higher base, its growth rate slows and starts to decline. This decline in the company’s growth rate has two re- sults. First, the value of expected future earnings relative to current earnings decreases—causing the multiple to decline as well. Although the company’s stock price may still increase, it will not do so as fast as the company’s earnings. Second, the company’s investor base starts to Like Apple and Tesco, most growth engines focus on or- ganic growth. And in recent years, many executives, board members, and investors have come to view the idea of acquisitive growth with skepticism. They have been influ- enced by the many research studies showing that most mergers and acquisitions—as many as two-thirds—fail to create value for the acquirer’s shareholders. And they are reacting against the excesses of the late- 1990s boom, in which many companies used acquisitions as a quick, but ultimate- ly unsustainable, method to boost earn- ings and valuation multiples. migrate from growth-oriented investors to- ward more value-oriented investors. Sooner or later every growth-engine company confronts multiple compression. The phenomenon of multiple compression presents senior executives with a funda- mental strategic choice. Either like Apple, Tesco, or Teva, they find ways to prolong their high growth rate (or, at least, cause it to decline more slowly than investors anticipate)—thus beating the expectations of their cur- rent growth investors, keeping their multiple relatively high, and continuing to grow their stock price at a high rate. Or they shi decisively to a strategy that balances growth against other priorities attractive to the growing number of more value-oriented investors who own the company’s stock. They should take another look. BCG re- search has shown that when it comes to value creation, there is no inherent disad- vantage to growth by acquisition, and some of the com- panies on our list confirm that insight.11 Acquisitive growth has been a key element in the growth trajectory of Gilead, for example, which has made five acquisitions since 1999, with a total deal value of more than $4 billion. And an aggressive acquisitions strategy—an average of one per year over the past 25 years—has allowed Israeli pharmaceuticals maker Teva (9) to increase sales at a rate of 25 percent per year over the past decade (three times the rate of our global pharmaceuticals sample) and be- come a dominant player in the global market for generic pharmaceuticals. Finally, even profitable growth can be “too expensive” if it comes at the price of eroding a company’s free cash flow. During the past decade, some companies in search of growth plowed all their capital back into the business and even took on debt or issued new shares to fund ad- ditional growth—but at the long-term cost of reducing their free-cash-flow yield. So among the other factors an aspiring growth engine needs to consider is the impact of its growth plans on the balance sheet—especially in to- day’s environment, in which balance sheet strength has become a much higher priority among investors. But as with any value-creation strategy, growth engines need to carefully manage the tradeoffs across the entire value-creation system. Failing to do so can lead to a num- ber of pitfalls. Perhaps the most common mistake that companies make when they pursue a growth-engine strat- egy is to chase growth at the expense of margins. A num- ber of the high-growth companies on our list have ex- perienced a decline in their EBITDA margins over the past few years, which raises questions about their ability to sustain their superior TSR in the future. In conclusion, being a successful growth engine does not necessarily mean always maximizing sales growth in the near term. Sometimes the most sustainable path is to fo- cus on steady and consistent growth over time. A good example is the number 11 company on our list, the Dan- ish pharmaceutical maker Novo Nordisk. With a com- manding 52 percent share in the global market for insu- Another challenge that sooner or later every growth en- gine confronts is multiple compression—the decline of its valuation multiple to the market average.12 Strong growth leads to an above-average valuation multiple, as investors bid up the company’s stock price in expectation of the fu- ture value created by that growth (which is considerable compared with the company’s current earnings). As the company continues to grow, the absolute value of sales increases, but because the company is starting from a 11. See Growing Through Acquisitions: The Successful Value Creation Record of Acquisitive Growth Strategies, BCG report, May 2004. 12. For a more detailed description of the phenomenon of multiple compression, see Missing Link:Focusing Corporate Strategy on Value Cre- ation, The 2008 Value Creators Report, September 2008, pp. 16–19.
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