Asia’s Conglomerates; Is It the End of the Road?

By Gimbar Maulana on 01:55 pm Oct 15, 2019
Category NEED TO KNOW

By Jean-Pierre Felenbok, Till Vestring and Nader Elkhweet

Our first brief in 2014, “Teaching Dinosaurs to Dance,” focused on Southeast Asia’s conglomerates and we followed it up in 2016 with “How Conglomerates in Southeast Asia Can Live Long and Prosper.” Now, for our third comprehensive study, we have added India, another market dominated by conglomerates.

In total, we tracked the performance of 102 conglomerates and 287 pure plays (companies that focus on a single business) between 2003 and 2016. Our initial motivation for this research was to understand the “conglomerate paradox” – why conglomerates in Southeast Asia outperformed pure plays. Unlike their Western counterparts, they delivered higher average total shareholder returns (TSRs) than companies in Asia that focused on a single business. (TSR is defined as stock price changes, assuming the reinvestment of cash dividends.)

We determined that Southeast Asia’s conglomerates had many things working in their favor. They benefited from easier access to opportunities, particularly the rights to natural resources, the foundation of many conglomerates in the region. They held an advantage in everything – from regulations, to talent, to capital. This dynamic is evident in Indonesia’s large and increasingly sprawling conglomerates, such as Sinar Mas, Lippo, Kalbe, Astra and more, playing an important role in the country’s economic development.

However, in 2014, as we looked closer, we saw that as Asia’s markets developed, those benefits steadily diminished and the conglomerate premium compressed.

We predicted that further development of these Asian economies would continue to erode conglomerates’ advantages. Ultimately, we determined that conglomerates in India and Southeast Asia would be forced to reinvent themselves and their sources of competitive edge to survive.

As their markets matured and as their historical advantages (favors from regulators, better access to capital, first chances for opportunities, etc.) shrank, the best way to survive would be to evolve their portfolios to reach a sustainable leadership position in each of their businesses. However, achieving and sustaining market leadership in a level playing field requires more managerial and financial attention. Conglomerates would be forced to make strategic decisions on where to focus their efforts.

Our 2016 research clearly confirmed the downward trend in conglomerate performance, and the 2018 edition of our conglomerate report represented a turning point. For the first time in our 15 years of tracking performance, Asian conglomerates lagged pure plays in their markets on core financial performance. From 2007 to 2016, TSR dropped to 11 percent for conglomerates – slightly less than the 12 percent for pure plays, but enough to signal changes. This should be a source of major concern. As conglomerates’ performance suffers, there will be calls from skeptical investors to break them up. That is what happened in the West. Moreover, if it happens in India and Southeast Asia, conglomerates will be less likely to attract talent, money and opportunities, further hurting their performance.

To avoid the bleak fate of their Western counterparts, Asia’s conglomerates must renew themselves – it is especially critical in a time of digital disruption and rising competition from global technology powerhouses. Fortunately, they can look to the actions of the top-quartile performers, which have maintained a hefty conglomerate premium. Indeed, some conglomerates in the region have outperformed pure plays by more than 13 percentage points on average, while the rest underperformed by an average 5 points.

Who are these winners? Conglomerates such as Thailand’s Charoen Pokphand and Berli Jucker Public, Malaysia’s Hap Seng Consolidated, India’s Bajaj, the Philippines’ DMCI and Indonesia’s Sinar Mas. All of these enjoyed annual TSRs of 24 percent or more for the years 2007 to 2016. Top-quartile conglomerates in India and Southeast Asia achieved average TSRs of 25 percent versus negative 3 percent for the bottom quartile from 2007 to 2016.

We found that these winners are differentiated based on their actual growth performance (sales more than margins) as well as expectations of future growth, as reflected in their multiple expansion. Unlike lagging conglomerates, they avoided boosting dividends or balance sheet adjustments and focused on growing their businesses. This finding serves as a critical lesson for conglomerates hoping to stay relevant as their economies mature.

How have Indonesia’s conglomerates fared in our most recent 10-year period? While most groups saw strong TSR growth (average of 25 percent) in 2007 to 2011, the years 2012 to 2016 were much more challenging, with average TSR growth of 2 percent. Only Sinar Mas made it into the top quartile of conglomerates over the full 10-year period. Indonesian conglomerates benefited from participating broadly in the country’s growth over many years. As growth slowed and competition intensified, however, many saw performance decline, with only those that reinvented themselves continuing to show strength.

Remaining on top takes a focus on growth, and based on our ongoing global research and analysis in India and Southeast Asia, core business growth depends on a company’s ability to create a transformational roadmap in which they excel in four distinct areas: finding a compelling ambition; maintaining a parenting advantage; enabling growth across the portfolio; and making the best financial choices.

We will look at these one by one.

Find a compelling ambition

To reinvent themselves for a world in which they no longer hold an advantage over pure plays, conglomerates must ask themselves: What is our purpose? What level of value creation should we aim for? Setting an ambition means different things for different conglomerates. For some, historically focusing on financial goals may have been enough, but today most conglomerates pursue a broader ambition. A compelling ambition needs to please three demanding (and sometimes contradictory) masters: It needs to provide the strategic clarity required to guide managerial decision making, inspire internal and external stakeholders and offer a convincing investment rationale to investors. For the many Asian conglomerates that are family-owned or controlled, this is doubly hard as they attempt to balance and reconcile family and corporate ambitions.

