Regional conglomerates underperform pure plays in shareholder performance

The conglomerates carried out a lesser number of M&As, which had been the drivers of their success in earlier years


CONGLOMERATES in South-East Asia are not performing as well as their pure-play competitors in total shareholders return (TSR), according to a recent study by Bain & Co.

In a report titled “South-East Asia Conglomerates’ Watershed Moments”, Bain stated that many of the region’s conglomerates were unable to face the reality of sluggish economic growth and failed to shift their focus to margin expansion and cost discipline.

As markets become more competitive, the research revealed the advantages of size, diversification and close government connections that fuelled decades of success for the conglomerates have now become disadvantages.

“The paradigm shift we have been predicting for years in the sector has finally happened. It’s clear conglomerates must reconsider their strategies, tackle costs and maybe even fundamentally rethink structure and business model if they are to survive in this new future.

“Covid-19 has thrown a wrench into conglomerates’ longevity and we will see a fascinating shift over the next few years as organisations attempt to become more resilient and more agile to avoid being overtaken by their more focused competitors,” said Bain & Co South-East Asia’s managing partner and co-author of the report Jean-Pierre Felenbok.

From 2010 to 2014, the annualised TSR for conglomerates outperformed pure plays by three percentage points. However, since then, they have underperformed pure plays by six percentage points.

The study also found the conglomerates carried out a lesser number of mergers and acquisitions (M&As), which had been the drivers of their success in earlier years.

Some conglomerates, however, took action and reshaped their portfolios compared to those who refused to do so and were saddled with weak competitive positions and overexposure to low growth industries.

Bain grouped these successful conglomerates as “all-weather star” which are family-controlled, giving them the ability to take a long-term perspective while being disciplined about their participation.

Notable “all-weather stars” included JG Summit Holdings Inc in the Philippines, Sinar Mas in Indonesia, Charoen Pokphand Group in Thailand and the Hong Leong Financial Group Bhd in Malaysia.

Bain’s advisory partner and also co-author of the report said the leading conglomerates are showing the world how to “protect, recover and retool” their organisations to come out stronger from the downturn.

“They are looking at the current crisis as a powerful catalyst to fundamentally reshape their portfolio, embrace new ways of working and transcend the traditional conglomerate model. For others, it may herald the decline that many observers have long predicted,” he said.

Top-performing conglomerates also protect their business by reducing costs early and aggressively managing liquidity and balance sheets.

“During today’s Covid-19 crisis, this could mean boosting customer engagement by developing a seamless omnichannel experience or by building big data analytics to better serve customers.

“It could mean investing in process digitisation, operations automation and supply chain resilience,” said the report.

It added companies that are active in M&As outperform those that turn their backs on the deals.

The region’s conglomerates that participate in more than two deals per year and those with deals amounting to more than 50% of the buyer’s market capitalisation achieved an annualised average TSR of 11.2% from 2010 to 2018.

“In contrast, companies participating in fewer than two deals a year representing less than 50% of their market cap — we call them “selected fill-ins” — achieved an 8.5% TSR over that period,” the report said.

The research also identified four conglomerate archetypes namely holding companies, diversified groups, cohesive groups and integrated groups.

It said integrated groups are those that “transcend the traditional conglomerate model” as it typically requires business model reinvention, portfolio cleanup and significant forays into new businesses and technologies.

“Ultimately, conglomerates might need to pursue this higher synthesis to avoid being broken apart into separate businesses — and truly to thrive over the long term,” it added.