{"id":279020,"date":"2025-06-07T09:35:45","date_gmt":"2025-06-07T09:35:45","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/mckinseys-koller-valuation-isnt-broken-expectations-are\/"},"modified":"2025-06-07T09:35:45","modified_gmt":"2025-06-07T09:35:45","slug":"mckinseys-koller-valuation-isnt-broken-expectations-are","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=279020","title":{"rendered":"McKinsey\u2019s Koller: Valuation Isn\u2019t Broken\u2014Expectations Are"},"content":{"rendered":"<p> <br \/>\n<\/p>\n<div>\n\t\t<span class=\"wp-block-paragraph lead-in-text\"><\/p>\n<p>\u201cValuation: Measuring and Managing the Value of Companies\u201d has long been a definitive guide for corporate finance professionals. Eight editions in, the book\u2019s lead author, Tim Koller\u2014a partner at consulting giant McKinsey &amp; Company\u2014says the biggest surprise is what hasn\u2019t changed. Koller speaks to Global Finance about one of the dealmaking world\u2019s most enduring topics.<\/p>\n<p><\/span><\/p>\n<p><strong><em>Global Finance<\/em><\/strong><strong>: To what extent does geography play a role in affecting a company\u2019s valuation?<\/strong><\/p>\n<p><strong>Koller<\/strong>: It applies to most parts of the world. If you are a purely local business, in Europe or Asia, for example, then it\u2019s less of an issue. But, if the US were to experience a severe recession, it would probably affect everybody. And then, of course, there are those businesses that are directly impacted\u2014companies that export, import or compete with US companies. A lot of companies, even if they appear to be local, they\u2019re competing with US-based companies, or they\u2019re trading with US-based companies. So, the impact is felt far beyond the US.<\/p>\n<p><strong><em>GF<\/em><\/strong><strong>: Are more companies growing frustrated with US volatility and seeking opportunities in Europe and the APAC region?<\/strong><\/p>\n<p><strong>Koller<\/strong>: For most companies, it takes years to build or to change strategies from a geographic perspective. Some of the companies I talked to are thinking about these things, but, at this stage, you don\u2019t just break into a market in a couple of months. If you want to build a business in a new country, or if you want to change your supply chain, these things take time. So it depends. If your supply chain is highly specialized, that could take years to restructure. If your supply chain is simple or there are lots of other producers, and you can switch from one country to another, that\u2019s a little bit easier.<\/p>\n<p>Bringing things back to the US is also very time consuming\u2014no matter what industry it is. People are thinking about it and making plans, but for the most part, the timeframe of any kind of major structural change is fairly long, and you don\u2019t want to commit to it until you probably know more about what\u2019s going on.<\/p>\n<p><strong><em>GF<\/em><\/strong><strong>: In this latest edition of your book, did you touch upon digital assets or how companies are building their own reserves?<\/strong><\/p>\n<p><strong>Koller:<\/strong> We don\u2019t address it, and I\u2019ll tell you why. For the most part, a lot of what people are talking about is not a currency. We call it a cryptocurrency, but it\u2019s not a currency. It is a speculative investment. And the nature of these speculative investments is unlike a stock or a bond. There\u2019s no inherent valuation. We won\u2019t know what the answer is eventually. It\u2019s purely a function of supply and demand of investors and sentiment for many of these cryptocurrencies. It\u2019s like investing in vintage automobiles or fine art. It\u2019s nothing more than that. As far as I\u2019m concerned, that\u2019s why we don\u2019t touch on it, because you can\u2019t do anything with it, and then I wouldn\u2019t understand why a company would put money into that. Because you\u2019re really betting on market sentiment. You\u2019re betting on other investors wanting to get into that market and pushing up the price.<\/p>\n<p><strong><em>GF<\/em><\/strong><strong>: What about stablecoins?<\/strong><\/p>\n<p><strong>Koller:<\/strong> Stablecoins are cryptocurrencies tied to real-world assets, usually the US dollar or another fiat currency. The more reputable ones are backed 1:1 by actual reserves. From a corporate valuation perspective, they\u2019re not particularly interesting. If a cryptocurrency is simply pegged to the dollar but involves additional transaction costs, it doesn\u2019t offer much advantage over using dollars directly.