Case study Siemens Corporate Strategy

Transcription

1 Case study Siemens Corporate Strategy Solutions to quantitative questions Bachelor Program Chair of Management Friedrich-Alexander-Universität Erlangen-Nürnberg Summer term 2009 Prof. Dr. Harald Hungenberg Dr. Andreas König Friedrich-Alexander-Universität Erlangen-Nürnberg Lehrstuhl für Unternehmensführung Siemens Corporate Siemens Strategy Case Teaching Study SS09 Note 1

2 The main part of the case focuses on the question of Does Siemens create value? First exercise After reading through the notes on his table, Peter Löscher presses a button on his telephone and says, Mrs. Müller, please connect me with corporate strategy. I need to talk to Franz Steinhoff. After a few seconds, he speaks with Steinhoff. Steinhoff, I want you to comprise me a report on the following questions: 1. Does our corporate centre create value? 2. What s the situation of our portfolio right now and what should we do with our portfolio in the future? Imagine, you are Franz Steinhoff, Head of Corporate Strategy. Work with your team to find answers to Peter Löscher s question. When discussing the answers, take into account the opportunities and threats, strength and weaknesses of Siemens and the overall strategic values of this company. 2

3 When computing the conglomerate discount, you need to take into account certain assumptions Assumptions for question 1 Apply the DCF-method (entity approach) in order to calculate the stand-alone values of the divisions and compare them with the market value of Siemens. Page 97 and 98 (diploma: page 52 and 53) of your course package are helpful. Consider that the market value of Siemens correlates with the equity value of the divisions. Besides exhibit 6, assume the following when completing your task: Equity ratio (market view) 2007: 65% Stock value September 2007: EUR Stock amount: 1,027,271,000 g = 2% Note: For all computations round intermediate results to 2 decimal places. 3

4 To prepare a portfolio discussion, you choose to visualize the situation in a BCG traffic light portfolio (I) Assumptions for question 2 Peter Löscher wants you to analyze the current portfolio. You decide to apply the BCG traffic light portfolio. This portfolio consists of three dimensions (see page 90 in your course package; diploma: page 40): 1. Strategic assessment 2. Financial performance 3. Relative share of total revenues (size of bubbles) Siemens Corporate - Exercise/Aufgabenstellung 4

5 To prepare a portfolio discussion, you choose to visualize the situation in a BCG traffic light portfolio (I) Assumptions for question 2 (1) Strategic assessment. The strategic assessment is an index comprising market growth and relative market share, which, in turn, determine the market attractiveness/competitive position sub-portfolio (see page 82 in your course handouts; diploma: page 25). Assume the following rates of market growth: A&D I&S SBT Osram TS 18% 1% 5.5% 2.8% -1% PG PTD Med SIS 21% 18% 19.7% -6% The relative market share of A&D is missing, but you know that the strongest competitor of A&D, ABB, had revenues amounting to EUR 13,382 million in Discuss the respective cut-off points. For market growth, consider the targets formulated in the corporate strategy (exhibit 2). Furthermore, assume that, in 2007, the average growth rate of all industries in which Siemens is active, was 6%. For relative market share, consider choosing 1 as the cut-off point. However, you may also want to use a different benchmark. Siemens Corporate - Exercise/Aufgabenstellung 5

6 To prepare a portfolio discussion, you choose to visualize the situation in a BCG traffic light portfolio (II) Assumptions for question 2 (2) Financial performance. The financial performance is an index comprising Spread (2007) (ROCE (ROCE WACC WACC 2007) (y-axis) 2007) (y-axis) and EVA and ( ) EVA ( ) (x-axis), (x-axis), which, in which, turn, determine turn, determine the profitability/value the enhancement sub-portfolio. You You first first need to compute ROCE and EVA in 2007 for each division. To do so, you calculate the NOPAT (2007) for each division. Assume a tax burden of 40%. Then you compute the Spread for 2007 and the the EVA EVA (EVA (EVA EVA ). EVA 2005). When When doing doing so, assume so, assume the following the following values values for EVA for EVA (2005) (2005) (in millions (in million of euros): EUR): A&D I&S SBT Osram TS PG PTD Med SIS Page 490 in (Hungenberg, (2009) offers information about setting the the cut-off points. 6

7 To prepare a portfolio discussion, you choose to visualize the situation in a BCG traffic light portfolio (III) Assumptions for question 2 (3) Relative share of total company revenues. Use the relative share of total company revenues to display the importance of each division (size of bubbles). This dimension is common to every of the three portfolios. Consolidate the strategic assessment and the financial performance sub-portfolios to the traffic light portfolio. Use a scoring-approach and assume that the respective dimensions of the strategic assessment index and the financial performance index are equally valued. For all calculations you can draw on exhibit 6 and 7. 7

8 Future cash flows can be derived from the business and profit plans Estimation of future cash flow per year of the planning period Sales Cost of material Cost of personnel Other costs EBITDA Depriciation/ Amort. EBIT Investment EBIT Taxes* Depriciation/ of flow Changes Cash Amort. reserves * In case of 100 % equity financing Changes of working capital Free cash flow 8

9 The company value 'as is' can be assessed on the basis of projected future cash-flows Net present value/discounted cash flow model of valuation 1 Estimate future cash flow Continuing value 2 Determine cost of capital DCF 3 Discount and aggregate Cost of capital Cost of equity Cost of debt 9

