BCG Annual Value Creators Report Shows Many Companies Find It Difficult
to Deploy Growing Cash Reserves to Generate Superior Shareholder Returns
BOSTON, Oct. 2 /CNW/ - A combination of record profits, strong balance
sheets, and modest growth opportunities is creating a "cash trap" that is a
drag on near-term total shareholder return (TSR), according to a new report
from The Boston Consulting Group (BCG).
Avoiding the Cash Trap: The Challenge of Value Creation When Profits Are
High is the ninth in BCG's annual Value Creators series. Starting from a
database of close to 5,000 global companies, the report presents detailed
analyses of TSR at 610 companies across 14 major industries for the five-year
period from 2002 through 2006.
The report argues that in many industries, there is too much cash chasing
too few organic growth opportunities. Competition for those opportunities is
making it harder to create long-term value. In addition, many companies are
finding it increasingly difficult to deploy their growing cash reserves in
ways that will generate superior shareholder returns. In some cases, too much
cash on the balance sheet is even exposing companies to predatory attack by
activist shareholders and private equity firms.
"There was a time when accumulating cash on the balance sheet wouldn't
have been much of a problem," said Eric Olsen, BCG's global leader for
integrated financial strategy and coauthor of the report. "Not anymore. In
today's capital markets, having large reserves of cash, excess free cash flow,
or untapped debt capacity not only depresses a company's near-term TSR but, in
some cases, also paints a big target on a company's back and raises the risk
of breakup or takeover."
According to the authors, the cash trap is likely to persist despite the
recent tightening of global credit markets. Indeed, tighter credit may even
exacerbate the problem. As the cost of debt rises, companies may become more
risk averse and institute higher hurdles for returns from their growth
investments, further constraining their growth opportunities.
The chief consequence of the cash trap is that a public company's room to
maneuver is narrowing. Increasingly, companies must create more value in the
short term in order to earn the right to create value in the long term. "There
are times when a company has to focus on the short term in order to maintain
control of its destiny," explained coauthor Daniel Stelter, global leader of
BCG's Corporate Development practice. "That is the situation today. Yet at the
same time, executives must not become so focused on the near term that they
neglect their company's long-term prospects. The solution is to strike a
delicate balance - to invest sufficiently in growth for the long term but in a
way that also wins favor from investors today."
Avoiding the Cash Trap examines how senior executives can address this
challenge. It also presents new research that compares the impact of different
uses of cash on shareholder value. For example, the report shows that
increases in dividend payout have a more positive impact on TSR than share
"Despite all the recent attention given to share repurchases," said
coauthor Frank Plaschke, project leader of BCG's Value Creators research team,
"in every industry we studied, share changes actually reduce TSR on average.
In other words, the amount of shares companies have been buying back has been
more than equaled by the new shares they are issuing for executive stock
options or using as equity for acquisitions. What's more, the impact of
dividend payouts on a company's valuation multiple is far more positive than
that of share buybacks. In some cases, buybacks cause a company's multiple to
Using examples drawn from BCG's client work, the report describes how
companies can manage the critical trade-offs around cash, avoid the cash trap,
and optimize both near-term and long-term value creation.
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm
and the world's leading advisor on business strategy. We partner with clients
in all sectors and regions to identify their highest-value opportunities,
address their most critical challenges, and transform their businesses. Our
customized approach combines deep insight into the dynamics of companies and
markets with close collaboration at all levels of the client organization.
This ensures that our clients achieve sustainable competitive advantage, build
more capable organizations, and secure lasting results. Founded in 1963, BCG
is a private company with 66 offices in 38 countries. For more information,
please visit www.bcg.com.
For further information:
For further information: To receive a copy of Avoiding the Cash Trap, or
to schedule an interview with one of the authors, please contact Dorenda
McNeil, at (416) 300-0269 or firstname.lastname@example.org