1. The Value Manager Chapter 2 Review Mary Sterba April 2, 2003

2. Becoming a Value Manager  Focus on long-run cash flow returns  Value-oriented view of corporate activities

3. Becoming a Value Manager  Characterized by an ability to take an outsiders view point - act on opportunities that create incremental value.  Develop and institutionalize a managing value philosophy company wide

4. The process of becoming value-oriented 1. Restructuring 2. Developing a value-oriented approach after restructuring. - establishment of priorities on value creation - performance measurement and - communicating with investors

5. Restructuring Hexagon Value w/Internal Improve. Total Potential Value “as is” Current Market Value Value w/ Improve. disposals Value w/ Growth Improve. disposals 1 2 3 4 5 6 Perceptions Gaps Operating Gaps Disposal/ New owners New growth opportunities Financial engineering Maximum opportunity

6. Restructuring Actions AreaAction ConsumercoCut cost of sales Reorganize sales force Increase advertising and R & D Build marketing skills FoodcoSell WoodcoKeep and consolidate; sell if in two years management cannot reach next level of performance PropcoSell (destroyed value) FincoLiquidate (destroyed value) NewscoSell (needless distraction) CorporateCut by 50%; decentralize remainder New growth opportunities To be determined FinancingIncrease leverage to maintain BBB rating and capture tax benefit. (borrow $500 million)

7. Ralph’s six steps to manage value 1) Focus planning and business performance revenues around value creation 2) Develop value-oriented targets and performance measurements 3) Restructure EG’s compensation system to foster an emphasis on creating shareholder value.

8. Ralph’s six steps to manage value (cont) 4) Evaluate strategic investment decisions explicitly in terms of impact on value. 5) Begin communication with investors and analysts about the value of EG’s plans 6) Reshape the role of EG’s CFO- blend corporate strategy and finance responsibilities together

9. Economic Profit Economic Profit (EP) is the spread between the return on capital and its opportunity cost time the quantity invested in capital. EP = Invested x (ROIC – Opportunity cost of) capital

10. Economic Profit EP discounts the value of future economic profit which would equal the discounted cash flow value. Therefore, maximizing the Economic Profit EG could maximize the discounted cash flow value.

11. Assessing the value of strategic investments 1) Capital spending tied closely to strategic and operating plans to ensure evaluation was realistic and fact based. 2) Hurdle rates vary by division to reflect the relevant opportunity cost of capital 3) Acquisition proposals would be handled by a relevant operations manager and CFO- perform thorough valuation analysis based on cash flow returns.

12. Summary Managing value consists of 3 steps: 1. Taking stock in value-creation- look for restructuring opportunities 2. Acting on identified opportunities 3. Instilling a value creation philosophy in the company

13. WhatQuestions Do You Have?