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MoF Issue 22

MoF Issue 22

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Published by qween

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Published by: qween on Jul 22, 2008
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04/13/2011

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McKinsey on 
Finance
What public companies can learn from private equity
1
Public companies will need to raise their governance game i they are to compete with private frms.
Are companies getting better at
M&A
?
7
The latest boom in merger activity appears to be creating more valueor the shareholders o the acquiring companies.
The truth about growth and value stocks
12
Investors and und managers build entire portolios around the premise thatgrowth stocks grow aster than value stocks. The problem is that they don’t.
Governing China’s boards: An interview withJohn Thornton
16
The ex-president o Goldman Sachs talks about his experiences as areormer o board governance in China.
Why accounting rules shouldn’t drive strategy
23
When changes in accounting rules provide no new inormation, they don’tregister with investors. Nor should they lead managers to shit ocus.
Perspectives onCorporate Financeand Strategy
Number 22,Winter 2007
 
McKinsey on Finance
is a quarterly publication written by experts and practitioners inMcKinsey & Company’s Corporate Finance practice. This publication oers readersinsights into value-creating strategies and the translation o those strategies into companyperormance. This and archived issues o 
McKinsey on Finance
are available online atwww.corporatefnance.mckinsey.com, where selected articles are also available in audioormat. A
McKinsey on Finance
podcast is also available on iTunes.Editorial Contact: McKinsey_on_Finance@McKinsey.comTo request permission to republish an article send an e-mail topermission@mckinseyquarterly.com.Editorial Board: James Ahn, Richard Dobbs, Marc Goedhart, Bill Javetski,Timothy Koller, Robert McNish, Herbert Pohl, Dennis SwinordEditor: Dennis SwinordExternal Relations: Joanne MasonDesign Director: Donald BerghDesign and Layout: Veronica BelsuzarriManaging Editor: Sue CatapanoEditorial Production: Roger Draper, Drew Holzeind, Karina Lacouture, Scott Le, Mary ReddyCirculation: Susan CockerCover illustration by David HollenbachCopyright © 2007 McKinsey & Company. All rights reserved.This publication is not intended to be used as the basis or trading in the shares o anycompany or or undertaking any other complex or signifcant fnancial transaction withoutconsulting appropriate proessional advisers. No part o this publication may be copiedor redistributed in any orm without the prior written consent o McKinsey & Company.
 
 What public companies can learn from
private equity
Public companies will need to raise their governance game if they are tocompete with private firms.
True, McKinsey research shows that three-quarters o private equity rms perormno better than the stock market over time.Even so, the top 25 percent o private equityrms do outperorm the relevant stockmarket indexes. Moreover, they do so by aconsiderable margin—and persistently.More important still is the source o theirsuccess. Top perormance does not, asmany imagine, come rom unusual nancialacumen. In our observation o private-sector deals worth more than $100 million,very ew o the successes came aboutbecause rms paid less than prevailingmarket prices or similar assets. Marketsare reasonably ecient, and most importantassets sold to private equity rms undergoa relatively wide auction. Indeed, i anything,the risk is that private equity rms over-pay or their assets as they compete againststrategic public buyers. Nor do privateequity rms obtain the bulk o their returnsby proting rom a rising market or aneven more quickly rising sector within themarket. Their real—and oten overlooked—source o success is the governance modelthey apply to the companies they own.This is an advantage that public companiesnd hard to emulate.The more successul private equity becomes, the more scrutiny it attracts. In November2006, the United Kingdom’s Financial Services Authority warned o the growing riskto the industry as private equity irms set their sights on ever bigger targets, in the processtaking on ever higher debt. Elsewhere, the high ees and dividends that some irmsare extracting within months o closing deals suggest that the clubby industry may haveentered a period o excess. Some irms may well ind that they have bitten o morethan they can chew. But it would be wrong to assume that the challenge private equityirms pose to the public equity model is about to ease.
Andreas Beroutsos,Andrew Freeman, andConor F. Kehoe

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