Category Archives: Corporate finance

Sustaining top-line growth: The real picture – McKinsey Quarterly – Corporate Finance – Performance

Sustaining top-line growth: The real picture – McKinsey Quarterly – Corporate Finance – Performance.

Finally an honest and factual article that shows the disconnect between the target growth rates of most public companies and what they can realistically achieve on the long run. For long I have been wondering whether I was the only one to find such growth performance objectives disconnected from the market reality and old good common sense. Ever-increasing top line growth rates are illusion: all businesses follow a development cycle, which will ultimately gets to maturity and decline if no actions are taken to diversify the portfolio through M&A or internal innovation. In that context, ever-increasing top line growth rates means that management boards have become Masters at anticipating business maturity and decline by proactively  managing on an ongoing basis a portfolio of internal innovation and M&A that will be used to more than offset the stagnation and/or decline of mature businesses. I’m sorry but it sounds too good to be true, I’m afraid that no matter how high an opinion they have of themselves,  they are not that good despite their laughable attempts to make us believe that success was long planned through a linear process… I’m a strong believer that success is like many other things in this world based on entropy. It is not based on continuous improvements and linear evolution, it is based on collisions and disruptions. It shows up at a time when you did not expect it any longer and through paths that you did not know where they will take you when you started them because at the time the outcome was simply not predictable. Unfortunately, with success a lot of people lose humility and a sense from where they started and what they had and what they truly knew when they were there… Way too often, I have seen people justifying and planning success after the facts. It certainly makes a nice cover story but does not qualify as a methodology…

Paying back your shareholders – McKinsey Quarterly – Corporate Finance – Performance

Paying back your shareholders – McKinsey Quarterly – Corporate Finance – Performance.

Interesting article in which we will discover that management boards pay dividends or buy back shares because their company cash flows are too strong and they have no better idea to generate business value to shareholders than either paying dividends to them or buying back shares.

Looking at this from a slightly different angle, it would be lovely if the people, who were actively involved in generating such strong cash flows in the first place, i.e. the company employees, would get their fair share of the business value they contributed to create.

Way too often people seem to forget that investors of any kind do not generate  business value as such, they solely provided the initial cash or the initial capital that made it possible for other people, the company employees, to generate business value. Too much focus on the shareholder (capital owner) to the detriment of the employee (business value creator), this article is symptomatic in my humble opinion of the imbalance that our economic system suffers from today…

Capitalism for the Long Term – Harvard Business Review

Capitalism for the Long Term – Harvard Business Review.

Is there an oxymoron right in the title or has the capital market slowly diverted the attention of the capitalistic system from long term value to quarterly earnings?If you are interested in the answers to such questions and what we shall do about it, this HBR article is for you !

The era of cheap capital draws to a close – McKinsey Quarterly – Corporate Finance – Capital Management

The era of cheap capital draws to a close – McKinsey Quarterly – Corporate Finance – Capital Management.

Here is another short article that is predicting that as demand for capital is growing to finance the growth of the global economy and as available funds are becoming scarce, this will trigger a new era where capital costs more than before.

The question then becomes: is this going to reshuffle the growth agenda and how it is distributed across the globe? Unfortunately no, as a country like China is not only a big money saver but also attracts a lot sovereign wealth funds, they will continue to enjoy economic growth way above the global average. So the winners of today seem to be the winners of tomorrow for the foreseeable future…

Five myths about US interest rates – McKinsey Quarterly – Economic Studies – Productivity & Performance

Five myths about US interest rates – McKinsey Quarterly – Economic Studies – Productivity & Performance.

If you are interested, I actually have several other posts referring to articles and videos on the same topic. This one has the merit to be short (3 pages) and kill some myths about interest rates in the US and abroad. The mechanics is exactly the same.

Good reading !

Managing for improved corporate performance – McKinsey Quarterly – Strategy – Growth

Managing for improved corporate performance – McKinsey Quarterly – Strategy – Growth.

Here is a fascinating article, which is 2003 old, and is as relevant today as it certainly was by then. Reading it really made we wonder what we learnt between now and then and whether we put into practice some of the key lessons and recommendations shared by the authors.

I read through a lot of business articles, not that many have that level of pertinence and candor in the analysis of a  macroeconomic situation. Once the assessment was done, the prescription was very straight forward. Interestingly enough though, we did not see that many major corporations since then re-balance their priorities between corporate and operating management.

The question has often been asked: “Does humanity take the lessons of the past or do we keep repeating the same mistakes again and again…?”

Reflections on the CEO’s guide to Corporate Finance by McKinsey

Last month, I read this thought provoking article by McKinsey on the 4 principles of value creation.  My key take-aways were the following:

  • When divesting a business, the one that wins at all times is the seller because of the premium that applied in the transaction. That premium is a pure bonus that goes directly into the value of the seller shareholders,
  • Creating value out of the acquired business becomes then a bet into the future given that value will be recognized only if it goes beyond the premium the buyer had to pay to acquire the business.
  • In exhibit 2, we see 2 examples where additional value was created as a result of an acquisition and 2 examples where value remains to be seen. Of course, there was value for the seller in the 2 cases…

But, this should be more than a pure finance exercise. The seller will always have a case to divest a business as it is a cash injection opportunity at a premium on the market price. On the other hand, if the acquirer cannot achieve value beyond what he had to pay to acquire the divested business, then we have to look at the value gained on the seller side and the value missing on the acquirer side. If the net net is not positive overall, then from a macro-economic standpoint, there was no value creation, just value erosion: The seller won, the buyer lost, the overall net net remains negative…

So what is the ultimate goal from a Finance standpoint? Is it to generate value on one side or is it to generate additional value that goes straight on the market? We would all be better off with more value on the market…