Value: The Four Cornerstones of Corporate Finance

5

The Best Owner

The fourth and final cornerstone states that the value of a business depends on who owns or manages it, because different owners will generate different cash flows from the same business.1 We call this cornerstone the best owner because value is maximized when it's owned by whomever can generate the highest cash flows from it. A corollary is that there is no such thing as an inherent value for a business; it always depends on who's operating it.

Acquisitions are a good example of the best-owner principle. Shortly after buying Pillsbury from Diageo in 2001 for $10.4 billion, General Mills increased Pillsbury's pretax cash flows by at least $400 million per year, roughly increasing Pillsbury's operating profits by 70 percent.

Diageo's core business is alcoholic beverages, while Pillsbury and General Mills sell packaged foods. Under Diageo, Pillsbury's operations were run entirely apart from Diageo's core business because there were few overlaps in manufacturing, distribution, and marketing. On the other hand, General Mills was able to substantially reduce costs in purchasing, manufacturing, and distribution—and it boosted revenues after introducing Pillsbury's products to schools in the United States where General Mills already had a strong presence. Also, General Mills used Pillsbury's refrigerated trucks to distribute its newly branded, refrigerated meals.

General Mills was a better owner of Pillsbury than Diageo. In truth, we never know who the very best owner ...