Valuation: Measuring and Managing the Value of Companies, Fifth Edition

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Corporate Portfolio Strategy

Part Four, beginning with this chapter, looks at value creation from a management perspective. At the heart of a company’s corporate strategy—its blueprint for creating value—lie decisions about what businesses it should own. The principle for guiding such decisions is straightforward: the owner that can generate the highest cash flows from a business is the owner that will create the most value. A corollary is that no business has an inherent value. The amount of value it creates will always depend on who owns it.

General Mills’ purchase of Pillsbury from Diageo in 2001 illustrates the point. Shortly after buying Pillsbury for $10.4 billion, General Mills increased the business’s pretax cash flows by more than $400 million per year, increasing Pillsbury’s operating profits by roughly 70 percent. Diageo’s core business is in alcoholic beverages, while both General Mills and Pillsbury sell packaged foods. Under Diageo, Pillsbury was run entirely separately from Diageo’s core business, because the two companies’ manufacturing, distribution, and marketing operations rarely overlapped. In contrast, General Mills substantially reduced costs in Pillsbury’s purchasing, manufacturing, and distribution, because significant costs were duplicated in their operations. On the revenue side, General Mills boosted Pillsbury’s revenues by introducing Pillsbury products to schools in the United States where General Mills already had a strong presence. And the synergies ...