CONGLOMERATES in South-east Asia are now underperforming compared to pure play companies, for the first time since Bain & Company began tracking their performance 16 years ago, according to a report released on Sept 15.
Conglomerates' traditional advantages of size, diversification and close government connections have turned into disadvantages, argued the Bain & Company report, Southeast Asia Conglomerates’ Watershed Moment.
Up till 2014, the average conglomerates still outperformed the average pure play based on the ten-year annualized total shareholder return (TSR). But the gap has closed.
Looking at the average five-year annualised TSR, conglomerates outperformed pure plays by 6 percentage points from 2010 to 2013, but have instead underperformed by the same margin from 2014 to 2018.
This change in fortunes came with the slowing of the high-growth era in 2015, with many conglomerates failing to adapt, said Bain & Company.
"Our research found that margin expansion accounted for 5% of the 8% of annualized TSR gains for pure plays between 2014 and 2018, yet conglomerates did not get any TSR increase from margins over the same period," said the report.
Over the same period, fewer mergers and acquisitions (M&A) were also carried out by conglomerates. By hesitating to reshape their portfolios, most conglomerates ended up with weak competitive positions and overexposure to low-growth industries, said the report.
The report also looked at what sets top-performing conglomerates apart. The top quartile of conglomerates were all family-controlled, "which gives them the ability to take a long-term perspective while being disciplined about where and how they participate".
In a crisis, they reduce costs early, aggressively manage liquidity and balance sheets, but also out-invest their competition.
They also actively manage their portfolios, with downturns being "a time to exit unattractive positions, consolidate positions and enter new industries".
According to the report, companies active in M&A outperform those that do few deals.
South-east Asia conglomerates that participate in more than two deals per year, with deals amounting to more than half the buyer's market capitalisation, had an annualised average TSR of 11.2 per cent from 2010 to 2018. Over the same period, companies in fewer than two deals representing less than half their market cap had an 8.5 per cent TSR.
Identifying four archetypes of conglomerates -- holding companies, diversified groups, cohesive groups and integrated groups -- the report argued that the final sort was most likely to find success in the future.
It is increasingly hard for conglomerates to compete as holding companies with unrelated businesses, given that private equity groups do the same.
Diversified groups, with broad portfolios but some group value added via sharing of best practices, may stumble as markets become more competitive, pure plays scale up, and disruption affects traditional businesses such as banking and telecommunications.
Cohesive groups, that have portfolios with a common theme, similarly face challenges from both focused pure play competitors and business model disruptors.
Rather, it is integrated groups -- those that have "portfolios with a unified purpose and integrated strategy" -- that may be able to thrive in the long term, said the report.