<\/p>\n<p>There\u2019s been talk for decades about something replacing the US dollar as the world\u2019s reserve currency\u2014whether the euro, the yuan, or others\u2014but those alternatives face their own challenges. For a currency to be viable for transactions, especially everyday purchases, it needs to have a stable value. That\u2019s why something backed by the dollar or another relatively stable fiat currency is necessary.<\/p>\n<p>However, stablecoins don\u2019t really factor into the strategic decision-making of most companies or investors unless they\u2019re directly involved in currency or cryptocurrency markets. And that\u2019s a niche area I\u2019m hesitant to speculate on.<\/p>\n<p><strong>GF: Are there certain basic mistakes that happen at a company that hurts valuation or leads to their failure?<\/strong><\/p>\n<p><strong>Koller:<\/strong> It\u2019s rarely that a company is fundamentally unsound. The real issue is often the gap between how companies value themselves and how the market values them. Many CEOs and CFOs believe their companies are undervalued, but when we analyze hundreds of companies each year\u2014using discounted cash flow models and peer comparisons\u2014we usually find valuations are within 10% of fair value. That margin is small and can fluctuate day to day.<\/p>\n<p>Companies, on the other hand, often have financial projections that are inconsistent with their market values, because the market doesn\u2019t give them credit for things that they hope to achieve, unless they have a strong track record. For example, if an industry grows at 4% annually and a company projects 6% growth, the market may only price in 4%. If the company hits just that, it\u2019s not a failure\u2014investors never expected more. It\u2019s not a disaster from a valuation perspective, because investors didn\u2019t expect that anyway.<\/p>\n<p>The bigger issue is the disconnect we saw in the dotcom bubble. There\u2019s sometimes a disconnect, you might argue, with some of the big mega [magnificent seven] stocks. One of the characteristics I look for, in terms of potential overvaluation, is who are the investors in a company. And, in particular, what share of retail investors? And if you see a very high share of retail investors inside in a stock, that is often a sign of overvaluation. Retail investors don\u2019t crunch the numbers. They typically buy based on emotion and hype. It may be a great company, but that doesn\u2019t mean you should pay 100 times earnings for it.<\/p>\n<p><strong><em>GF<\/em><\/strong><strong>: Could that also complicate M&amp;A strategies?<\/strong><\/p>\n<p><strong>Koller<\/strong>: Yes, although that does create an opportunity. Very few companies have the guts to take advantage of it. If my shares are overvalued, that\u2019s the time when you can use those shares to buy something, and that\u2019s great. We\u2019ve seen a couple of those, but not that often.<\/p>\n<p><strong><em>GF<\/em><\/strong><strong>: Over the eight editions on valuation, what\u2019s the most surprising change that you\u2019ve seen in how companies wrestle with value?<\/strong><\/p>\n<p><strong>Koller<\/strong>: The most surprising thing isn\u2019t how much companies have changed, but how little they have. And it\u2019s not just because we\u2019ve written a book, but other academics have done research. Many companies remain too short-term oriented. Large firms still try to cost-cut their way to success, which only works for a limited time. And while innovation continues, it often comes from smaller companies rather than the big players.<\/p>\n<p>One positive shift has been the steady decline of conglomerates. More companies are breaking themselves up into simpler, more focused entities. This trend, certainly evident in the US and to some extent in Europe as well, has improved management effectiveness and is favored by investors who value focus and clarity. That\u2019s probably the most meaningful change\u2014the breaking up of complex companies into smaller ones.<\/p>\n<p><strong><em>GF<\/em><\/strong><strong>: Do the recent headlines of Google and Meta being under scrutiny and possibly broken up exemplify that trend?<\/strong><\/p>\n<p><strong>Koller: <\/strong>I can\u2019t speak specifically to Google or Meta, because their business units are more interconnected than, say, a company making both valves and toothpaste\u2014where there\u2019s clearly no synergy. What matters isn\u2019t size but complexity, especially when businesses don\u2019t share customers, technologies, suppliers, or distribution channels. That\u2019s when it makes sense to consider breaking them up.