10 Assessing the continuing/residual value is a critical step Forecast of cash flows and continuing value Detailed cash flows Derive cash flows in detail from business and profit plans Continuing value Calculate continuing value based on the cash flow of the last planning period (eternal rate) Continuing value = FCF 2008 (1+g) / r-g r = cost of capital (often equals WACC) g = development index Typical assumption: (g=0) cash flows continue 2008 unchanged eternally Continuing value If changes can be proved: g>0 (e.g. sustainable competitive advantages) or g<0 (declining business) 10

11 Using the discounted cash flow method you arrive at the equity value of each division Calculation of equity value for A&D (in bn ) WACC: 7.5 % g=2% * Continuing value * Residual value: 2.499*(1+0.02) / ( ) = DCF Debt Equity value 11

12 Solution DCF and equity value to be computed by students Operations Groups (all values in millions of EUR) WACC Free Cashflow Free Cashflow Free Cashflow DCF Equity value * 2009* Automation and Drives (A&D) 7.50% 1,857 2,154 2,499 42,909 27,891 Industrial Solutions and Services (I&S) Siemens Building Technologies (SBT) 8.00% ,319 5, % ,960 5,174 Osram 7.50% ,356 4,712 Transportation Systems (TS) 8.00% ,771 7,001 Power Generation (PG) 8.00% 2,019 2,480 3,045 47,506 30,879 Power Transmission and Distribution (PTD) 8.00% ,783 9,609 Medical Solutions (Med) 8.00% 1,380 1,617 1,894 29,272 19,323 Siemens IT Solutions and Services (SIS) 8.50% Total Operations Groups 7.94%** 7,253 8,744 10, ,746*** 110,335*** *adjusted by means of annual EBITDA growth ** assumed *** note divergences due to rounding errors 12

13 The comparison of the equity value with the market value of Siemens reveals a conglomerate discount of 10% External assessment of Siemens' groups values versus market value (in bn ) A&D I&S SBT Osram TS PG PTD Med SIS " * 10% 99 0 Conglomerate discount * Stock value Stock amount Equity value of divisions Sum of the parts Market value 2007 *note divergences due to rounding errors 13

14 In order to prepare BCG s traffic light portfolio, you first have to calculate the necessary dimensions To be computed by students Operations Groups (in millions of euros) NOPAT Relative revenues Market growth Relative market share ROCE Spread EVA EVA Automation and Drives (A&D) 1,255 21% 18.0%* 115% 17.9% 10.4% Industrial Solutions and Services (I&S) % 0.9%* 47%* 20.3% 12.3% Siemens Building Technologies (SBT) 214 7% 5.5%* 45%* 11.8% 3.8% Osram 289 6% 2.8%* 67%* 14.5% 7.0% Transportation Systems (TS) 119 6% -0.9%* 32%* 40.1% 32.2% Power Generation (PG) % 20.9%* 60%* 50.3% 42.3% Power Transmission and Distribution (PTD) % 18.1%* 49%* 19.9% 11.9% Medical Solutions (Med) % 19.7%* 63%* 9.0% 1.0% Siemens IT Solutions and Services (SIS) Total Operations Groups * Not to be computed by students 146 7% -5.8%* 42%* 57.6% 49.1% , % 2,213 Ø 246 1,669 Ø

15 Computing the variables for FY 2007 (computation based on exhibit 6 and 7, assignment on page of this teaching note) Overview: NOPAT = EBIT tax (40%) = EBIT * 0,6 Relative revenues = revenues of each division / total company revenues (determines the size of bubbles) NOTE: Students will not have time to draw sizes of bubbles perfectly, however: 10%=1cm could serve as an indication Market growth given in Assignment Relative market share = own revenues / revenues of leading competitor (computation by students just for A&D) Spread = ROCE - WACC = (NOPAT / capital employed) - WACC EVA = NOPAT cost of capital = NOPAT (capital employed * WACC) EVA ( ) = EVA (2007) EVA (2005) 15

16 Market growth and relative market share are the dimensions which determine the strategic assessment of the divisions Strategic Assessment sub-portfolio Market growth (in %) PG PTD Med A&D Remember: It is possible to choose different cut-off points! TS SBT I&S Osram -4-8 SIS -12 0, , , , , , ,2 Relative market share

17 Spread and EVA are the dimensions which determine the financial performance of the divisions Financial performance sub-portfolio Spread 2007 (in %) PG TS SIS Remember: It is possible to choose different cut-off points! Osram I&S PTD 0-10 Med SBT A&D EVA

18 Use a scoring approach to evaluate the respective dimensions of the strategic assessment and financial performance Scoring approach in order to prepare BCG s traffic light portfolio Operations Groups Strategic Assessment Financial Performance Share Growth Total score EVA Spread Total score Automation and Drives (A&D) Industrial Solutions and Services (I&S) Siemens Building Technologies (SBT) Osram Transportation Systems (TS) Power Generation (PG) Power Transmission and Distribution (PTD) Medical Solutions (Med) Siemens IT Solutions and Services (SIS) Remember: This is just one out of many solutions! 0=0-9% 1=10-24% 2=25-49% 3=50-74% 4=75-99% 5= 100% =<0% 1= % 2= % 3= % 4= % 5= 12.0% 0=<0 1=0-99 2= = = = 400 0=<0% 1= % 2= % 3= % 4= % 5= 8.0% 18

19 The traffic light portfolio offers a more sophisticated analysis than classical portfolio approaches BCG traffic light portfolio Strategic Assessment 5 A&D 4 3 Med PG PTD 2 1 SBT Osram TS I&S SIS Financial Performance 19