Professional Documents
Culture Documents
Perspectives on
Corporate Finance
and Strategy
Number 24,
Summer 2007
Companies that stick to valuation basics can capture any value that would
make them attractive for takeover bids.
The state of the corporate board, 2007:
A McKinsey Global Survey 6
Corporate directors want more information about their companies and industries,
and they say that investments by private-equity firms improve governance.
Investing in sustainability:
An interview with Al Gore and David Blood 12
Reforms that attracted little attention in the Western world mark a major step
forward in the modernization of Chinas capital markets.
The granularity of growth 25
The market for corporate control is undergoing a fundamental change: it is not only
growing M&A activity reached record levels in 2006, peaking at nearly $4 trillion
globallybut also getting more aggressive. Last year more than 100 hostile transactions,
valued at over $520 billion, were announced around the world (Exhibit 1). Thats
three times the previous record, in 1999, according to data from Dealogic.
This activity is driven in part by a host of
new playersincluding private-equity firms,
hedge funds, and activist shareholders
that seem more and more willing to put
companies in play at a moments notice.
Further complicating the landscape, notably
in Europe, is a recent flood of valuecreating cross-border opportunities that
have appeared as traditional barriers
to hostile pursuits erode.1
Exhibit 1
A burst of hostility
Web 2007
Proactive defense
Exhibit 1 of 2
McKinsey on Finance
Summer 2007
Glance: The market for corporate control is increasingly aggressive.
Exhibit title: A burst of hostility
Value, $ billion
Number of deals
600
150
500
400
100
300
200
50
100
0
Share of global M&A
volume, %
2000
2001
2002
2003
2004
2005
2006
20072
13
10
1Any
deal (including withdrawn deals) provoking initial hostile response from board of target company; includes only deals
with a value >$25 million.
2Extrapolated based on value and number of unsolicited bids up to May 21, 2007 ($210 billion).
Source: Dealogic; McKinsey analysis
Web 2007
Proactive defense
Exhibit 2 of 2
Preempting hostile takeovers
Glance:
The corporate-strategy hexagon assists managers in diagnosing their own vulnerability
to a takeover.
Exhibit title: Back to basics: The corporate-strategy hexagon
Exhibit 2
Back to basics:
The corporate-strategy
hexagon
The corporate-strategy hexagon
assists managers in diagnosing their
own vulnerability to a takeover.
Valuation and
perception gap
Maximum
opportunity
Current market
value
6
Total potential
value
Value as is
Operating
improvement
Value with
internal
improvements
3
Disposal/
new owners
Value with
internal
improvements
and disposals
Financial
engineering
Value with
internal
improvements,
disposals,
and growth
New growth
opportunities
Source: Tim Koller, Marc Goedhart, and David Wessels, Valuation: Measuring and Managing the Value of Companies,
fourth edition, Hoboken, NJ: John Wiley & Sons, 2005
McKinsey on Finance
Summer 2007
The authors would like to thank Pedro Rodeia and Felix Wenger for their contribution to the development
of this article.
Jenny Askfelt Ruud (Jenny_Askfelt_Ruud@McKinsey.com) is a consultant and Johan Ns (Johan_Nas@
McKinsey.com) is a partner in McKinseys Stockholm office; Vincenzo Tortorici (Vincenzo_Tortorici@
McKinsey.com) is a partner in the Milan office. Copyright 2007 McKinsey & Company. All rights reserved.
At a time of significant public debate about the role and performance of boards of directors,
a recent McKinsey Quarterly global survey of corporate directors and other executives
indicates that directors strongly desire more financial and operational information from
management about the companies they serve and want to see more sector specialists
and outside experts on company boards. They also regard the growing influence of private
equity on the value of public companies as generally positiveat least in the short
termand indicate that private-equity investors tend to strengthen many aspects of corporate governance. Few executives see hedge funds making any positive contributions.
Survey 2007
Board survey
Exhibit 1 of 6
Glance: This article's exhibits display respondents' views on board governance.
