This is the fifth part of a series of articles on SME Business. In this article, we will explain what a lot of family business conglomerates wonder about but very few people have analysed – conglomerate strategy. Hopefully this mixed law and business article will help unravel some queries that you always wondered but no one has explained clearly enough.
Conglomerate strategy – In South East Asia or even in Asia, a businessman builds business via business connections so after a while, it is not uncommon to see a large conglomerate that does many different lines of business. From the family office point of view (that controls all the operating business), it needs to consider on an ongoing basis what entities to keep/sell, what business to expand or close down and which of these entities to keep unlisted (private) and which to list on the relevant stock exchanges (go public).
Save for the larger Indonesian conglomerates that centrally manage all their subsidiaries, most businessmen are shareholders in each of their smaller subsidiaries and manage them separately. This article, aims to explain how you can be like Temasek and figure out how to maximise wealth for your shareholder depending on market cycles and business ebbs and flows.
Consideration #1: Determining which companies to keep or sell/close down
Many businessmen send their kids to business school and many people learn the Boston Consulting Matrix which classifies companies/businesses into 4 types. Cash Cows, Dogs, Stars and Question Marks.
- Cash Cows: As the name suggests, they generate consistent profit for the group.
- Dogs: Very slow business.
- Stars: Business that grow very fast and do really well either in terms of EDBITA or revenue.
- Question Marks: Unknown.
So most business schools teach that in a conglomerate, you should keep the stars, Cash Cows but sell the Dogs and incubate the Question Marks (using a venture capital fund perhaps). This arises from corporate strategy 101 which teaches CEOs to increase revenue and reduce cost. So arising from this logic, CEOs typically when newly appointed sell non-performing entities or those they think have no strategic value to the group.
The problem with such classification when looking at traditional Asian business conglomerates is this, the founders usually build their business with a counter-cyclical mindset in mind (which may appear to the next generation as hap hazard growth). When the business is handed to the kids, after they go to the business schools, they come back and start selling off parts of the business without an understanding of business cycles and when something bad hits (like a war or bad economy or financial crisis), the whole conglomerates goes bust (as it had sold off its cash cows prior to the crisis).
Many years ago, I visited a Korean chaebol and noticed that when the dad divided up the business for each of the kids, he had bundled an animal feed company with an entertainment company and gave it to his daughter to run. I asked the management of the entertainment company why this was so but they could not give me an answer. From a western BCG matrix point of view this would be irrational but from an Asian business mindset the dad was probably thinking that the animal feed company was a cash cow which could balance out the ebbs and flows of the fortunes of the entertainment company. I am sure if that Korean Chaebol hired one of the Western consulting firms, they would say that the entertainment company should sell the animal feed company away.
Conglomerate strategy Consideration #2: Timing the equities markets properly
Many business groups have many divisions of the business. In this paragraph we will explain the way to grow a property portfolio using other people’s money period where equity prices are low.
Case Study #1
The key here is to list and expand during an equities boom period and consider delisting during a bust and keep the business (assuming your cash flow of your underlying business allows for it)
One of our friends used to run a listed company doing hotels and they are a large hotel brand in Singapore. During the equities boom period, they raised a lot of money and built many hotels both in Singapore and overseas. Then later once the equities boom ended and share prices came down, as soon as they figured out that the cashflow from their hotels could match a 3 year bridging loan (from a bank), the founders set up a company and raised bridge funding and delisted the company. So here the learning lesson is, list your company at a period when equities markets are booming and then delist when equity markets are at an all-time low so you can buy out your other shareholders cheaply and keep control of your asset heavy company/business.
Case Study #2
The key here is to list and use the equity boom and run up in your company share price to fund raise and use it in growing business segments.
One of our school seniors runs a listed company in Singapore which started as a contractor firm. Their share price rose as they become the subcontractor of a large Singapore government developer. Then when their share price ran up, they used funds raised from the market to go into property development. During the boom years, the property development profits resulted in millions of dollars and the money was sent up to the shareholders via dividends. Today the controlling family of that listed company family office has substantial cash due to their prudent cash management and deployment.
Consideration #3: How to get a good market valuation for your listed entities
Depending on the market, the prices of some companies tend to move very rapidly. The best use of a listed company in Singapore is to list a stable business that produces good profits and issue dividends to shareholders once you have good profits. This would encourage people to buy your shares and drive the share price up. The second element to a good listed company is to have a growth story so that people can have a reason to buy your shares and a good reason for share prices to trend upwards. Thus, having a mix of a stable business and a growing business is important for your share prices for your listed company to rise.
Another way is to get some growth funding from a private equity fund with a strong track record in your sector so that they can help you corporatize your operations and scale in a measured way.
In conclusion, building a business is one part, growing it in the public markets properly will help your family wealth growth larger. The correct top level strategy is important to ascertain the correct way forward when restructuring your family business. Do speak to a good corporate lawyer who has seen one or two financial cycles and market cycles to advise you on how to structure your conglomerate growth/development plans.
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