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MoF Issue 11

MoF Issue 11

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Published by: qween on Jul 28, 2008
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McKinsey on 
Finance
High tech’s coming consolidation 1
Economic pressures to restructure high tech will eventually becomeirresistible. More acquisitions loom.
When efficient capital and operations go hand in hand 7
Olli-Pekka Kallasvuo, Nokia’s head of mobile phones and a formerCFO, discusses strategic organization, performance measurement, andthe value of financial transparency.
All P/Es are not created equal 12
High price-to-earnings ratios are about more than just growth.Understanding the ingredients that go into a strong multiple can helpexecutives make the most of this strategic tool.
Putting value back in value-based management 16
Value-based management programs focus too much on measurementand too little on the management activities that create shareholder value.
Perspectives onCorporate Financeand Strategy
Number 11, Spring2004
 
 
McKinsey & Company is an international management-consulting firm serving corporate and governmentinstitutions from 85 offices in 47 countries.
Editorial Board:
Richard Dobbs, Marc Goedhart, Keiko Honda, Bill Javetski, Timothy Koller,Robert McNish, Dennis Swinford
Editorial Contact:
McKinsey_on_Finance@McKinsey.com
Editor:
Dennis Swinford
External Relations Director:
Joan Horrvich
Design and Layout:
Kim Bartko
Circulation Manager:
Kimberly DavenportCopyright © 2004 McKinsey & Company. All rights reserved.Cover images, left to right: © Paul Schulenburg/Stock Illustration Source/Images.com, Corbis, Bonnie Rieser/ Photodisc Green/Getty Images, Timothy Cook/Stock Illustration Source/Images.comThis publication is not intended to be used as the basis for trading in the shares of any company or for undertakingany other complex or significant financial transaction without consulting appropriate professional advisers.No part of this publication may be copied or redistributed in any form without the prior written consent ofMcKinsey & Company.
McKinsey on Finance
is a quarterly publication written by experts and practitioners in McKinsey & Company’sCorporate Finance & Strategy Practice. It offers readers insights into value-creating strategies and the translation ofthose strategies into stock market performance. This and archive issues of
McKinsey on Finance
are available onlineat http://www.corporatefinance.mckinsey.com
 
For some time, the rules of economics
appeared not to apply to the high-technology sector. Growth slowed, profitsshrank, and investors eagerly awaited thebillions ofdollars in value likely to flowfrom mergers, acquisitions, downsizings,and liquidations. All signs pointed to animminent restructuring, yet until recentlylittle occurred.Today consolidation pressures are mountingfast, and some segments have alreadysuccumbed. Where operating systems forPCs, midrange computers, and mainframeswere once numerous, now only a fewremain. Ditto for database software. Nicheplayers in segments such as vertical-specificapplications may remain fragmented, thanksin part to the unique nature ofthe valuepropositions they offer.To develop a sense ofhow imminentconsolidation really is, and to pinpoint thesegments within and outside high tech thatmight encounter challenges or opportunitiesin the trend, we investigated the extent towhich the economic forces drivingconsolidation were at play in 21 ofthesector’s leading industries. The indicatorswe looked at included each industry’sfragmentation levels, maturity (as measuredby growth rates), and profitability. We alsoconsidered incentives for consolidation, suchas the need for scale to justify larger capitalexpenditures and the importance ofscopeto meet the customer’s changing needs.
1
 Where and how
We found strong signs ofimpendingrestructuring in 11 ofthe industries weanalyzed (Exhibit 1). These hot spotsaccount for more than two-thirds ofthesector’s revenues—a fact that speaksvolumes about its ripeness for consolidation.In IT services, for example, professional andoutsourcing services seem to be poised foran across-the-board restructuring. Softwareis vulnerable in particular areas, such asenterprise applications, network and systemsmanagement and security, middleware, andsoftware for application servers. Inhardware, the targets are PCs and notebookcomputers, networking gear, and storagesystems; in semiconductors, they are logic,memory, and semiconductor equipment. Ourresearch also found many small and midsizecompanies that are barely profitable, ifatall, with cost structures more appropriate tolarger businesses (Exhibit 2).As economic forces take effect, companieswill jockey for increased scale or scope orfor some combination ofboth (Exhibit 3).As in any sector, scale-driven mergers,which aim to streamline fixed costs overgreater volumes and to satisfy the demandfor bigger and more stable suppliers, willmostly take place between companiescompeting in the same industry. Customerneeds will also influence mergers that areundertaken to achieve advantages ofscope.Indeed, deals ofthis nature have already
High tech’s comingconsolidation
Economic pressures to restructure high techwill eventually become irresistible. Moreacquisitions loom.
High tech’s coming consolidation
|
1
Bertil E. Chappuis,Kevin A. Frick, andPaul J. Roche

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