Thailand’s Charoen Pokphand maintains a socially oriented ambition: Create prosperity on three levels – countries, communities, the company and its people. Its sustainability goals include aggressive targets for reducing energy consumption and it has a stated aim to provide employment for smallholder farmers, small and medium enterprises and people in vulnerable groups. For its part, Larsen & Toubro has a more investor-oriented ambition. Its priorities include reallocating capital to businesses with visible value-creation potential, divesting non-core businesses and increasing transparency by listing subsidiaries.

Maintain a parenting advantage

As the initial advantages for conglomerates diminish, they need consciously to determine the parenting model that best suits them – the center as a hands-off portfolio manager, as a challenger of key decisions or as a hands-on integrator pursuing synergies across the portfolio. The best-fit model will depend on the similarity of the businesses in the portfolio – the degree of customer, cost and capability sharing, for example. It also will depend on the corporate capabilities that can add value, everything from manufacturing know-how to go-to-market proficiency.

Best-in-class conglomerates evolve their parenting model as their portfolio mix and markets shift over time. Tata started out as a parent known for maintaining central control. Over the decades, it became more detached, pruning its portfolio and supporting the business units with access to capital or talent hired at the group level. Tata carefully evolved its parenting advantage. One area of focus for the center has been to strike the right balance between driving its core businesses to full potential (what we refer to as “Engine 1”) and reinventing its business for the future (“Engine 2”). Tata has been particularly effective at relying on its center to incubate companies for its Engine 2.

Enable growth across the portfolio

Top-quartile conglomerates achieve leadership position with both organic and inorganic growth, constantly pruning their portfolio to refocus on growth while looking for new opportunities. The best performers rigorously maintain focus and allocate resources differentially across businesses. They also actively shape where and how to grow across the different businesses in their portfolio.

Growing beyond your home country.

Internationalization is a sustainable way to grow only when there is a clear path to achieving a leadership position in the countries entered. Berli Jucker successfully expanded to Vietnam and Malaysia only after achieving a leadership position in its home market of Thailand. Its objective is to become the leader in any market it enters – as it has in Vietnam and Malaysia in glass packaging.

Turning to M&A.

Our experience shows that inorganic growth becomes increasingly critical for fulfilling a company’s growth ambitions. However, conglomerates in Southeast Asia still appear lukewarm toward acquisitions. About 60 percent of the conglomerates we surveyed conduct less than one deal a year on average, and 40 percent of those deals are valued at less than $20 million. In our experience, M&A is a learned skill, with frequent acquirers substantially outperforming infrequent acquirers. Conglomerates that executed 10 or more deals (acquisitions or divestments) achieved a median TSR of 14 percent from 2012 to 2016, while non-acquirers achieved a median TSR of negative 4 percent during the same period.

The growing importance of “Engine 2.”

Amid digital disruption and other fast-paced changes, conglomerates need to stay relevant. One way is to incubate new businesses as part of their “Engine 2” strategy. The best conglomerates acknowledge that incubation requires a different operating model than running a core business. For example, it calls for a different level of autonomy and decision rights that may take years to generate material revenue contributions. Therefore, successful conglomerates create two operating models: one for running the core business and the other for incubation.

Arguably, conglomerates may be better positioned than pure plays to nurture an “Engine 2.” They already know the tricks of running businesses with different operating models, and their diversification protects them somewhat from the risks of disruption to any business.

Kalbe was able to use its conglomerate structure to dramatically shift its core business over the years. Founded in 1966 as a pharmaceutical business, it expanded heavily into health and nutrition in the early 2000s, to the point that the “new” business now generates more than half of Kalbe’s revenue. Another growing approach: Leading conglomerates such as Sinar Mas and Lippo create venture capital arms to seed new bets from the center.

When divestitures or spin offs make sense.

Divesture is another critical lever for conglomerates to outperform and stay relevant. Yet many conglomerates in Asia are reluctant to exit a business, even if it offers limited upside. Divestment was used by 67 percent of the outperforming companies in our survey.
Our research shows that focused divestment has a positive impact on conglomerates’ TSR. Divestitures that strategically clean up a company’s portfolio and command an optimal price can generate shareholder value for both buyer and seller.

Our research on divestiture has found that companies achieve better results when they take a four-step approach to divestiture (see the Bain Brief “Everybody Wins in Divestitures,” June 2017). They proactively and thoughtfully select the right assets to divest. In addition, they earn higher multiples by investing the time, talent and money required to make a business attractive for sale, instead of waiting until it is too late and selling quickly. The best divesting companies also run a smooth selling process that clearly communicates value to buyers. In addition, they ultimately implement a low-risk carve-out program aimed at minimizing execution costs and future stranded costs.

Divestitures involve the sale of a part of the business to a third party. Another option is to create a spinoff – a public listing of a part of the business, with shares of the newly created company distributed to shareholders.

Make the best financial choices

Finally, top-quartile conglomerates differentiate themselves from their counterparts in how they deploy capital. They focus on investing in growth over providing dividends and can convince shareholders about their prospects for future growth. For Larsen & Toubro, a compelling equity story validated its strategy to investors and investment banks. Investment banks praised its diverse business model and productive management, to the point that both its enterprise value-to-earnings before interest, taxes, depreciation and amortization and price-to-earnings ratios outperformed the median for both conglomerates and pure plays in India. Key to a conglomerate’s success is its ability to pursue the right funding mechanism, whether it is equity funding, debt finance, project finance or joint ventures and other forms of partnership.

Assessing and rearticulating these four pillars of corporate strategy are the first steps for any conglomerate hoping to stay relevant and thrive in the decades ahead.


Jean-Pierre Felenbok is the office head of Bain & Company Southeast Asia, Till Vestring is an advisory partner based in Singapore, and Nader Elkhweet heads the firm’s Jakarta office.

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