Public Storage 2006 Annual Report Download - page 5

I
ntrinsic Val
ue
In un
d
erta
k
ing an
d
structuring a merger, it is as important to un
d
erstan
d
w
h
at you are
b
uying as w
h
a
t
y
ou are
g
ivin
g
up. In t
h
e case o
f
an a
ll
cas
h
transaction, it is easy to un
d
erstan
d
w
h
at you are payin
g
. But
in the case of a stock mer
g
er, such as with Shur
g
ard, we in effect “sold” part of our company, about 23%,
to the Shur
g
ard shareholders in return for 100% of their company and the assumption of debt.
A
ccordingly, we needed to understand our intrinsic or enterprise value and make some assessments of
Sh
urgar
d
’s intrinsic va
l
ue. T
h
is is exact
l
y w
h
at we
d
i
d
.
To un
d
erstan
d
intrinsic va
l
ue, t
h
ere is no
b
etter source t
h
an Warren Bu
ff
ett. His
d
e
f
inition goes
s
omet
h
in
g
l
i
k
e t
h
is:
“Intrinsic va
l
ue is t
h
e
d
iscounte
d
va
l
ue o
f
t
h
e cas
h
t
h
at can
b
e ta
k
en out o
f
a
b
usiness
d
urin
g
its
l
i
f
etime
.
C
a
l
cu
l
atin
g
intrinsic va
l
ue is typica
ll
y
h
i
ghl
y su
bj
ective t
h
at varies
b
ot
h
as estimates o
f
f
uture cas
h
fl
ow
s
a
re revise
d
an
d
as interest rates move. Intrinsic va
l
ue is t
h
e on
l
y
l
o
g
ica
l
way to eva
l
uate t
h
e re
l
ativ
e
a
ttractiveness o
f
investments an
d
b
usinesses. Un
d
erstan
d
in
g
intrinsic va
l
ue is as important
f
or mana
g
er
s
a
s it is
f
or owners. W
h
en mana
g
ers ma
k
e capita
l
a
ll
ocation
d
ecisions, suc
h
as a mer
g
er or acquisition, it
is vita
l
t
h
at
d
ecisions are ma
d
e to increase intrinsic va
l
ue rat
h
er t
h
an
d
estroy it. Many mana
g
ers ten
d
t
o
f
ocus on w
h
et
h
er a transaction is imme
d
iate
l
y
d
i
l
utive or anti-
d
i
l
utive to earnin
g
s per s
h
are rat
h
er t
h
a
n
e
va
l
uate its impact on intrinsic va
l
ue. Over time, t
h
e s
k
i
ll
wit
h
w
h
ic
h
mana
g
ers a
ll
ocate capita
l
wi
ll
h
av
e
a
n enormous im
p
act on a com
p
any’s intrinsic va
l
ue.
”
In assessin
g
a mer
g
er wit
h
S
h
ur
g
ar
d
, we eva
l
uate
d
t
h
e cas
h
fl
ows o
f
b
ot
h
b
usinesses. Here is a snaps
h
ot
of
b
ot
h
companies at t
h
e en
d
o
f
2005 usin
g
Fun
d
s
f
rom Operation (see
b
e
l
ow
f
or exp
l
anation):
Comparison o
f
FFO per Common S
h
are in 200
5
(
Amounts in mi
ll
ions, exce
p
t
p
er s
h
are)
Sh
urgar
d
Pu
bl
ic Storag
e
SHU reported FFO $ 68 PSA reported FFO $ 46
5
Merger costs 14 Hurricane casualty losses 3
Real estate development costs 13 Gain on sale of non-real estate assets (1)
G&A costs 35 EITF D-42 c
h
arges
9
E
uro
p
ean
l
osses 1
8
FFO after ad
j
ustments $ 148 FFO after ad
j
ustments $ 47
6
S
h
ares issue
d
39 S
h
ares outstan
d
in
g
129
FFO per share after adjustments
$
3.79 FFO per share after adjustments
$
3.6
9
S
o ad
j
ustin
g
for special char
g
es, one time items or costs that we did not think would be recurrin
g
, the
transaction was immediately FFO positive for Public Stora
g
e shareholders. However, we would not have
pursued the merger for a few cents of earnings accretion. The real value lies in the opportunity to achiev
e
l
ower costs an
d
h
ig
h
er revenues in S
h
urgar
d
’s
d
omestic an
d
European properties an
d
l
ower t
h
e operating
costs o
f
Pu
bl
ic Storage’s
d
omestic port
f
o
l
io (t
h
roug
h
economies o
f
sca
l
e).