill Huyett and focuses on four factors that drive the value of a company:* The Core of Value: growth, return on capital and the resulting cash flows.* The Conservation of Value: the desire for high cash flows over accounting gimmicks that simply rearrange existing cash flows.* The Expectations Treadmill: how market expectations, as reflected in the stock price, can become the tail wagging a dog's performance.* The Best Owner: how the value of a business is tied to who is managing it, and how management requirements change as the business ages.Traditional capitalist theory holds that above-costs-of-capital returns should be competed away, but the McKinsey team uses their experience and access to the extensive data at the McKinsey Global Institute to show that theory and the real world can be made to part ways.While their explanations of how to optimize value are well detailed, the reader need not be a CPA to come away with key insights.For my part I believe this text is an ideal tool for aligning the strategic thinking of Outside Board members, Executive Management and employees, who actually manufacture the “value” on the same page in terms of how to think about and measure value. I recommend this book to any new clients where I find a lack of symmetry between where the leadership is trying to direct the firm and where the employees are actually taking it. Of all the management books at Amazon, this is the one Shareholders should want on the desks of employees creating value for them.Like most good management books, this one rewards the reader early with insights, and keeps them coming without the drone of a McKinsey sales pitch. Ever since college, I’ve made a point of highlighting and notating almost any book I read. In reviewing my highlighting of this text I note that the examples are, once again, the type which almost anyone can follow. They communicate nuance without losing the lay reader and for this reason I find the text is not only helpful for those working in a large corporate environment, but also helpful for employees building a startup business.In term of getting value for what you paid, this text is a real bargain.

This book about how companies create value and about value creation process,value Corner stones, what is roic , how to calculate it. You can read if you interested in about value and investment.

Like McKinsey's Valuation text, this book does a superb job discussing how managers create value. The authors relentlessly drive home the point that there are three drivers of value creation: (1) growth, (2) high ROIC, and low cost of capital. Activities that do not affect these three value drivers will not affect value: hiding debt off balance sheet, generating accretive M&A transactions, and changing the capital structure (within reason) will not affect the value of the firm.My favorite chapter in the book is called "The Best Owner." The underlying message of the chapter is that there is a best owner for every company. Your goal as a manager is to purchase companies (at a reasonable price) if you are the best owner and sell divisions when the business unit is more valuable for a different owner. Notice this might entail selling a highly profitable business unit. Further, managers should take an active approach to buying and divesting companies.One drawback of the book is that there is some overlap with the Valuation text, especially the second half of the book. That said, the first half of the book is a must read.