METRIC WARS

Marketing battles erupt as Stern Stewart and rivals seek your hearts, minds, &
dollars.

by Randy Myers, CFO, October 1996

"Forget EPS, ROE, and ROI. The true measure of your company's performance is EVA."
--Stern Stewart & Co. magazine advertisements

"CFROIs are ideally suited to displaying long-term track records, whereas a Stern
Stewart-type EVA is in millions of dollars, heavily influenced by asset size, and
unadjusted for inflation-induced biases."
--HOLT Value Associates partner Bartley J. Madden, writing in the National Association
of Corporate Directors newsletter

Could Coke and Pepsi compete any harder than this? Spurred by lucrative fees and
Corporate America's frenzied search for shareholder value, consultants are scrambling
over each other to help companies install new value-based performance metrics to
replace the old standbys of per-share earnings, return on equity, and return on investment.
In the Coca-Cola role is the New York-based Stern Stewart powerhouse, promoting its
proprietary Economic Value Added and EVA's companion performance measurement,
Market Value Added (MVA). Offering the "challenge" are The Boston Consulting Group
(BCG), whose Chicago-based experts combine cash flow return on investment, or
CFROI, with a concept they call Total Business Return (TBR); Chicago-based CFROI
proponent HOLT Value Associates; various purveyors of EVA look-alikes; and such
other marketers of the new glamour metrics as LEK/Alcar Consulting Group and its
Shareholder Value Added (SVA).

"It's usually a bake-off between three or four or five of us," says BCG vice president Eric
Olsen, who also bears the title of value-management practice leader. "Once in a while it's
just us and Stern Stewart; we've become known for offering two state-of-the-art
services."

Stern Stewart's response to such an appraisal? Don't flatter yourself, Boston Consulting.
To Stern Stewart senior partner and co-founder G. Bennett Stewart III, CFROI is "a
technology in search of a problem, as opposed to a system designed to be integrated into
a company's culture in the way real people make business decisions." For the uninitiated,
that latter reference is to EVA. Stewart adds: "CFROI is literally a consultant's
concoction. It was quite an imaginative development by a consulting firm, but it is not
well grounded in the basic elements of corporate finance theory. CFROI attempts to
measure shareholder wealth--which is not clearly related to maximizing shareholder
wealth."
COKE FOR A CLIENT

Even within the narrower world of consultants marketing EVA clones, though, "the field
is very crowded," says E. Mark Gressle, a former Stern Stewart partner who left with
some colleagues to form Finegan & Gressle, in New York City. He is now a Stern
Stewart competitor, along with a number of Big Six accounting firms and others. "It's
unbelievable," he says. "Everybody has an EVA group."

There's little question that Stern Stewart is outmuscling its rivals, as its principals are
quick to remind potential clients. Since being founded in 1982, some 250 corporate
customers have hired it to install EVA systems--companies whose total worldwide
revenues exceed $400 billion. Among their clients are such behemoths as AT&T Corp.,
Eli Lilly, TransAmerica, Georgia-Pacific, and, yes, Coca-Cola Co., which has seen its
stock increase more than tenfold since adopting EVA in the early 1980s. All but about 25
of those full-fledged customers have signed on in the last three years, and Stern Stewart
predicts continued robust growth next year. Indeed, perhaps the most notable marketing
clash in the contest--between EVA and CFROI--is better compared to Coke versus Dr
Pepper. (Boston Consulting estimates that about 100 companies, also with hundreds of
billions of dollars in global revenues, have gone with its CFROI program. HOLT is only
now beginning to target corporate clients.)

But some corporate executives who have waded through the competitive hype and heard
the formal pitches say that, much as in the Cola Wars, the similarities between EVA,
CFROI, and other new metrics are at least as great as the differences. Virtually all are
rooted in the concept that companies should look not at reported earnings, which are
subject to accounting distortions, but at how a company's returns exceed its cost of
capital. And each uses the principles of discounted cash flow.

To be sure, differences among the metrics command the close attention of potential
customers. EVA measures a company's aftertax profit from operations, less the cost of all
capital employed to produce that profit. CFROI is an efficiency measure that compares
cash flows with the total assets employed to generate those flows. An inflation-adjusted
measure calculated in a manner similar to internal rate of return, CFROI was first used as
an investment tool. So there's far more to picking a metric approach than giving each a
simple "taste test."

