We got carried away in demergers
MANY people don’t like Mathematics. Maths phobia, if that’s the right term, has forced some gifted students to drop the subject instead of learning it. I almost dropped it at O-Level but the usual suspects, parents, and my History teacher intervened. I had tried to woo my History teacher to be an ally against the usual suspects, him being an Arts person. “Go back to class, you are too young to specialise,” he said. The matter was closed.
Today I am amazed at how fast time flies when I run regressions on economic development questions of our time. Time flies when I take a break to read on fully-lived lives of men and women from our pasts to flesh-up the analyses churned out by the regression models.
Sometimes I wonder if I will ever specialise. In the early 2000s, there was a flurry of listings on the Zimbabwe Stock Exchange. Some were Initial Public Offerings such as Trust Bank which, on the first day of trading its share price jumped from $15 to $96 before easing slightly to close at around $85.
Not all listings came with such fanfare. Some were low key graced by the traditional champagne toast and special eats. The lowkey listings were typically subsidiaries of already listed conglomerates which were being listed as separate entities.
Examples include Powerspeed which was a spin-off from Mashonaland Holdings, and others such as Steelnet, Phoenix, Cairns, Tractive Power and so on.
I, and perhaps a few others, did not see merit in most of these smaller entities becoming separately listed companies. I was sceptical of the long-term advantages to the independent firms and benefit to the economy at large.
Indeed, some of the listings such as Pelhams and Steelnet are no longer with us. Some are still there but seem to be getting back together with their long-lost parents or siblings as we are seeing in Dawn Properties and African Sun or in ZPI and ZimRe.
Just a few remain standing as formidable entities in their respective sub-sectors.
Curious about merits of demergers in Zimbabwe, I decided to study the question methodically in my Master’s research project which I titled ‘Diversification, refocusing and corporate performance: a case study of Delta Corporation Limited.’ At the turn of the century, Delta Corporation was a conglomerate with interests in hotels (Zimbabwe Sun), fast-moving consumer goods (OK Zimbabwe) and furniture (Pelhams). A decision was made to spin-off the units such that what remained as Delta was the beverages unit.
I used the Delta Corporation demerger to study the extent to which demergers deliver shareholder value. Wasn’t it fine to just leave things as they were in the conglomerate structure? It was definitely fun doing the study.
I was of course guided by other scientific studies across the world on how to measure shareholder value and how to determine and decide-on performance benchmarks to use. I had to read a lot on shareholder value to appreciate the importance of stripping out inflation and enterprise-specific risk from standardly calculated shareholder returns.
The final thesis, available online, is far from what a lecturer will parade to students as a model thesis. In it, the reader will find exuberance of youth which still linger even in this article but the youthful student was empowered and that is the purpose of education.
What I found is pretty much known to readers of corporate finance and strategy: that a focused business delivers better value for the shareholder than a conglomerate.
There was a but in the findings which to me then was novel. “In 2005,” so I wrote as I wrapped up the thesis, “47 million Delta shares representing about 5 percent of the firm were issued to SAB Miller for the construction of a glass furnace plant. Although the plant would take care of all local bottling needs, the main drive for the investment was the export market for the bottles so that import requirements for the carbonated soft drinks could be met. Delta also began to aggressively finance barley production so as to ensure continued supply of raw materials after the collapse of commercial farming during this time.
“By the end of 2005 it had acquired a 40 percent stake in Ariston Holdings Limited, a listed company with interests in tea, coffee, horticulture and livestock production.” Delta was diversifying again just four years after the demergers! Why? Because if it did not diversify it would perish.”
In developing markets where industry is still formative, a business has no choice but to internalise what in a developed market can be supplied by other firms. The conglomerate is thus an unavoidable type of organisation in developing economies.
We find the same when we travel back in time to the developed economies in their early years of industrialisation. Conglomerates are not just internalised capital market but provide necessary economies of scale to deliver products and services cheaper and efficiently especially when underpinned by an astute central treasury.
They seed industrial development and diversification. No surprise then that when some subsidiaries were weaned off, they perished or are somehow finding their way back home. Back in the 2000s, we chased the advisory fees, the thrill new listings and illusions of an expanding capital market but overlooked the empirical evidence.
When I teach corporate finance, I sometimes grumpily argue that we could be having larger and stronger enterprises had we heeded the evidence. When students ask me to substantiate my claim, I make it their problem.
I challenge them to reflect on companies such as Innscor Africa and Econet. They are just two examples of conglomerates seeding new businesses and broadening the industrial landscape and both are local enterprises. We are probably still too young to specialise. If, however, we choose to specialise as a business, it makes sense to spread our wings across borders like Seed Co because ours is too small a market to be too specialised.
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