4.4 Value Management
Cash value added-based system
One of the prime objectives of the Bayer Group is to sustainably increase enterprise value. We use a Group-wide value management system to plan, control and monitor our businesses. An important value-based indicator is the cash value added (CVA), which shows the degree to which the cash flows needed to cover the costs of equity and debt and of reproducing depletable assets have been generated. If the CVA is positive, the respective company or business entity has exceeded the minimum requirements. If it is negative, the anticipated capital and asset reproduction costs have not been earned. The CVA is an indicator for a single reporting period. For a year-on-year comparison we therefore use our second central steering parameter for value management, the delta CVA, which is the difference between the CVAs of two consecutive periods. A positive delta CVA denotes an increase in the company’s value.
The value-based indicators aid management’s decision-making, especially regarding strategic portfolio optimization and the allocation of resources for acquisitions and capital expenditures. The focus at the operational level is on the key drivers of enterprise value: growth (sales), cost efficiency (EBITDA) and capital efficiency (working capital, capital expenditures), since these directly affect value creation.
Calculating the cost of capital
Bayer calculates the cost of capital according to the debt/equity ratio at the beginning of the year using the weighted average cost of capital (WACC) formula. The cost of equity capital is the return expected by stockholders, computed from capital market information. The cost of debt used in calculating WACC is based on the terms for ten-year Eurobonds issued by industrial companies with an “A-”rating.
To take into account the different risk and return profiles of our principal businesses, we calculate individual capital cost factors after income taxes for each of our subgroups. In 2010 these were 8.1% (2009: 8.0%) for HealthCare, 7.5% (2009: 7.5%) for CropScience and 7.1% (2009: 7.0%) for MaterialScience. The minimum return required for the Group in 2010 was 7.8% (2009: 7.7%).
Gross cash flow, cash value added and cash flow return on investment as performance yardsticks
The gross cash flow as published in our statement of cash flows is the measure of our internal financing capability. Bayer has chosen this parameter because it is relatively free of accounting influences and is therefore a more meaningful performance indicator.
Taking into account the costs of capital and of reproducing depletable assets, we determine the gross cash flow hurdle. If the gross cash flow hurdle is equaled or exceeded, the CVA is positive and thus the required return on equity and debt plus the cost of asset reproduction has been earned.
In calculating the hurdle we made methodical changes compared to the previous year, mainly relating to the reproduction requirements for intangible assets. In addition, material participating interests of direct relevance to business operations are included in the capital invested starting in 2010. The figures for 2009 have been restated accordingly.
The profitability of the Group and of its individual business entities is measured by the cash flow return on investment (CFRoI). This is the ratio of the gross cash flow to the capital invested, which is derived from the statement of financial position and basically comprises the property, plant and equipment and intangible assets required for operations – stated at cost of acquisition or construction – plus working capital, less interest-free liabilities (such as current provisions). To reduce fluctuations in the capital invested, the CFRoI is computed on the basis of the average figure for the respective year.
The CFRoI hurdle for 2010 was 10.0% (2009: 9.9%), while the corresponding gross cash flow hurdle was €4,384 million (2009: €4,280 million).
Actual gross cash flow came in at €4,771 million, exceeding the hurdle by 8.8%. Thus in 2010 we earned our entire capital and asset reproduction costs, and the positive CVA of €387 million shows that Bayer not only exceeded the minimum return and reproduction requirements but earned a premium on the capital invested. Given the previous year’s CVA of €378 million, the Bayer Group therefore recorded a positive delta CVA of €9 million, showing that it created slightly more value than in the previous year. The CFRoI for 2010 amounted to 10.9% (2009: 10.7%).
HealthCare and MaterialScience exceeded their target returns including asset reproduction, while CropScience was €335 million below the gross cash flow hurdle. The CFRoI for HealthCare was 12.8% (2009: 13.6%). CropScience was below the previous year with a CFRoI of 5.9% (2009: 11.6%). MaterialScience recorded a CFRoI of 11.0% (2009: 3.4%).
|Value Management Indicators by Subgroup||[Table 3.18]|
| ||HealthCare||CropScience||MaterialScience||Bayer Group|
| ||€ million||€ million||€ million||€ million||€ million||€ million||€ million||€ million|
|Gross cash flow hurdle (GCF hurdle)|
|Gross cash flow* (GCF)||3,153||2,948||1,043||546||319||1,058||4,658||4,771|
|Cash value added (CVA)||895||657||221||(335)||(641)||85||378||387|
|Delta cash value |
added (delta CVA)
|Cash flow return on investment (CFRoI)|
|Average capital |
2009 figures restated
* For definition see Chapter 4.5 "Liquidity and Capital Expenditures of the Bayer Group."