Still, as some impartial financial executives and even some money managers see it,
neither EVA nor CFROI should be unpalatable if properly implemented and properly
supported.

CFROI fan Peter Woodworth, a senior vice president and portfolio manager for Boston's
State Street Research & Management Co., thinks corporate managers would do better
selecting his favored measurement over EVA. But he concedes that "EVA seems to be
the more predominant [metric] if you go out and talk to businessmen, as I do all the time,
probably because EVA is a simpler concept and can be run directly off the books of the
corporation." He'd much rather see managements use EVA, he says, than no value-based
performance metric at all.

GETTING THE HARD SELL

Such dispassionate views rarely come from those who are trying to convert corporate
finance managers to one performance measurement or another. Rather, suggests
Monsanto Co.'s vice president for financial planning and analysis, Steve Stetz, they get
an aggressive hard sell tinged with attacks on their rivals.

"Each comes in and sings the praises of their particular approach or metric--and does
their level best to take the other guy's product apart," Stetz says. "Then they try to
convince you that if you were to even remotely consider going with the other person's
product, you would be doing your corporation a disservice and would be out of step with
how the market acts and reacts."

Stetz became the big chemical company's point man on metric matters when CFO Robert
Hoffman decided early last year that Monsanto needed a new way to measure
performance and frame business decisions. After the company made known that it was
interested in moving away from traditional accounting yardsticks, its St. Louis
headquarters were besieged by the top guns of the metric world. Bennett Stewart and
BCG's Olsen flew in from New York and Chicago, respectively; HOLT president Robert
Hendricks popped in from Chicago; and a McKinsey & Co. consultant made the trip,
too--all eager to get Monsanto to bank completely on their particular acronym.

It didn't work out that way, though few of the supplicants went away totally disappointed.
For what none could have counted on was Monsanto's tenacity in sorting through their
marketing spiels and producing a hybrid it believed was appropriate for its purposes.

"We frustrated the hell out of the consultants," Stetz says. "We asked ourselves a
fundamental question: What really defines and drives value in a business enterprise, and
what drives stock price?" To get the answer, his team tore apart what he calls "an
extremely complex TBR/ CFROI model and a somewhat simple EVA model," and, he
says, mathematically proved that they are identical in their discounted cash-flow
technology. In other words, if you establish the right premises for cash flows going
forward and for discount rates, you come up with the same net present value--"to four
decimal points," Stetz figures--no matter which of those two systems you use.

"The first thing that happened was that we quickly took off the table the consultants
saying, 'Your product is inferior or your product is inferior,'" he says. "Then we focused
on the strengths of each particular model or metric and what it really brought to the
party." Using data from a sampling of its competitors, suppliers, customers, and St. Louis
neighbors, Monsanto also did its own analysis to find out how well the two measures
correlated with actual stock market performance over a 20-year period.
"This almost sounds like B.S.," says Stetz, employing one acronym not in the consultants'
lexicon, "but we actually got well over 85 percent correlation, on average, with CFROI.
The Stern Stewart model was never as good in terms of predictive ability as was the BCG
model."

THE DISCOUNT THAT WASN'T

Comments like that are music to a CFROI booster's eyes. But far from booting Stern
Stewart out the door, Monsanto hired both Boston Consulting and Stern Stewart last
December, choosing the latter's EVA as the metric that would be pushed down through
the corporation to the company's line managers and touted to shareholders in the annual
report. The TBR/CFROI system was adopted for the lower-profile job of defining at the
corporate level the EVA targets its managers would have to meet. For good measure,
Monsanto brought in HOLT to help it understand how money managers use CFROI to
value corporations, and how to communicate effectively to investors about use of the new
performance metrics. (Monsanto also employs a balanced-scorecard framework, into
which it fits its various EVA and CFROI measurements.)

"TBR/CFROI is an extremely sophisticated model that is just about unusable down in

your line organization, whereas EVA is a very easy metric to communicate to your
operating people," Stetz says. "If a secretary tells you she's buying supplies a year ahead
of time to get a 4 percent discount, and you tell her she has to earn 12 percent
(approximately Monsanto's cost of capital) on what she spends, it's easy to see the 4
percent discount doesn't make it."

