Amid tough economics, Southeast Asia’s once-thriving conglomerates need to work harder to remain competitive, according to a report by Bain & Company.
Conglomerates continue to play a major role in Southeast Asia, accounting for around 40% of the top listed stocks.
Although creating value has become much more difficult in the region, conglomerates continue to outperform their focused peers as they did from 2003 to 2012, albeit by a noticeably reduced margin.
Median total shareholder return (TSR) has fallen, from an impressive annual 29% from 2003 to 2012 to a still-respectable 13% from 2006 to 2015. (TSR is defined as stock price changes, assuming reinvestment of cash dividends.) Similarly, pure plays saw median TSR decline in the same periods, from 19% to 11%.
Conglomerates still can make great strides in South- east Asia. In fact, during the same period, those in the top quartile achieved a median annual TSR of 25%— much higher than the 3% for the bottom quartile.
Surprisingly, the top 10 have proven to be highly diverse, spanning different sizes, countries and industries, says the report.
But the factor that helped many conglomerates in the years prior to 2012 is the same element that hurts them now: heavy exposure to commodities. As many as 30% of the region’s conglomerates have a commodity focus.
During the commodities boom years, conglomerates benefited from rising prices in agriculture, livestock and natural resources. But their fates reversed with the recent softening of prices for many commodities.
Bain & Company has five recommendations for any conglomerate hoping to live long and prosper amid the uncertain economic environment and rising competition.
1. Enhance portfolio resilience. Commodity-focused companies need to reconsider the fundamental makeup of their portfolio and how to better handle volatility and uncertainty.
2. Rethink the ownership model and capital structure. Reconsider which of three ownership models best positions them for future growth: Privately held holding company with listed and un- listed subsidiaries; listed holding company with some subsidiaries also listed; or divisional structure with a listed holding company and all business units private and fully owned.
3. Find new sources of profitable growth through mergers and acquisitions (M&A), international expansion and digital muscles.
4. Tackle costs and improve productivity to remain competitive and expand margins.
5. Rediscover the Founder’s Mentality. Chris Zook and James Allen, authors of the new book The Founder’s Mentality: How to Overcome the Predictable Crises of Growth, explain how great and growing companies survive the existential crisis of growth by reinvigorating the fundamental values that made them great in the first place.