Family & conglomerates

Conglomerates in Asia are in decline, says Bain. Family businesses are thriving, says Credit Suisse. What’s up?

Is it a good time to be a family-owned business in India? Reports by two leading global consultancies last week present a picture of contrast, one gung-ho and the other, well let’s say, not so good. The truth though may be more nuanced.

Take the good part first. A global report on family-owned businesses by Credit Suisse — Credit Suisse Family 1,000 in 2018 — presents family-owned businesses’ rude health almost as a virtue aiding that ultimate capitalist goal — shareholder return.

The 111 Indian family-owned companies such as Reliance Industries, Dabur, Marico, Godrej and Page Industries with $839 billion market capitalisation in the Credit Suisse report generated around 14 per cent annual average share price return since 2006, compared to six per cent recorded by their non-family-owned peers. The report’s verdict is clear; “Family businesses in Asia outstrip their non-familyowned peers with superior financial performance and more robust share price returns, largely due to their longer-term focus.” Around 1,000-odd listed companies with a minimum 20 per cent direct shareholding and voting rights by founders or descendants, and $ 250 million market capitalisation floor were considered by Credit Suisse for this study.

A Bain & Company report— Asia’s Conglomerates: End of the Road? — released on the same day last week, though not strictly on family-owned or run businesses, paints a worrying picture of decline and decay in conglomerates. For the first time in 15 years, on total annual shareholder return (TASR) for the 2006-17 period, pure-plays or firms that focus on a single business pipped Asian and Indian conglomerates, 12 per cent to 11 per cent, notes the Bain report, which studied 102 conglomerates and 287 pureplays across Asia.

All along, conglomerates were generating a higher return in Asia and India compared to pure-plays. In the 2003-12 period, conglomerates generated 32 per cent versus 28 per cent for pure-plays. But as early-mover advantage over large markets and natural resources — often a foundation of many conglomerates in the region — wear off, the premium they enjoyed is on a downward spiral. Bain’s prognosis on the future of these largely family-owned businesses is harsh; “As conglomerates’ performance suffers, there will perhaps be calls from sceptical investors to break them up. That is what happened in the West. Moreover, if it happens in India and Southeast Asia, a doom loop could set in motion: Conglomerates will be less able to attract talent, money and opportunities and perhaps further hurting their performance.”

Lean on Bain, and looks like end of the road for family-owned businesses, right? Or would you rather believe Credit Suisse and bring out the bubbly? A reality check on both. A family generation-wise analysis by Credit Suisse reveals the familiar pattern of diminishing premium for family-owned companies as businesses move down generations. Lack of founder passion is just one reason. As businesses get older they are “less likely to be located in the “new” more disruptive (that is, technology) sectors, which by their nature offer much stronger growth,” notes the CS report.

One of the surest way is to keep refocusing and redefining the core and/or successful diversification into emerging areas. It could be an active acquisition-led strategy like that of Godrej Group to refocus on its core or seeding new ‘tech’ businesses such as telecom with Reliance Industries.

What’s heartening, even by the standards of the alarming Bain report, is that the top quartile conglomerates that includes family groups like such as Bajaj, Wadia, Murugappa, Lalbhai, Godrej, Emami and Torrent continue to thrive, with an average TASR of 25 per cent compared to pure-plays’ 11 per cent! So no matter who you pick, Bain or Credit Suisse, the panacea is the same — remaining top of your game it seems is the best antidote to irrelevance and decay, notwithstanding the nature of the shareholding!