The cost of Monsanto's blend of EVA and CFROI the first year: $3 million, "not counting
somebody doing something for me down at the division level," says Stetz. Stern Stewart
says its larger customers can pay fees of $2 million to $3 million, with smaller outfits
paying in a range that is down to $200,000 or so. Boston Consulting's typical Fortune
500 client company spends at least $500,000 in fees over a 12-to-18-month period, with
$1.2 million to $1.5 million at the high end. And Finegan & Gressle typically charge
from $125,000 to $500,000 for each of its 3-to-6-month projects. HOLT markets CFROI
mainly to money managers as a tool for making investment decisions. It worked with
both money managers and corporations before selling the corporate planning division to
Boston Consulting in 1991, and now is beginning to get back into corporate marketing in
a limited way.

In its pitch, Boston Consulting Group "spends a good bit of their time trying to tell you
that EVA misses something," says Stetz. "After they go through that exercise, they say,
'We recognize TBR/CFROI is extremely complex and difficult to push down through the
organization, so let us offer you this milieu of measures we can make work with CFROI
sitting on top.'"

But Boston Consulting's hard work countering the merits of EVA may reflect Stern
Stewart's long lead--with recognition and success gained through seminars around the
world, numerous articles in trade and financial journals, and Bennett Stewart's book The
Quest for Value.

REMEMBERING "SVEN"

"Stern Stewart is preeminent; they're the best marketers," says Katherine Hudson,
president and chief executive officer of W.H. Brady Co. in Milwaukee, a $350 million
manufacturer of industrial and commercial signs, labels, and tapes. Hudson partly credits
Stern Stewart seminars for her firm's decision to embrace EVA, though her company
internally developed its own system, called Shareholder Value Enhancement, or SVE.
Brady scarcely entertained the idea of actually hiring Stern Stewart, deeming it far too
expensive for a company that size.

The midwestern company used some homespun ingenuity to construct its own SVE
system--one with a decidedly un-Stern Stewart look. Sven, a sword-bearing Viking
warrior mascot, storms through company literature and employee newsletters, for
example, making the Brady program seem very approachable to the rank-and-file. He's
also around for the games of "Brady Bingo"--in which business units win green dots for
being SVE-positive and showing a year-to-year improvement, and have to live with
yellow or orange dots for lesser performance.

Brady, like Monsanto, doesn't buy into the idea that any one performance metric can be a
panacea for every company. "Almost anything is good if you understand it and translate it
to your own experience, and it represents at least some attempt to get close to generation
of economic value," says Hudson. "The key for me is that it has to take into account not
only the income statement-- which American business has learned very well--but also the
balance sheet; you're not only trying to create margins, but utilize the assets in your
company."

Brady's creation of Sven illustrates what Boston Consulting thinks may be a weakness in
the Stern Stewart model. "Our marketing approaches are quite different," says BCG's
Olsen. "Stern Stewart has a specific mousetrap and they really drive to that; they've built
a good case around that mousetrap, and they're very aggressive about pushing it." But
they are "probably far less flexible in terms of tailoring it because they come with only
one way of doing these things. We're much more flexible," Olsen believes. "Clients who
want to go through the mental effort to review the pros and cons [of competing metrics]
should come up with a better answer."

"FOUR PEOPLE" VERSUS 100

Mark Gressle, the Stern Stewart expatriate whose new outfit, Finegan & Gressle,
attempts to deliver specialized EVA-style programs, hones in on his competitor's
supposed inflexibility. "EVA failures in the past have occurred essentially because
somebody pulled the template off the shelf and said, 'OK, here's EVA; go forth.' And they
didn't understand the unique situation the company was in," he says. Now that EVA is
being better understood by companies, "today companies are coming to us and saying,
'We know how to calculate EVA and we think we can link it to compensation, but
implementation is another matter. We want you to bring in your skills and whatever you
need to change the way this organization thinks about creating value.'"

But such criticism piques Bennett Stewart. "How many people do they have working
there? Probably about 4. We have 100 people," he says. (Of Stern Stewart's 100
employees worldwide, 60 to 65 are professionals. Finegan & Gressle has 10
professionals.) Finegan & Gressle, says Stewart, has "attempted to piggyback off what
we've created, and are saying to companies, 'Now that you understand EVA and MVA
we can help you integrate this more deeply into your decision-making.' They're able to do
that essentially only after a company has embraced the EVA/MVA methodology."

Indeed, Stern Stewart has many rabid supporters, among them Brady's Milwaukee
neighbor, Harnischfeger Industries Inc. The manufacturer of papermaking machinery,
mining equipment, and materials-handling equipment adopted Stern Stewart's EVA as a
performance measurement tool for its fiscal year ended October 1993, linking incentive
compensation to EVA the following year.

