Growth? Now?

Growth? Now?

          
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Growth? Now?

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    In This Article
    • Searching for growth amid the aftermath of a stock market meltdown and the prospect of a double-dip recession may seem questionable—but it remains a market imperative.

    • There are promising opportunities, both through organic growth and acquisition, for companies that are prepared to pursue them.

    • A successful corporate-development program requires adequate funding, a systematic approach to screening opportunities, and experienced management.

     

    Despite the uncertainty and pessimism infecting today’s business environment, a number of industrial goods companies with portfolios of mature businesses are beginning to search for growth opportunities. This strategic thrust may seem questionable in view of current circumstances: the stock market meltdown, the economic slowdown, and the prospect of a possible “double dip” recession, not to mention a war. Under these conditions, most industrial companies have understandably concentrated on reining in expenditures, rationalizing facilities, and focusing on core activities.

    But although those tactics may be prudent, they are not sufficient. In the long term, shareholders and employees alike want to see growth. Markets require above-average growth to achieve superior shareholder returns, and organizations that don’t grow don’t attract or retain the best people. Moreover, companies that have streamlined their operations to earn more than the cost of capital now have surplus cash to invest in new opportunities. They are expected to grow.

    And, as it happens, current markets are replete with opportunities for growth. Although organic growth may prove challenging, this is an excellent time to explore growth through acquisition into existing, related, or even unrelated businesses. Not only have potential targets been weakened by the economic slowdown, but market valuation ratios and acquisition premiums (above market prices) have been reduced.

    Paradoxically, acquisition activity tends to accelerate in positive stock-market environments, despite higher earnings multiples and acquisition premiums. But research by The Boston Consulting Group shows that positive environments are no more conducive than negative environments to companies’ ability to generate superior shareholder returns through acquisitionbased growth strategies. In fact, BCG research indicates that the higher the premium paid for an acquisition, the less likely it is that the acquisition will generate superior long-term value for shareholders. (For a detailed analysis of this subject, see The Synergy Trap, by Mark Sirower, The Free Press, 1997.) Furthermore, some recent research suggests that acquisitions made during stock market downturns have a better chance of generating superior long-term shareholder returns than those made during upturns.

    Little wonder, then, that a number of industrial goods companies with portfolios of mature businesses are resuming the search for growth—and finding some very promising opportunities. Danaher and SPX, for example, have both made M&A activity an important part of their growth strategy, and both have completed significant acquisitions during 2002. Not every company, however, is positioned to pursue growth in today’s markets. Should your company go for growth? And if so, what’s the best way to go about it?

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