BCG CFA Perth Presentation

Shareholder value creation in a hesitant
economy
Ramesh Karnani
11 April 2013
Agenda
Introduction
2 Market expectations and equity prices
Organic growth in a hesitant economy

With an uncertain outlook, how can companies position for outperformance?
Creating value through growth: some lessons from history
The impact of capital efficiency on value creation
Creating value through M&A

What does the market have in store?
Most acquisitions destroy value: how to avoid the M&A trap
BCG CFA Perth Presentation v6.pptx
Copyright 2013 by The Boston Consulting Group, Inc. All rights reserved.
Investor expectations reached record lows at close of FY2012...

...but expectations are recovering as equity prices rise
Which was the best and worst performing sector of the

ASX300 since the GFC?1
Options
Metals & Mining
Financials
Industrials
Energy
1. March 2009
NOTE: GICS definitions used
Source: Capital IQ, Datastream
Which was the best and worst performing sector of the

ASX300 since the GFC?1
Options
Financials & Industrials have dramatically outperformed

TSR
24%
Metals & Mining

19%
Financials
Industrials
Energy
5%
4%
1. March 2009
NOTE: GICS definitions used
Source: Capital IQ, Datastream
The Boston Consulting Group

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resulting in sustainable competitive
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and lasting change through sustained
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Over 75 offices strategically placed worldwide

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worldwide in over 75 offices around the globe
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4
Introducing BCG's corporate development practice our

topic map
Corporate
Strategy
Corporate
Processes
Industry
landscaping
Finance excellence &

organization
Corporate vision
Corporate planning &

budgeting
Negotiation &
transaction support
Expert advice
Portfolio strategy
Monitoring &
reporting
Partnering &
alliances
100 day program
M&A
Private Equity
Buy-side: Target identification &

due diligence
Post-merger
integration
PMI methodology
Functional
expertise
Industry expertise
Growth strategy
Value management
TSR and investor

strategy
Risk management
Sell-side: divestiture & IPO support

M&A excellence &
organization
PE best practices
Special situations
Source: BCG
BCG's proprietary valuation model compares the fundamental

value (FV) of a company with its current market capitalisation
Fundamental value (FV) methodology
Expectation premium
= value above FV
Current performance1 inputs
Empirically observed inputs
Current profitability (ROI, ROE)

Current growth rate
Current capital employed
Profitability and growth fade rates

Profitability and growth fade-to rates
Fundamental value is based on fading

returns and growth from current levels to
industry averages
FV
Market
Capitalisation
Fundamental
Value (FV)
Book value of
+
capital employed today3
Future economic profit3 added on

the basis of the 'fade' concept2
1. Fundamental value reflects todays proven performance, not some future promise of value creation (e.g., blue sky growth potential)
2. The series of resulting economic profits is interpreted as what the investors expect in future periods, based on what they know today
3. Economic profit is net profit after tax (NPAT) less a capital charge
Source: BCG case experience
Change in Expectations and Fundamental Value by Sector

Expectations had fallen in many industries despite strong earnings growth over the past two years
Change in Expectation Premium as % of MV

(Ppt pa, FY10-121)
10
Sustainable Performance
Turnaround
0
Healthcare
-10
Capital Goods
Energy
Media Telcos
Real Estate
Com. and Prof. Services

Insurance
Utilities
Banks
Transportation
ASX 200
Consumer Services
Discretionary Retail
-20
Software and Services

Food and Staples Retailing
Mining / Materials
-30
Continued Decline
-5
0
= ASX 200
Unsustainable Performance
5
10
15
20
25
% Change in Fundamental Value

(CAGR %, FY10-12E2)
1. 30/6/2010 to 30/3/2012
Source: Capital IQ
Market expectations have recovered from FY12 lows

Market Value / Fundamental Value
(Ratio)
2.0
1.5
1.0
0.5
0.0
FY09
PE Ratio
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
14.2x
15.4x
14.0x
13.0x
12.2x
12.0x
12.2x
14.2x
11.0x
11.6x
11.7x
12.2x
11.4x
14.9x
1. Based on forecast of fundamental value in FY13 versus current market capitalisation for surveyed companies.
P/E ratio based on forward P/E with exceptional records excluded.
Source: Capital IQ
Recent moves suggests the stock market has begun to

recognise fundamental value in the economy
Everywhere we look there
is pessimism...
...but the fundamentals suggest

a different story
Low levels of business investment
Low unemployment
Companies sitting on their cash
Growth that most can only dream about
Muted M&A activity
Recent market rally
Talk of a recession
Strong and deepening ties within Asia
Australia in 2020 a snapshot:
Gas production double current levels (could become world's largest LNG supplier)1
Steel consumption in China still growing (total annual consumption expected to peak in 2025) 2
Twice the number of Chinese tourists visiting Australia (~1 million per year)3
Others...
1. Economist Intelligence Unit; 2. Standard Chartered; 3. Tourism Australia

