Bain report tracks declining performance of ASEAN conglomerates

03 October 2018 5 min. read

A long-term analysis of conglomerates in Southeast Asia by strategy and management firm Bain & Company has revealed a declining performance when compared to pure plays in the region, with many previous advantages subject to erosion as the Asian markets have developed.

Tracking the financial performance of over 100 conglomerates and 287 ‘pure plays’ (companies that focus on a single business) in Southeast Asia between 2003 and 2016, the global strategy and management consulting firm Bain & Company has noted a declining conglomerate performance in terms of total shareholder returns (TSR – defined as stock price changes assuming the reinvestment of cash dividends) as compared to pure-plays, with concerns for a potential break-up call from investors on the horizon.

Having originally initiated the long-term study to determine why conglomerates in Southeast Asia in fact outperformed pure plays – unlike their Western counterparts, delivering higher than average TSR against pure plays – Bain concluded a range of favourable factors, including easier and earlier access to opportunities, advantages as to regulations, talent and capital, and, notably for the region, advantageous initial rights to natural resources – the foundation of many of the region’s conglomerates.Conglomerate advantage declines as markets in Asia mature

Now, the firm says, as Asia’s markets have developed over time, those advantages against the competition have diminished. And the latest analysis by Bain has revealed that the region’s conglomerates have for the first time underperformed in core financial areas compared to pure plays across the ten-year period from 2007-2016 – with average conglomerate’ TSR in that time-span dropping to 11 percent against the 12 percent delivered to shareholders from pure-plays, reversing a 32 percent vs 28 percent conglomerate/pure play balance between 2003 and 2012.

While the difference to date may be minor, Bain warns of a ‘doom loop’ for conglomerates as has previously been witnessed in the West. “As conglomerates' performance suffers, there will be calls from sceptical investors to break them up,” the head of Bain’s Jakarta office and long-term Bain Partner Jean-Pierre Felenbok says. “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.”Top performing conglomerates in Southeast Asia and India

The solution? To avoid the bleak fate of their counterparts in the West, the report argues, Asia’s conglomerates will need to renew themselves, which is “especially critical in a time of digital disruption and rising competition from global technology powerhouses.” In addition, a conglomerate will need 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.”

The latter point, the firm says, will require a focus 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 expansions," Bain’s Bangkok office head Sharad Apte said. “Unlike lagging conglomerates, they avoid boosting dividends or balance sheet adjustments and focus on growing their businesses. This finding serves as a critical lesson for conglomerates hoping to stay relevant as their economies mature.”

Market leaders

To illustrate the point, those conglomerates in the top quartile of performers which have followed such a path still maintain a healthy lead over pure plays despite the erosion of market advantages for conglomerates in the region over time, outperforming pure plays in TSR by an average of greater than 13 percentage points – with the very top performers, such as Thailand's Charoen Pokphand Group and Malaysia's Hap Seng Consolidated, delivering a TSR rate in excess of 35 percent for the 2007 to 2016 period.

With respect to nearly 100-year old Charoen Pokphand Group, which employs over 300,000 people worldwide and operates across the agribusiness and food, retail (with over 10,000 Seven Eleven outlets) and telecommunications sectors among others, Bain singles the conglomerate out for its socially-oriented ambition, looking to create prosperity on three levels – countries, communities, the company and its people – as well as its aggressive targets for reducing energy consumption and providing employment for smallholder farmers and vulnerable peoples.

Bain concludes that setting an ambition will mean different things for different conglomerates, but needs to consider three factors; strategic clarity required to guide managerial decision making, the ability to inspire internal and external stakeholders, and whether it offers a convincing investment rationale to investors. “For some, historically focusing on financial goals may have been sufficient, but today most conglomerates pursue a broader ambition… For the many Asian conglomerates that are family-owned or -controlled, this is doubly hard as they attempt to balance and reconcile family and corporate ambitions.”