Exhibit title: Degrees of satisfaction
Exhibit 1
% of respondents (n = 824)
Degrees of satisfaction
66
Strategic information
Operational information
52
44
74
57
56
Exhibit 2
Survey 2007
Board survey
Exhibit 2 of 6
McKinsey on Finance
Exhibit title: Broadening input
Summer 2007
Broadening input
n = 724
n = 824
92
81
24
Minority shareholders
35
Survey
2007
Other board members
4
Board survey
Exhibit 3 of 6
Source: April
2007
McKinsey
Quarterly
corporate-governance
survey
Exhibit
title:
Roles
financial
investors
play
Exhibit 3
35
Academic experts
40
63
Retired executives
54
71
Current executives
64
Heads of divisions or
business units
78
Sector specialists
Controlling/majority
shareholders
20
Labor representatives
12
% of respondents (n = 2,668)
Roles financial
investors play
Accountability to
shareholders
59
32
Strategic focus
58
23
Financial structure
55
26
Governance
45
20
Destroy value
Neither
Dont know
Private equity
1Figures
60
Short-term value
Long-term value1
Hedge funds
29
29
17
21
15
22
16
34
13
31
22
24
28
32
value. Another possibility is that respondents see hedge funds as simply choosing
the right companies to invest in.
Governing boards
Exhibit 4 of 6
Exhibit title: Evaluating compensation
10
McKinsey on Finance
Exhibit 4
% of respondents (n = 2,668)
Evaluating compensation
Summer 2007
Appropriately
compensated
53
33
25
Survey 2007External board member
45
Nonboard member
15
Board survey
Exhibit 5 of 6
Source: April
2007
corporate-governance
Exhibit
title:
A McKinsey
voice inQuarterly
compensation
decisionssurvey
Exhibit 5
A voice in compensation
decisions
Overcompensated
Dont know
13
55
17
28
1
3
12
% of respondents
n = 2,668
No role
25
38
Nonbinding
advisory role
60
Structure of
compensation package
49
Exceptional and
one-off payments
35
Power to veto
executive pay deals
Total amount of
compensation package
47
42
Compensation
Survey 2007
Board survey
Exhibit
6 of 6
The state of the corporate board, 2007: A McKinsey Global Survey
Exhibit title: Regulation improves governance
Exhibit 6
11
% of respondents (n = 2,668)1
Regulation improves
governance
Made governance
less effective
Had no effect
12
76
16
68
17
60
58
57
SEC2 regulations
56
13
28
40
28
4
5
8
12
13
25
34
Dont know
10
6
11
18
11
6
24
16
21
25
15
1Figures
2US
3ICGN
Contributors to the development and analysis of this survey include Rainer Kiefer (Rainer_Kiefer@McKinsey.com),
an associate principal in McKinseys Munich office; Frank Mattern (Frank_Mattern@McKinsey.com), a
partner in the Frankfurt office; and Frank Scholz (Frank_Scholz@McKinsey.com), a partner in the Hamburg
office. Copyright 2007 McKinsey & Company. All rights reserved.
12
Investing in sustainability:
An interview with Al Gore and
David Blood
The former US vice president and his partner in an investment-management
firm argue that sustainability investing is essential to creating long-term
shareholder value.
As McKinsey research indicates, executives around the world increasingly recognize that
the creation of long-term shareholder value depends on a corporations ability to understand
and respond to increasingly intense demands from society.1 No surprise, then, that the
topic of socially responsible investing has been gaining ground as investors seek to incorporate concepts such as sustainability and responsible corporate behavior into their
assessments of a companys long-term value.
Three years ago, former US Vice President
Al Gore and David Blood, previously the
head of Goldman Sachs Asset Management,
set out to put sustainability investing firmly
in the mainstream of equity analysis. Their
firm, Generation Investment Management,
engages in primary research that integrates
sustainability with fundamental equity
analysis. Based in London and Washington,
DC , Generation has 23 employees, of whom
12 are investment professionals, and a single
portfolio invested, at any given time, in
30 to 50 publicly listed global companies.
The two partners recently sat down with
McKinseys Lenny Mendonca and
Jeremy Oppenheim to discuss reconciling
13
complicated.
