This article first appeared in The Edge Malaysia Weekly on February 18, 2019 - February 24, 2019

IN the age of disruption, conglomerates could see more restructuring ahead as they strive to evolve and adapt to a constantly changing operating environment or risk an inevitable decline.

“Any business that doesn’t adapt, acquire new skills and transform itself over time will inevitably decline. That’s equally true for conglomerates but there is an additional dynamic at work that conglomerates need to be aware of — as their home market matures, opens up and becomes more competitive, the traditional advantages of a conglomerate, namely access to capital and talent, and close relationship with government, decline,” says Till Vestring, advisory partner at Bain & Co, in an email interview.

He adds that leading conglomerates have shown that they are sensitive to this evolution and have responded by regularly trimming their portfolio of businesses and focusing on those in attractive markets, where they enjoy a leadership position and where they can deploy group value-add, for example capital, talent, synergy or a superior business model.

Vestring is one of the authors of a report entitled “Asia’s conglomerates: End of the road?” that was released late last year.

Management consultancy firm Bain has been monitoring Asia’s conglomerates over the last 15 years and in 2014, sharpened its focus on those in Southeast Asia. In 2016, it added India, which is also dominated by conglomerates.

Bain’s studies found that conglomerates in Southeast Asia outperformed pure plays. Unlike in the West, conglomerates in Southeast Asia delivered higher average total shareholder returns (TSR) than companies in Asia that focused on a single business. This was because conglomerates in Southeast Asia benefited from earlier access to opportunities, particularly rights to natural resources, which have been the foundation of many conglomerates in the region.

However, as Asia’s markets develop, these benefits are fading steadily and there is a compression of the conglomerate premium. In its latest report, Bain observes a turning point for Asian conglomerates, where they underperformed pure plays as TSR from 2007 to 2016 slipped to 11%, just slightly lower than the 12% for pure plays.

Bain sees this as a signal for changes ahead and as a source of concern. It warns that with conglomerates underperforming, there will be calls from investors to break them up.

It is worth noting that in Malaysia, Sime Darby Bhd’s demerger in 2017 saw the group’s plantation and property outfits — Sime Darby Plantation Bhd and Sime Darby Properties Bhd — break away from the holding company to have their own listed entities on the local stock exchange.

When asked if other conglomerates in the region would take the same route, Francesco Cigala, managing partner of Bain & Co’s Kuala Lumpur office, believes so. “We absolutely see more restructuring involving conglomerates in the years ahead. This can be driven by external investor pressure or internally by the desire to remain a top-performing entity. Restructuring will take many different forms, from takeovers to spin-offs to privatisations,” he says.

Cigala notes that leading conglomerates will not wait until activist investor pressure forces them to change but will proactively shape their portfolio of businesses. For some conglomerates, this will mean pruning their portfolio by selling or spinning off businesses while for others it may mean privatising to drive their businesses without the short-term pressure of shareholders or finding new businesses to invest in.

Despite the challenges, top-quartile conglomerates in India and Southeast Asia continue to perform, Bain finds.

Bursa Malaysia-listed Hap Seng Consolidated Bhd, which posted TSR of 36% from 2007 to 2016, was among the 15 Indian and Southeast Asian conglomerates identified by Bain as thriving despite challenges.

Hap Seng shares the top 15 list with the likes of Thailand’s Charoen Pokphand Group and Berli Jucker Public Co, India’s Bajaj Group, the Philippines’ DMCI Holdings and Indonesia’s Sinar Mas Group.

Hap Seng, which is involved in the trading of heavy equipment and motor vehicles, leasing and money lending, oil palm plantations and fertilisers, has seen its share price grow at an annualised 39.65% in the last 10 years.

“Our analysis shows that the top quartile of Southeast Asian conglomerates continue to handsomely outperform their peers as well as pure plays. As Southeast Asian markets mature, open up and become more competitive, we believe that the gap in performance between the best conglomerates and the rest will become even more pronounced. In our experience, the leadership at top conglomerates is obsessed with retaining or even extending their leading positions and is fully aware of the changes they need to embark on in order to stay on top. As one head of a Southeast Asian conglomerate put it, ‘only the paranoid will survive’,” Vestring quips.

In its report, Bain notes that unlike their lagging peers, the top-quartile conglomerates avoided boosting dividends or balance sheet adjustments and focused on growing their businesses.

It also points out that nearly half of the top-quartile conglomerates today were on the list years ago. “Remaining on top takes a focus on growth, and based on our ongoing global research and analysis in India and Southeast Asia, core business growth depends on a company’s ability to create a transformational roadmap in which they excel in four distinct areas,” it adds.  

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.