While businesses may be tempted cut costs in the face of

uncertainty, history suggests this is wrong path to take
Three responses to a slowdown
Odds of breakaway
performance (%)
Combination strategy
most likely to succeed
30
20
10
Cut costs deeper

than rivals
Invested more
than rivals
Cut costs deeper

and invested
more than rivals
Defensive strategy least

likely to succeed
Source: 'Roaring Out of Recession', Gulati R., Nohria N., Wohlgezogen F., Harvard Business Review , March 2010
10
Businesses must pursue 'good' break-out growth to deliver

value to shareholders
Growth is important...1
...but doesn't always add value2

Average annual
TSR (%)
Annual TSR
change (%)
40%
20
'Good growth'
No growth
15
20%
10
0%
FCF
Multiple
Bad growth
Margin
Growth
0
3 yrs.
5 yrs.
10 yrs.
20%
20%
0%
20%
40%
Average annual revenue growth (%)
1. Sources of TSR for top-quartile performers (S&P 1200, 1991-2008); 2. Correlation of revenue growth and TSR (S&P 500, 1990-2009)
Source: Compustat, BCG ValueScience Center, 2008
11
BCG research has identified at least 4 factors that distinguish

'good', or value-creating, break-out growers
Examples
Key lessons
Global
Local
Prioritise the core
Focus on growing the core do what

you do best, but do it better
Pursue returns > cost of capital and
operational excellence for the core
Expand
geographically
Carefully evaluate all market entry

options (M&A, JV, organic etc.)
Partner, as required, with governments
and/or local players
2
Acquire to grow
Evaluate potential deals using consistent

strategic rationale
Pursue targets that leverage and
reinforce the core
Preserve margin
and minimise debt
while growing
Deliver growth that is profitable not

'growth for growth sake'
Avoid excessive capital intensity (i.e.
'capital-light' growth options)
All companies should

take this focus
Source: BCG analysis

BCG document
Draftfor discussion only
12
Capital intensity is increasing across the resources sector:

capital efficiency is just as important as cost management
Australian Iron Ore projects1
Australian LNG Liquefaction projects2
US$/tpa
US$/tpa
250
3000
200
2000
150
100
1000
50
2004
2005
2006
2007
2008
2009
2010
2011
2012
Project startup year

Pre-commissioning
1985
1990
1995
2000
2005
2010
2015
Project startup year
Operating
1. Company announcements, literature searches, annual reports and UBS 2. Bernstein research report, "Asia Pacific Oil & Gas", Feb 16 2011, BCG analysis (Note: An additional $4bn has been
added to GLNG and QCLNG for post-FID drilling. All costs for projects beyond 2011 are Bernstein estimates)
13
Working capital optimisation is a powerful lever for creating

value
Days
Days 50
debtors1
0
Victoria
NSW
WA
Queensland
Dec-10
Days
Dec-11
Days 50
payable2
0
Victoria
NSW
WA
Queensland
Change in 2011 working capital

balances if operating 2010 days
Debtors ($M)
(30)
60
(10)
Payables ($M)
60
30
30
30
Net ($M)
30
30
(30)
20
Preventing working capital erosion saved $80m and

increased annual economic profit by $8m
Numbers are indicative only
Source: BCG Case Experience
14
As security prices rise, so too does M&A activity

# deals closed
8,000
200
6,000
150
4,000
100
2,000
50
ASX200 Price Index
0
Q1
2004
Q3
2004
Q1
2005
Q3
2005
Q1
2006
Q3
2006
Q1
2007
Q3
2007
Q1
2008
Q3
2008
Q1
2009
Q3
2009
Q1
2010
Q3
2010
Q1
2011
Q3
2011
Q1
2012
Q3
2012
Q1
2013
Deals
ASX200
Recent run-up in the ASX200 suggests more

corporate activity is on the horizon for Australia
Note: Price index quoted for end of quarter