"We had a number of folks in our finance group who went to different seminars put on by
different people, and EVA was what was recommended by the group, unanimously," says
Harnischfeger's executive vice president of finance and administration, Francis M. Corby
Jr.

Its simplicity was key, as was Stern Stewart's assurance that long-term corporate
development wouldn't suffer. "Our experience has been that people haven't backed off
investing in their businesses; in fact, since implementing EVA, our company has tripled
in size, largely through acquisitions made within the context of EVA--where people were
betting future bonuses that aftertax returns would exceed our 12 percent cost of capital."
Harnischfeger's stock price also has moved up sharply, to 383/8 from 18 when it began
using EVA.

P&G CHOOSES CFROI

So why even consider any other system if you can afford EVA? "All of these tools have a
trade-off between simplicity of application and whether it gives you the right answer or
not," says David Walker, vice president of finance at Procter & Gamble Co. The
Cincinnati consumer-products giant began testing TBR and CFROI in its U.S. food and
beverage business in 1994, and was so pleased with the results that it changed over the
rest of its U.S. businesses last summer. It's now incorporating TBR in its international
operations, a job it expects to complete by January.

What Procter & Gamble likes about TBR "is that it places an enormous value on growth,
not just on improving short-term financial returns. A lot of people don't think of us as a
growth company, but we are growing very fast; the plan is to double our business every
10 years in real unit-volume terms." Says Walker, "You can make EVA growth go up by
cutting investments, and that's what concerned us about the simplistic use of that tool."
Besides Procter & Gamble's argument and Monsanto's experiment with using both EVA
and CFROI, some companies don't buy the conventional wisdom that the EVA model is
that simple. When AGCO Corp., a farm-equipment manufacturer in Duluth, Georgia,
acquired the international division of Massey Ferguson, another farm-equipment maker,
in 1994, Massey had been using EVA for two or three years. "In certain areas they felt
like it had been successful--but not lower in the organization," observes Allen Ritchie,
president of the finance and administrative group at AGCO. "A lot of employees were
being improperly motivated and didn't fully understand what the objective of EVA
measurements was. Maybe it was the fact that [Massey Ferguson] had not done a good
enough job in the education process and implementation phase, but we found it much
more appropriate to focus back on the principal corporate finance objectives on which
EVA is based. And that really came around to return on net assets (RONA) for the most
part." Having unwound Massey's EVA program, AGCO now employs a RONA-based
performance measurement system that Ritchie says has been easy to apply across all of
its operations.

Mark Ubelhart has worked with numerous corporations--among them little Valmont
Industries Inc., a metal-structures manufacturer in Valley, Nebraska--linking executive
pay to value-based performance metrics in his role as practice leader for corporate
finance and compensation at the Lincolnshire, Illinois, compensation consulting firm of
Hewitt Associates LLC (see "Do It Yourself: How Valmont Industries Implemented
EVA," March 1996). Ubelhart says differences between the varying metrics are
frequently narrowed in real-world applications anyway. CFROI may indeed be more
complicated, he says, "but the full-fledged EVA, with all their adjustments, is also quite
complicated." Indeed, Stern Stewart offers about 160 possible variations of it. And
neither EVA nor CFROI "in the pure form is very often implemented," he says.

"The fact is, EVA, CFROI, and all the others are premised on fundamental economics
that 20 years ago was called residual income," Ubelhart continues. "Those things don't
change."

W.H. Brady CEO Hudson agrees, noting that the basic research behind EVA, and even
her own SVE clone, "is actually old; you can go back to [Merton] Miller and [Franco]
Modigliani and their paper on the price of a stock being related to economic value
generated," Hudson says. "I was in college in the 1960s, and this was required reading."

She adds: "One thing a consultant can't give you is common sense." *

THE ACRONYMIC A-LIST

A Glossary of Selected Performance Metrics Definitions

EVA:
Stern Stewart & Co. describes Economic Value Added as a company's net operating
profit minus an appropriate charge for the opportunity cost of all capital invested in an
enterprise. In equation form, EVA equals net operating profit after taxes, minus the
company's book capital, multiplied by its cost of capital. According to Stern Stewart,
EVA is an estimate of a company's true "economic" profit, or the amount by which
earnings exceed or fall short of the required minimum rate of return investors could get
by investing in other securities of comparable risk.