David Blood: Yes, sustainability research
14
McKinsey on Finance
Education
Graduated in 1969 with BA in
government from Harvard College
Attended divinity school (197172)
and law school (197476) at
Vanderbilt University, Nashville,
Tennessee
Fast facts
Author of several books, including
An Inconvenient Truth (about the threat
of and solutions to global warming);
featured in the Academy Award
winning documentary film of the
same name
Summer 2007
Career highlights
Generation Investment Management
(2004present)
Cofounder and chairman
Current TV (2005present)
Cofounder and chairman
US government (19772001)
Vice president (19932001)
Senator (198593)
Member, House of Representatives (197784)
Al Gore
15
Education
Graduated in 1981 with BA
from Hamilton College, Clinton,
New York
Career highlights
Generation Investment Management
(2004present)
Managing partner
Fast facts
Serves on board of trustees of
Acumen (nonprofit global venture fund)
and of SHINE (UK organization that
funds educational-support projects for
disadvantaged children and young
people)
(199799)
Served in various positions, including head of
David Blood
16
McKinsey on Finance
Summer 2007
17
The authors wish to acknowledge the contributions of Sheila Bonini; Colin le Duc, the head of research at
Generation; and Lila Preston, an associate at Generation.
Lenny Mendonca (Lenny_Mendonca@McKinsey.com) is a partner in McKinseys San Francisco
office, and Jeremy Oppenheim (Jeremy_Oppenheim@McKinsey.com) is a partner in the London office.
Copyright 2007 McKinsey & Company. All rights reserved.
18
When China first began privatizing its state-owned enterprises in the 1990s, the intent
resembled that of other privatization programs around the world: to use capital market
pressures to improve the performance of a large number of state-owned companies, many
of which had weak balance sheets and were not as commercially focused as publicly held
companies elsewhere. However, the government wanted to retain substantial shareholdings
in and influence over these companies, which precluded the full privatization of state
assets. To allow such companies to raise capital in that context, a two-tier ownership
structure was put in place. Essentially, the original equity remained legally distinct
from the new equity and formed a separate class of shares held by the existing state-linked
owners. Although both classes had the same theoretical rights to profits and votes, the
nontradable shares could not be sold on the public markets.
As Chinese companies have grown in scale
and complexity, this system has faced
several challenges. With a two-tier equity
structure to manage, state-owned
enterprises understandably concentrated
on their most important stakeholders:
the government and one or two of their
largest holders of nontradable shares.
Smaller holders of nontradable shares and
public-market shareholders had very
limited influence either on the governance
of these companies or their investment
decisions. This arrangement had a
19
A measured transition
100
75
50
25
0
2005
1Based
2006
2007
2008
2009
2010
2011
2012
Source: Financial China Information & Technology (FinChina); Shanghai Stock Exchange; Shenzhen Stock Exchange;
McKinsey analysis
20
MoF 24 2007
China share reform
Exhibit 2 of 2
McKinsey on Finance
Summer 2007
Glance: Currently, the proportion of nontradable to tradable shares in total sector capitalization
varies across sectors depending on the strategic importance of that sector.
Exhibit title: How many are currently untradable?
Exhibit 2
67
Coal mining
Food manufacturing
61
Nonferrous-metal processing
57
Agriculture
56
52
Real estate
47
Printing, papermaking
40
IT
37
Transportation, storage
26
Pharma
25
21
22
McKinsey on Finance
Summer 2007
23
24
McKinsey on Finance
Summer 2007
James Ahn (James_Ahn@McKinsey.com) is a partner in McKinseys Hong Kong office, and David
Cogman (David_Cogman@McKinsey.com) is an associate principal in the Shanghai office. Copyright 2007
McKinsey & Company. All rights reserved.
25
Mehrdad Baghai,
Sven Smit, and
S. Patrick Viguerie
What are the sources of corporate growth? If, like many executives, you take an average
view of markets, the answers may surprise you: averaging out the different growth rates in
an industrys segments and subsegments can produce a misleading view of its growth
prospects. Most so-called growth industries, such as high tech, include subindustries or
segments that are not growing at all, while relatively mature industries, such as European
telecommunications, often have segments that are growing rapidly. Broad terms such as
growth industry and mature industry, while time honored and convenient, can
prove imprecise or even downright wrong upon closer analysis.
Our research on the revenue growth
of large companies suggests that executives
should de-average their view of markets
and develop a granular perspective on
trends, future growth rates, and market
structures. Insights into subindustries,
segments, categories, and micromarkets are
the building blocks of portfolio choice.
Companies will find this approach to
growth indispensable in making the right
decisions about where to compete.
