THE THINGS WE DO FOR GROWTH
EVERYONE AGREES ON THE NEED TO CREATE VALUE, BUT HOWTO DO IT? MORE CORPORATE BOARDS AND INVESTORS MUST BE READY TO LAY SOME BIG BETS.
the big end of town is hoping that a Coalition government will be far more accepting of the role business plays in creating wealth – a concept it believes the Gillard government has failed to grasp. However, the real issue for business is to focus on the value being delivered to shareholders, rather than any impediments being laid at its feet.
And there are many people ready to help, such as Boston Consulting Group global chairman Hans-Paul Burkner, who was in Australia recently spruiking the benefits of growth. “Every society needs growth and so does every company,” he said, and went on to urge more global expansion by Australian companies.
Now, there’s no argument about the desirability of creating more shareholder value. But it’s always an issue of how best to do it – expand to new markets, pursue a merger or acquisition, or cut costs and bide your time.
Of course, Burkner is quick to admit that such advice smacks of the old line about the consultant who calls at a farm and offers to tell a farmer how to count his sheep. The farmer responds: “Great, you want me to pay you so you can tell me something I don’t need to know.”
Still, when genuine international corporate leaders such as Burkner spread the word, it makes sense to listen, especially since BCG’s revenues tripled during his nine years as global chief executive. In 2010, he opened a Perth office with three people and by the end of 2012 the staff number was 30.
Suffice it to say that business and government are on the same page when it comes to chasing growth, but opinions differ on execution.
Just ask ANZ chief Mike Smith, who did what few others in Australian banking have done. He convinced his share register of the need to expand into Asia and sold the regional super story successfully – until recently.
But when you’re part of the Australian banking oligopoly high-teen returns are expected and that’s considerably better than the 8-11 per cent returns achieved to date in Asia. ANZ’s traditional business banking base means it always trades at a price-earningsmultiple discount of about 4 per cent compared with its big-bank peers. However, this has blown out to 9 per cent as the market fears ANZ has gone ex-growth.
The calls for global expansion and takeovers are supported with wild enthusiasm by investment bankers and rightly so. While board conservatism amid political and economic uncertainty has kept deal activity to a minimum, the fact is that well-executed, counter-cyclical big deals can deliver real value.
A study reported in the Harvard Business Review examined 215 global deals worth more than $US5 billion done between 2000 and 2010. The authors found that on average the buyer’s stock outperformed the market by about 6 per cent over two years. However, some buyers recorded outperformance of more than 25 per cent in the longer term.
On a different track, Macquarie Group strategist Tanya Branwhite says that growth through cost control is what’s needed today to get businesses back into shape before they look for the next leg-up. She expects industrial company earnings per share to grow by 6.6 per cent this financial year and 10.9 per cent next year, primarily through cost-cutting. This margin expansion will be the major positive driver on the local bourse this year after four consecutive down years.
Even so, chief executives must keep companies growing to maintain profitability and keep staff motivated. And that, according to Burkner, requires more positive thinking. The starting point is a realisation that Australia is at the centre of the fastest-growing region in the world. As Burkner says: “You have to stop feeling that you are on the fringe of the world – you are at the centre.”
Corporate boards need to adopt a long-term perspective and be ready to lay some big bets. Burkner’s four keys are to focus on core competence, expand geographically, preserve margin and acquire to grow. Easy to say, not so easy to execute.
Investor inertia is a key obstacle in Australia, where the mere mention of an offshore acquisition sends people running. Fund managers argue they can invest offshore if they want, but they invest in Australian companies because they like the returns, the concentrated industry sectors, franked dividends and the like. This is an area where investor relations needs to do its bit.
It’s a never-ending battle that requires consistently superb execution. But that’s exactly why chief executives get paid the big bucks, isn’t it?