CFROI:

Cash flow return on investment compares the cash flow of a firm to its owners with the
total assets employed to generate those flows. HOLT Value Associates calculates CFROI
in two steps. First, it measures the inflation-adjusted cash flows available to all capital
owners in the firm and compares that with the inflation-adjusted gross investment made
by the capital owners. HOLT then translates the ratio of gross cash flow to gross
investment into an internal rate of return by recognizing the finite economic life of
depreciating assets and the residual value of nondepreciating assets such as land and
working capital.

MVA:

Market Value Added, a measure created by Stern Stewart, is the difference between total
market value--what investors can take out of the company--and the total capital invested.
A positive MVA indicates that a firm has created wealth. Stern Stewart calculates MVA
by adding the capital taken in by a company during its lifetime through securities
offerings, loans, and retained earnings, then makes some EVA-like adjustments (such as
capitalizing and amortizing R&D expenditures), and subtracts the total from the current
value of the company's stock and debt.

TSR and TBR:

Total Shareholder Return represents the change in capital value of a company over a one-
year period, plus dividends, expressed as a gain-or-loss percentage of the beginning
value. Total Business Return, as used by The Boston Consulting Group, is that measure
as calculated for private companies or business units for which stock prices aren't
available. To figure beginning and ending values, BCG uses the unit's CFROI and the
growth in invested cash.

ROI, ROE, ROA, ROCE, and RONA:

Return on investment is a generic term referring to the efficiency of a business in

producing income (or cash flow) in relation to its capital employed. Common accounting
ROI measures include return on equity, which is net income divided by owner's equity;
return on assets, or net income divided by total assets; return on cash employed, or
earnings divided by book capital; and return on net assets, or net income divided by net
assets.
Sources: Stern Stewart & Co., The Boston Consulting Group, HOLT Value Associates,
and The Portable MBA in Finance and Accounting, John Wiley & Sons, New York,
1992.

A STUDY IN SNIPING

A University of Washington Critique of EVA Makes the Rounds --With Help from Stern
Stewart's Rivals?

In the crossfire between Stern Stewart & Co. and its rivals, anything reflecting poorly on
EVA's performance-measuring abilities can quickly become ammunition. Take, for
instance, a new study from the University of Washington's business school--harmlessly
enough titled "Evidence on the Relative and Incremental Information Content of EVA,
Residual Income, Earnings and Operating Cash Flow."

The professors who prepared the 25-page report start by documenting the lavish claims
made for EVA. After discounting earnings growth as a measurement, for example,
Bennett Stewart is quoted as proclaiming that "EVA stands well out from the crowd as
the single best measure of wealth creation on a contemporaneous basis," and boasting
that "EVA is almost 50 percent better than its closest accounting-based competitor in
explaining changes in shareholder wealth."

The report's authors--Washington professors Gary C. Biddle and Robert M. Bowen, and
James S. Wallace of the University of California, Irvine--say the study was motivated
both by the metric and by the "increasing use of EVA by firms, increasing interest in
EVA among academics, and potential interest in EVA among accounting policymakers"--
not to mention the widespread positive publicity the metric has received in the business
press. Three years ago, Fortune magazine branded EVA "the real key to creating wealth."
And an American Institute of Certified Public Accountants workshop on the future of
financial management actually predicted that EVA will replace EPS in the regular stock
and earnings reports in the Wall Street Journal.

The Washington study raises questions about such a future for EVA, however. It
concludes that while EVA may add "incremental information in some settings," as a
performance measure it can't even outperform basic income before extraordinary items.
"In contrast [to Stern Stewart's claims of superiority], all of the evidence points to
earnings having at least equal [and often higher] relative information content," according
to the report.

Stern Stewart disputes elements of the methodology. Senior vice president Stephen F.
O'Byrne argues that the authors failed to adjust for two real-world anomalies when
correlating EVA to stock prices over five-year periods. "First, they didn't recognize that
the market puts a higher multiple on positive EVA than it does on negative EVA," he
says. "Second, they didn't recognize that the multiples on capital under EVA decline with
the company's size." O'Byrne ex-presses some sympathy with the difficult task taken on
by the researchers, who presented the report August 12 before the American Accounting
Association. "It took us a number of years to figure this stuff out," he says. "It's only in
the last number of years that we understood the adjustments you have to make."