Source: MergerMarket, Datastream, Capital IQ
15
There are rewards for being first during an M&A wave
Overall, there is no advantage in doing deals

during an industry M&A wave ...
... but a closer look shows a

significant first-mover advantage
CAR1 (%)
CAR1 (%)
1.5
1.5
-0.7%-points
1.2%
1.0%
0.9%
1.0
0.5
0.0
1.0
0.9%
0.9%
0.5%
0.5
10,213
16,231
Acquisitions outside
industry M&A waves
Acquisitions during
industry M&A waves
0.0
5,703
7,865
2,668
1st stage of
an industry
M&A wave
2nd stage of
an industry
M&A wave
3rd stage of
an industry
M&A wave
n
# of observations
Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; BCG analysis.

Note: The underlying sample consists of 26,444 M&A transactions between 1988 and 2010. Lower numbers for individual analyses are due to limited data availability for certain sub-samples. Industry
M&A waves are periods of at least three years in which there is above average, clustered M&A activity with an identifiable peak. The first stage of such a cycle is its first two years. This analysis
excludes all firms active in the financial services industry (based on Fama/French industry classifications). Includes all types of M&A (i.e. public-to-private, private-to-private, public-to-subsidiary)
1 CAR = cumulative abnormal return calculated over a seven-day window centered around the announcement date (+3/3).
M&A report 2011 Video slides 24May11-JK-MUN.pptx
16
Backup
M&A and value creation: Do it right and be well prepared!

Four golden rules for successful M&A
1. Pick the right target
Strategic, capabilities and cultural fit
Ease of execution, relative to experience
2. Negotiate the right price, don't overpay
Apply high-resolution valuation
Reasonable synergy expectations and
value drivers
3. Lay the groundwork for swift approval
No major regulatory delays
No unexpected enforced divestments
4. Manage the integration well

Maintain core business growth and
momentum
Achieve synergies above announced levels
Do
Dont
Which deal(s) will help us realize the

maximum value?
Deploy M&A to support overall strategy
Develop a high-level screen to filter
potential targets on an on-going basis
Be willing to walk away from the deal
How do we get deal xyz done?

Look at a deal in isolation
Focus on "opportunity on the table"
Source: BCG experience

MnA-TargetSearch-01May08-JK-RA-MUN.ppt
17
Thank you
bcg.com | bcgperspectives.com

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Shareholder value creation in a hesitant

2 Market expectations and equity prices

Organic growth in a hesitant economy

Creating value through M&A

BCG CFA Perth Presentation v6.pptx

Investor expectations reached record lows at close of FY2012...

Which was the best and worst performing sector of the

Metals & Mining

Which was the best and worst performing sector of the

Financials & Industrials have dramatically outperformed

Metals & Mining

The Boston Consulting Group

Worldwide presence and network

Leading in innovative strategic thinking

BCG CFA Perth Presentation v6.pptx

Advising senior management at world's

Over 75 offices strategically placed worldwide

Introducing BCG's corporate development practice our

Finance excellence &

Corporate planning &

100 day program

Buy-side: Target identification &

TSR and investor

Sell-side: divestiture & IPO support

BCG's proprietary valuation model compares the fundamental

Current performance1 inputs

Empirically observed inputs

Current profitability (ROI, ROE)

Profitability and growth fade rates

Fundamental value is based on fading

Future economic profit3 added on

Change in Expectations and Fundamental Value by Sector

Change in Expectation Premium as % of MV

Com. and Prof. Services

Software and Services

% Change in Fundamental Value

Market expectations have recovered from FY12 lows

Recent moves suggests the stock market has begun to

...but the fundamentals suggest

Low levels of business investment

Companies sitting on their cash

Growth that most can only dream about

Muted M&A activity

Recent market rally

Strong and deepening ties within Asia

Australia in 2020 a snapshot:

1. Economist Intelligence Unit; 2. Standard Chartered; 3. Tourism Australia

While businesses may be tempted cut costs in the face of

Three responses to a slowdown

Cut costs deeper

Cut costs deeper

Defensive strategy least

Businesses must pursue 'good' break-out growth to deliver

...but doesn't always add value2

Average annual revenue growth (%)

BCG research has identified at least 4 factors that distinguish

Prioritise the core

Focus on growing the core do what

Carefully evaluate all market entry

Evaluate potential deals using consistent

Deliver growth that is profitable not

All companies should

Source: BCG analysis

Draftfor discussion only