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Is Growth an Always an Inherent Corporate Value?

             All companies, from major multinationals to start-ups, face a common challenge: how to grow their businesses so they can boost earnings and enhance the value of their shares. When we think of the operation of a corporation, “growth” is an inseparable concept. Firms are subject to pressures to continually grow from sources both inside and outside of the organization. To prove this argument, we need look no further than the case studies of AT&T and Carbot Corporation.

             Before moving on to the case studies, there is an important concept to know to understand the argument: the growth imperative. Corporations live or die whether they can sustain growth. This depends on the relationships to investors, to the stock market, to banks and to public perception. The growth imperative fuels the corporate desire to find and develop scarce resources in obscure parts. Then what is a growth company and why is growth necessary? A growth company refers to any firm whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders, opting instead to plow most or all of its profits back into its expanding business.

             The case study of AT&T, the primary long distance telecommunication service provider in the United States, suggests the internal and external forces that inevitably drive the corporation to grow. When the company matured, it began to seek avenues for growth. It first built a computer division, which decision resulted in annual losses of 200 million dollars. Then, it AT&T bought NCR, the world’s fifth-largest computer maker for 7.4 billion dollars. However, the purchase resulted in the loss of 2 billion dollars, and the company had no choice other than to sell NCR back for 3.4 billion dollars. The third attempt to seek for a new avenue was purchasing McCaw Cellular, a wireless business. AT&T spent 15 billion dollars in total on wireless business but such effort was later valued at 10.6 billion only. To reinvent the local telephone business with broadband technology, it finally acquired TCI and MediaOne. However, this too did not bring a success. After its failure to growth, AT&T had to sell its cable assets for 72 billion dollars, which were bought for 112 billion dollars. Overall, AT&T’s effort to seek new platforms for growth resulted in the loss of 50 billion dollars and decrease in shareholder value. Upon a large amount of losses, AT&T had to seek growth opportunities in technology closer to its core.

             The second case to look at is Cabot Corporation, world’s major producer of carbon black. The business had been very strong, but the markets did not grow rapidly. So its executives launched aggressive growth initiatives. Carbon Corporation acquired specialty metals and high-tech ceramics business, infusing new process and materials technology. The executive board anticipated acceleration of Cabot’s growth trajectory and it seemed to be successful when share price tripled. However, subsequent losses soon dragged down corporation’s earnings and shares dropped by more than half. Profitability then rebounded, and share price doubled accordingly. Unfortunately, stock price later deteriorated again because of its lack of growth perspective. Cabot finally decided to shut down new businesses and refocus on the core.

             Both the cases of AT&T and Carbot Corporation showed a similar pattern or the cycle of the process of the trials for growth. The pattern is called the “Status Quo Ante”, because the whole process leads back to the status quo in the end. When a company seems to be matured, a new growth platform is demanded. Accordingly, the executives launch new initiative, but mostly they fail after undergoing a fluctuation of the share price. After its stock is hammered, the process eventually goes back to low-growth core business.

             Still, growth imperative is demonstrated in both situations of expanding company and failing company. In the case of an expanding company, investors first discount into the present value of a company’s stock price the rate of growth they foresee the company achieving. To boost its stock price, the company must exceed the forecast rate of growth. Investors also discount the growth from ‘new’ business that shows historical ability to generate new lines of business. For a failing company, once it fails to deliver growth, it gets harder to deliver it in the future. So the company is punished by equity markets. According to a statistics, out of 172 companies, only 5 percent were able to sustain a real growth rate of more than 6 percent. The remaining 95 percent stalled growth, but to the rates at or below the rate of growth of GNP. Among them, only 4 percent could reignite their growth. Increased pressure to regenerate growth quickly led the companies to continuously seek for new platforms for growth.

             Theoretically, as shown in the case studies above, the possibility of growth, especially when a company is fully matured, is very scarce. However, internal and external forces that demand new growth, or the growth imperative, fuel the company’s desire to find and develop new platforms for growth. Thus, upon a higher chance of failure, the company invests to acquire new platforms, showing a pattern of ‘status quo ante.’