Professor Bowen's response to Stern Stewart's criticism: "We did do considerable

sensitivity analysis in our study, and we used standard academic methodology. We
treated every performance metric equally." If any equations could benefit from revisions,
he adds, "we'd be happy to attempt to improve the study by making adjustments." The
authors purchased the basic data used in the research directly from Stern Stewart, but the
professor says Stern Stewart didn't respond to their questions about EVA during the work
on the report.

The study seems destined to become a lightning rod, at least among those companies
shopping for metric help among Stern Stewart and the Chicago-based marketers for its
main rivals, The Boston Consulting Group and HOLT Value Associates. In the course of
reporting this month's cover story, a CFO editor mysteriously received a copy of the
report in the mail. Throughout the document, negative statements about EVA were
marked with a half-dozen yellow tags and highlighted with an orange marker.

The envelope had no return address, but it was postmarked Chicago.

WHAT SNAPPED AT QUAKER?

Garbage in, garbage out, say consultants

Planning to adopt a value-based performance metric? Think it will help you make smarter
acquisition decisions? Okay, chew on this: If EVA is so smart, how come it didn't prevent
EVA poster child The Quaker Oats Co. from making its disastrous $1.7 billion purchase
of Snapple Beverages Co. in late 1994--which it was forced to sell two years later for a
mere $300 million?

Answer: Quaker didn't use EVA to calculate its $14-per-share offering price for Snapple.
According to company spokesman Mark Dollins, Quaker uses a discounted cash flow
model to evaluate acquisitions and divestitures, and merely uses EVA as an incentive
compensation tool.

"EVA does not take into account, in mergers and acquisitions, things such as market
conditions," Dollins says.

Not surprisingly, Stern Stewart & Co. says EVA is a wonderful tool for valuing
acquisitions. "Whether it had been an EVA analysis or a discounted cash flow or price-to-
earnings analysis, it's really the old adage--garbage in, garbage out," says Stern Stewart
senior partner and co-founder G. Bennett Stewart III. "It all depends on the assumptions."

To see just how good some of the new metrics are at valuing acquisitions, we asked both
Stern Stewart and HOLT Value Associates LP to calculate a fair value for Snapple at the
time of its acquisition by Quaker, using only data that was publicly available at that time.
Stern Stewart declined, citing its former consulting relationship with Quaker, but HOLT
agreed to take on the assignment using its CFROI (cash flow return on investment)
methodology.

First, some background. In valuing a company whose CFROI is higher than average,
HOLT assumes those returns will gradually fade toward the market norm because of
competitive pressures. The rate of fade is determined in part by the volatility of the
company's historic CFROI levels. That's important because HOLT's valuation
methodology is based on projecting how the company will be performing (in terms of its
CFROI level and the real rate of growth in its assets) five years into the future.

In Snapple's case, HOLT was confronted with a very high CFROI and a very high asset
growth rate--25.5 percent and 35 percent, respectively. With little company history by
which to judge volatility in those numbers, HOLT director of research Sam Eddins
calculated a value for Snapple's stock as if its CFROI would fade at an average rate, and
calculated Snapple's asset growth rate at a slightly above-average rate. That would have
left it with a CFROI of 17 percent and an asset growth rate of 21 percent by 1999.
Discounting those values back to 1994, it suggested a price for Snapple of $19.55 per
share--or $5.55 per share more than Quaker actually paid.

Funny numbers

But as HOLT partner Bart Madden explains, his firm advises clients not to use current
CFROI and growth rates as a starting point when the company being evaluated has an
abbreviated history, as was the case with Snapple. "This was more like a hot IPO with a
couple of peak years under its belt. If you extrapolate from that, you get funny numbers,"
Madden says.

Adds Eddins: "In this assumption, Snapple would have been maintaining a CFROI of 17
percent five years after the acquisition, which would have put them in line with the best
companies in Corporate America. In fact, we would have expected a fairly rapid fade rate
for Snapple. Even at $14 a share, Quaker would have been assuming that Snapple would
have a 14.5 percent CFROI in five years, which is absolutely a preeminent level. I would
have told them this was a crazy acquisition."

Is the CFROI methodology useless, then? Absolutely not, according to HOLT. In valuing
young companies, it says, clients are advised to compare projected growth rates for the
firm over the next five years with those of other companies in similar lines of business.
Perhaps more than anything else, HOLT's exercise illustrates that using value-based
metrics to put a price tag on acquisitions can be as much art as science. R.M.

Randy Myers is a contributing editor of CFO.