<\/p>\n<p>More broadly, while the trend toward focused companies has been positive, many firms remain too short-term oriented. They often blame the stock market, but that\u2019s not entirely fair. Our research shows that about 75% of investors\u2014whether retail, index funds, or institutions\u2014are long-term holders. The problem is that companies tend to pay too much attention to the loudest voices, which are often short-term traders. There\u2019s still a lot of room for companies to take a more long-term approach, and that\u2019s work that continues.<\/p>\n<p><strong><em>GF<\/em><\/strong><strong>: In<\/strong> <strong>past editions or in this new edition on valuations, has there been any sort of trend or surprising development you noticed?<\/strong><\/p>\n<p><strong>Koller: <\/strong>One major trend we\u2019ve seen is the globalization of equity markets over the last 35 years. Today, the shareholder-base of large companies in Europe, Japan, and Taiwan often looks very similar to their US peers. As an individual investor, you can easily buy hundreds of international funds or even individual foreign stocks\u2014and the same goes for investors abroad buying US equities. So, from a capital markets perspective, things have truly globalized.<\/p>\n<p>However, corporate behavior still varies by region. On average, European companies continue to earn lower returns on capital than their US counterparts\u2014though the gap has narrowed, and some of the best-performing companies in various industries are European. In Asia, there\u2019s still a noticeable emphasis on size and prestige over value creation. I\u2019m surprised that focus persists. While it\u2019s slowly shifting, many companies still prioritize growth and scale rather than returns, which often results in lower valuations compared to US firms\u2014unless they\u2019re high-growth global competitors.<\/p>\n<p><strong><em>GF<\/em><\/strong><strong>:<\/strong> <strong>What will modern finance look like in the future?<\/strong><\/p>\n<p><strong>Koller: <\/strong>I\u2019m hopeful that AI will help us value companies more effectively. Right now, it\u2019s good at tasks like summarizing and researching quickly, and over time it may become more capable. But while tech\u2014and AI in particular\u2014makes up a large share of the stock market, it still represents a relatively small part of the broader economy. Most people still need housing, food, clothing, travel\u2014those businesses aren\u2019t going away.<\/p>\n<p>AI will be used across many industries to improve customer experience, reduce costs, or enhance products, but it\u2019s not fundamentally going to change things. Valuations are going to be disproportionate towards those companies.\u00a0 But the real question is: Will companies use AI to actually boost profits, or will those gains be passed on to consumers, like with many past innovations? For investors and executives, the key is understanding whether AI is a true source of competitive advantage. That distinction will vary by industry, but it\u2019s central to how we think about value in the future.<\/p>\n<\/p><\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>\u201cValuation: Measuring and Managing the Value of Companies\u201d has long been a definitive guide for corporate finance professionals. Eight editions in, the book\u2019s lead author, Tim Koller\u2014a partner at consulting giant McKinsey &amp; Company\u2014says the biggest surprise is what hasn\u2019t changed. Koller speaks to Global Finance about one of the dealmaking world\u2019s most enduring topics. [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":279021,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[93],"tags":[107534,4771,107533,107532,11441],"dealstore":[],"offerexpiration":[],"class_list":["post-279020","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-brokenexpectations","tag-isnt","tag-koller","tag-mckinseys","tag-valuation"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.4 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>McKinsey\u2019s Koller: Valuation Isn\u2019t Broken\u2014Expectations Are - Som2ny Network<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/fivemor.com\/?p=279020\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"McKinsey\u2019s Koller: Valuation Isn\u2019t Broken\u2014Expectations Are - Som2ny Network\" \/>\n<meta property=\"og:description\" content=\"\u201cValuation: Measuring and Managing the Value of Companies\u201d has long been a definitive guide for corporate finance professionals. 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Eight editions in, the book\u2019s lead author, Tim Koller\u2014a partner at consulting giant McKinsey &amp; Company\u2014says the biggest surprise is what hasn\u2019t changed. Koller speaks to Global Finance about one of the dealmaking world\u2019s most enduring topics. 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