26
McKinsey on Finance
Summer 2007
At first blush, our findings seem counterintuitive. They demonstrate that although
good execution is essential for defending
market share in fiercely contested markets,
and thus for capitalizing on the corporate
portfolios full-market-growth potential, it
is usually not the key differentiator
between companies that are growing quickly
and those that are growing slowly. These
findings suggest that executives ought to
complement the traditional focus on execution and market share with more attention
to where a company isand should be
competing.
Going beyond averages to adopt a granular
perspective on the markets is essential
for any company as it shifts its portfolio in
search of strong growth, as this article
will explain. It will also argue that a finegrained knowledge of the drivers of the
companys past and present growth, and
of how these drivers perform relative to
competitors, is a useful basis for developing
growth strategies. To that end we will
present the findings of two diagnostic tools:
one that enables companies to benchmark
their growth performance on an apples-to-
27
These findings should encourage com M&A is the inorganic growth a companies in industries with slow overall growth.
pany achieves when it buys or sells
Seeking growth is rarely about changing
revenues through acquisition or divestment.
industriesa risky proposition at best for
most companies. It is more about focusing
Market share performance is the organic
time and resources on faster-growing
growth a company records by gaining
segments where companies have the capaor losing a share of the market. We define
bilities, assets, and market insights needed
market share by the companys
2
for profitable growth.
weighted-average share of the segments
in which it competes.
To make granular choices when selecting
markets, management teams must have a
Beyond the averages
deep and similarly granular understanding
Our growth analysis of ten large
of what drives the growth of large
European telcos, for example, found that
companies and, in particular, of their own
individual companies can differ widely in
company and its peers. They can use
their performance on each driver.
the resulting growth benchmarks when they
plan their portfolio moves. One thing they
Portfolio momentum was by far the biggest
are likely to learn from the benchmarks is to
growth driver for the group as a whole,
avoid making unrealistic assumptions
followed by M&A . Market share perforabout a companys chances of consistently
mance made a negative contribution. When
gaining market share.
we looked beyond the averages, a more
nuanced picture emerged. Individually, these
Disaggregating growth
companies range of performance on the
The growth profiles of companies began to
three growth drivers was startling: from 2
emerge when we broke down their
to 18 percent annual growth for portfolio
growth into three main organic and inormomentum, from 2 to 13 percent for
ganic elements that measure positive
M&A , and from 6 to 5 percent for market
and negative growth.
share performance. Clearly, companies in
the same sector grow not only at different
Portfolio momentum is the organic
speeds but also in different ways (Exhibit 1).
revenue growth that a company achieves
through the market growth of the
To probe the sources of growth for the
segments represented in its portfolio. The
average company in any sector, we took the
company can influence the momentum
data on all of the companies in our
of its portfolio in several ways. One is to
database and broke down their average
28
McKinsey on Finance
Summer 2007
exhibit 1
A wide range
Exhibit 1
Compound annual growth rate (CAGR) of revenues for 10 large European telcos,1 19992005, %
A wide range
The range or performance on the three growth
drivers was startling.
Average
Range
10
Growth by component
Portfolio momentum
10
15
2 to 18
3.0
0.6
1 Based
7.1
M&A2
Total growth
2 to 13
6 to 5
9.5
1 to 25
2 Includes
Source: Analyst reports; company reports; Dealogic; Global Insight; Hoovers; McKinsey analysis
20
25
29
30
Growth
Exhibit 2 of 3 (including sidebar exhibit)
Glance: Analysis of growth by segment or region can reveal
strengths and weaknesses in a
McKinsey on Finance
Summer 2007
companys portfolio.
exhibit 2
A detailed picture
Exhibit 2
Disguised example of growth for GoodsCo, a multinational consumer goods company, 19992005
A detailed picture
Growth1
Revenue share
By region
Great
North America
62%
Good
Poor
Europe
Asia-Pacific
24%
7%
2%
Total
100%
By product
category,2 %
18
A
B
C
D
E
14
13
11
9
G
H
I
6
6
4
K
L
4
2
Total 100%
1Exceptional
Mehrdad Baghai is an alumnus of McKinseys Toronto and Sydney offices, Sven Smit (Sven_Smit@
McKinsey.com) is a partner in the Amsterdam office, and Patrick Viguerie (Patrick_Viguerie@McKinsey.com)
is a partner in the Atlanta office. Copyright 2007 McKinsey & Company. All rights reserved.
31
32
McKinsey on Finance
Summer 2007
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