Valuation: Measuring and Managing the Value of Companies, Fifth Edition

5

Growth

The business world is gripped by growth. The popular view is that a company must grow to survive and prosper, and there is certainly some truth to this. Slow-growing companies present fewer interesting opportunities for managers and so may have difficulty attracting and retaining talent. They are also much more likely to be acquired than faster-growing firms: over the past 25 years, most of the 340 companies that have disappeared from the S&P 500 index were acquired by larger companies. That explains why today’s public companies are under tremendous pressure to grow.

However, growth creates value only when a company’s new customers, projects, or acquisitions generate returns on invested capital (ROICs) greater than the cost of capital, as we discussed in Chapter 2. And finding good, high-value-creating projects becomes increasingly difficult as companies grow larger and their industries ever more competitive. To illustrate, in 1990, a year in which Wal-Mart added 57,000 new employees, the company’s revenues grew by 26.3 percent. In 2003, the company grew physically so much bigger that it had to add another 100,000 employees, but its revenue growth that year was only 4.8 percent. To replicate 1990’s revenue growth, even at 2003’s improved levels of productivity, Wal-Mart would have needed to add nearly half a million people in a single year—a challenge by any standards.

Achieving the right balance between growth and return on invested capital is critically ...