The corporate restructuring hexagon (McKinsey)

Corporate transactions create value only when an owner can improve a business, combine it advantageously or transfer it to someone who values it more. McKinsey’s restructuring hexagon broadens that logic into a comparison between current market value and the value potentially available through communication, operations, disposals, growth and financial design.

When to use it

• Ask whether the firm’s current market value is materially below its defensible potential value.
• Decompose the gap, identify its largest drivers and improve the probability-adjusted value of the relevant initiatives; see Expected value and sensitivity analysis.
• Apply the same reasoning to a private company by estimating notional value rather than relying on a quoted share price.

Origins

McKinsey developed the hexagon within its corporate-finance and restructuring practice to show the successive sources of value that management—or an acquirer—might unlock. The framework reflects a shareholder-value view of the corporation and the market for corporate control: a persistent gap between current and attainable value can attract an activist, competitor or financial buyer.

What it is

The model identifies five routes from current market value towards maximum potential value:

• Perception management: communicate credible evidence about competitiveness, cash generation and prospects so investors can value the company more accurately. Communication cannot create operating value, but it may reduce an unjustified information gap.
• Operational improvement: redesign processes, improve productivity or use approaches such as Business process redesign (Hammer and Champy) and Outsourcing where they create real net benefit.
• Disposals: sell businesses that another owner can operate or combine more effectively, ideally after correcting avoidable operational and financial weaknesses.
• Growth opportunities: create value through credible organic initiatives, acquisitions or partnerships.
• Financial engineering: adjust the capital structure to improve equity value without creating an unacceptable probability of distress.

The corporate restructuring hexagon

A raider?!

Perception management

Financial engineering

Operational improvement

Growth opportunities

Disposals

The distance between current value and restructured value is the maximum theoretical ‘raider opportunity’. If incumbent management cannot close a credible part of the gap, another owner may attempt to do so through a takeover, leveraged buyout or strategic combination. The model is a diagnostic, not evidence that every estimated uplift can be realised or added together without interaction.

How to use it

Use the valuation techniques in Making the strategic investment decision to estimate:

• current market value;
• promoted value after better disclosure of value-relevant evidence;
• incremental value from each operational initiative and their combined effect;
• incremental value from acquisitions and disposals;
• incremental value from strategic growth opportunities; and
• incremental equity value from a sustainable change in capital structure.

For every step, state the baseline, cash flows, timing, investment, dependencies, implementation risk and probability of success. Avoid counting the same benefit in more than one route. Test sensitivities and distinguish value available to all capital providers from value shifted between debt and equity holders.

The resulting gaps should provoke questions about operating performance, organic strategy, transaction plans, financing and investor communication. If investors reject the story, determine whether the problem is missing evidence, weak delivery or an unrealistic valuation. The final test is whether a credible outsider could pay a premium and still create value.

Top practical tip

Value each route separately, probability-adjust the initiatives and reconcile overlaps before comparing current value with the attainable whole.

Top pitfall

The hexagon looks sequential, but the routes interact and do not form a circular process. Adding optimistic uplifts can materially overstate potential value.

Further reading

• Copeland, T., Koller, T. and Murrin, J. (two thousand). Valuation: Measuring and Managing the Value of Companies. Wiley.
• Koller, T., Goedhart, M. and Wessels, D. (twenty twenty). Valuation: Measuring and Managing the Value of Companies. Wiley.