SOURCE: The Boston Consulting Group

October 16, 2008 00:01 ET

Unique M&A Opportunities for Consumer Products Companies in the Embattled (or Uncertain) Economy, Says a Report by The Boston Consulting Group

BCG's 2008 Consumer-Products Value Creators Report Calls for Integrating Business Strategy With Financial Policies and Investors' Priorities

BOSTON, MA--(Marketwire - October 16, 2008) - Financial markets are roiling, the business environment is experiencing the first period of real price inflation in consumer products in 30 years, and the full economic impact of rising energy and other commodity prices remains unclear. What's more, many companies are encountering a new class of global competitors from rapidly developing economies.

Yet some conditions remain the same: most consumer-products companies continue to generate more cash than necessary to support market growth rates, and they must figure out the best way to deploy this cash for maximum value creation. Actions taken now could reshape consumer markets for decades to come -- because periods of economic slowdown are often good times for companies to create value from mergers and acquisitions. But in order to maintain strong performance in today's much tougher economic environment, companies need to redesign their corporate-strategy process to focus more explicitly on value creation.

The BCG Value Creators Series

This conclusion is the core finding of "Focusing Corporate Strategy on Value Creation," the 2008 Consumer-Products Value Creators Report from The Boston Consulting Group (BCG). The report shares BCG's insights about value creation with clients in the consumer products industry and the broader corporate community.

The report ranks the top consumer-products value creators based on a detailed analysis of total shareholder return (TSR) at 171 global companies for the five-year period from 2003 through 2007. The rankings also show TSR performance for 2008, through September 9. In addition, the report breaks down TSR performance by relevant managerial drivers, including top-line growth, margin expansion, and cash flow contribution -- as well as the impact of changes in the valuation multiple. It considers all consumer-products companies with a market capitalization of $2 billion or more at the end of 2007. Among the key findings:

-- The median annual TSR for the companies in the sample was a healthy 18 percent. Companies in the top quartile had a median annual TSR of 42 percent, and the median annual TSR for the top ten companies was 74 percent.

-- In order to achieve top-quartile status, companies needed to post an average annual TSR of at least 31 percent. The very best performers had truly stunning average returns ranging from roughly 70 percent to 140 percent per year.

-- The top ten companies, which ran the gamut from Chinese beverage producers to French video game developers, grew faster than all of the rest, generated higher margins, and created more margin improvement.

-- Many of the top performers were smaller companies, with market capitalizations of less than $10 billion. The median annual return for the top ten companies with market capitalizations between $2 billion and $10 billion was 73 percent, and the median for the top ten companies with market capitalizations greater than $10 billion was 43 percent.

"The superior performance of small-cap companies should not be surprising, since larger companies are more likely to 'fade' closer to the industry average. Indeed, the challenge of sustaining outstanding performance is more difficult as companies become larger," said coauthor Jeff Gell, a partner in BCG's Chicago office.

Redefining Corporate Strategy

The key to generating superior shareholder value in the future, according to the report, is to repair what it describes as a "pervasive disconnect" between corporate strategy and value creation at many companies.

"Corporate strategy and value creation exist in a symbiotic relationship," said coauthor Daniel Stelter, a senior partner in BCG's Berlin office and global leader of the firm's Corporate Development practice. "And yet the necessary connection between the two is a critical missing link in many companies' corporate-strategy process. Establishing that link doesn't necessarily mean privileging shareholder value creation over all other strategic goals -- let alone always maximizing shareholder value in the short term. But it does mean understanding how a company's strategy actually generates value and how capital markets monetize it."

The report introduces a broader and more comprehensive approach to corporate strategy than companies typically employ today. In particular, it supplements the traditional focus on business strategy with a new strategic focus on a company's financial policies and its investors' priorities and goals.

"Business strategy, financial strategy, and investor strategy ought to be three equal parts of a company's corporate strategy and should be addressed in a holistic fashion," said coauthor Eric Olsen, a senior partner in BCG's Chicago office and the firm's global leader for value management. "An integrated approach is necessary because decisions in each of these areas can have a positive or negative impact on the others."

To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

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.