SINGAPORE - Asian conglomerates appear to be losing their advantage over pure plays, as they underperformed the latter on core financial performance for the first time in a 10-year period from 2007-2016, an industry study has found.
Consultancy Bain & Co said in a report released on Friday (Sept 14) that total annual shareholder return (TSR) dropped to 11 per cent for conglomerates for the period under study, compared with 12 per cent for pure plays, which are companies that focus on a single business.
The consultancy has studied 102 conglomerates and 287 pure plays in Asia since 2003, and initially found that conglomerates delivered higher average TSR, defined as stock price changes assuming that cash dividends were reinvested.
They enjoyed easier and earlier access to opportunities such as rights to natural resources, and advantages in regulations, talent and capital. However, these benefits started to diminish in 2014 as Asia's markets developed, the report said.
While the underperformance margin is small, it could have no small impact on the Singapore market, as Chinese conglomerate Jardine Strategic Holdings is set to strengthen its presence on the Straits Times Index to five companies or 15.4 per cent when Dairy Farm replaces telco StarHub on Sept 24.
"As conglomerates' performance suffers, there will be calls from sceptical investors to break them up," said Mr Jean-Pierre Felenbok, head of Bain's Jakarta office and a co-author of the report.
"If that happens, a doom loop will be set in motion: conglomerates will be less able to attract talent, money and opportunities, further hurting their performance."
The conglomerates that outperformed pure plays in the region did so by more than 13 percentage points on average, while the others underperformed by an average of five points. These top performers, which include Thailand's Charoen Pokphand Group and Malaysia's Hap Seng Consolidated, could serve as inspiration for other conglomerates.
To succeed, the report said, a conglomerate needs to have a compelling ambition that powers the company; identify its parenting advantage, or the best way that it can add value to each business in its portfolio; actively manage and allocate resources to drive organic and inorganic growth; and employ a sound financial strategy to fund their ambitions, focusing on investing in growth over providing dividends.
"Winners stand out based on their actual growth performance, as well as expectations of future growth, as reflected in their multiple expansion," said Mr Sharad Apte, head of Bain's Bangkok office and a co-author of the report.
"Unlike lagging conglomerates, they avoid boosting dividends or balance sheet adjustments and focus on growing their businesses. This finding serves as a critial lesson for conglomerates hoping to stay relevant as their economies mature."