At consulting firm Accenture, EVA performance is linked with compensation for the firm’s partners. “A big portion of our partners’ and units’ compensation is based on EVA generation,” explains CFO Harry You. You likens EVA to a more precise version of return on invested capital. He also uses EVA in doing business with clients. “We look at the way we can create EVA for them,” he says. “We’re selling our business based on how we sell EVA to our clients. A vast majority of our clients may not use it, but they understand it.”
“EVA is the most important empirical link to MVA,” says Stewart. The change in EVA explains 35 percent of the change in MVA, or seven times more than sales growth, while the change in earnings per share explains only about 3 percent of the change in MVA.
MVA itself is the stock market’s assessment of the net present value (NPV) of EVA. In other words, MVA is the difference between the market value of a company (which includes both equity and debt) and the capital that lenders and shareholders have entrusted to the company over the years. Thus, MVA is a measure of the difference between “cash in” (what investors have contributed) and “cash out” (what they could get by selling at today’s prices), Stewart explains.
If MVA is positive, it means that the company has increased the value of the capital entrusted to it and thus created shareholder wealth. If MVA is negative, the company has destroyed wealth.
Like all other metrics, says Accenture’s You, MVA has its limitations. For one thing, like a company’s price-to-earnings ratio, it is in part captive to the vagaries of the stock market. “Over longer periods, MVA correlates with EVA, but over a shorter time, it may not,” he insists.
On the other hand, MVA is a better measure of a company’s shareholder-wealth creation than simple market capitalization. Take, for example, Verizon Communications. The telecom giant’s market value is $200 billion, nearly the size of Microsoft’s. Although one would think the two companies therefore rewarded their shareholders equally, Microsoft’s MVA is 13 times greater than Verizon’s. This is because Verizon issued $65 billion of stock to buy GTE in 2000, skewing its market value growth.
And this transaction followed by just three years the all-stock merger of Bell Atlantic and Nynex that first created Verizon. In the past 10 years, Verizon’s total return to shareholders has been only 7.84 percent, according to Stewart.
All High Performers Are Not Alike
The top three performers, according to the MVA ranking of Tier-1 companies, are General Electric, Microsoft, and Wal-Mart Stores. (Note: The rankings delineate Tier 1, Tier 2, and Tier 3 companies by size.) Although representing diverse industry sectors and business strategies, all three companies have created nearly the same amount of wealth for their shareholders — GE, $223 billion; Microsoft, $212 billion; and Wal-Mart, $207 billion.
Wal-Mart had $246 billion in sales in the most recent year, while Microsoft had “only” $31 billion. GE has $156 billion in long-term debt, while Microsoft has none. Microsoft’s return on average capital is nearly twice that of the other two companies.