In brief
For years, conglomerates — multisector organizations with at least three distinct business units under a parent group — were thought to thrive due to advantages in several areas. These include size, synergy between portfolio companies, brand advantage and a diversified business model, wherein the poor performance of one subsidiary could be counterbalanced by better-performing subsidiaries. However, an EY-Parthenon study, Defining a winning strategy for Southeast Asia’s conglomerates, revealed that conglomerates worldwide have underperformed in the market over the last decade. Their total shareholder return (TSR) is almost 10 percentage points below that of their pure-play counterparts.
That said, the EY-Parthenon study found that conglomerates in Southeast Asia have outperformed their counterparts in the rest of the world (global counterparts). The 10-year annual average TSR from 2002 to 2011 of conglomerates in the region was 34%, way above that of conglomerates in the rest of the world (only 14%).
The high returns of these conglomerates in Southeast Asia can be attributed to their inherent advantages in the early 2000s. These include easy access to capital, strong government relations and early exposure to high-growth sectors like energy, commodities and industrial.
However, these inherent advantages are rapidly diminishing. While conglomerates in the region used to outperform their global counterparts in the average TSR performance by 20 percentage points from 2002 to 2011, this outperformance dropped to only 3 percentage points from 2012 to 2021.
A sectoral analysis of the region’s conglomerates reveals that there have not been any significant changes in the sectoral contribution mix since 2002. A majority (80%) of the revenue of these conglomerates continues to come from the industrial, energy and consumer goods sectors, which have seen diminishing returns over the past decade. Conversely, these conglomerates have limited exposure to sectors such as health care or technology, media and telecommunications, which have generated very high returns during the same period.
Pure-play companies, which have been able to generate better returns in both traditional and emerging sectors, are also increasingly challenging conglomerates in Southeast Asia.
The EY-Parthenon study found that pure-play companies have been more agile in capital allocation and operations, enabling them to take advantage of windows of opportunity for top-line growth and customer acquisition. Pure-play companies have also leveraged digital transformation to accelerate growth. In fact, pure-play companies now outperform conglomerates in Southeast Asia, with the TSR higher by up to 37% in some sectors.
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Read moreThe study also highlighted other attributes of Southeast Asia’s conglomerates.
Conglomerates in Southeast Asia are less diversified, with the top three sectors where they operate in representing some 90% of total revenues, compared with 75% for global counterparts. Being less diversified allows for access to capital markets more easily, which can be used to enter new markets. However, the lower diversification also exposes them to a higher degree of financial and sector-specific risks.
Nearly 75% of conglomerates in Southeast Asia are family-owned, compared with only 50% of global counterparts. Family-owned businesses typically have a longer-term strategic outlook for legacy reasons and tend to leverage relationships and networks to perpetuate greater influence over the market.
Conglomerates in Southeast Asia are smaller and control about 50 portfolio companies on average, compared with about 175 for their global counterparts. They also have an average revenue of US$4.5b, compared with over US$50b for their global counterparts covered in this study. Having fewer portfolio companies allows better strategic alignment and focused management, leading to a greater parenting advantage.
Conglomerates in Southeast Asia typically have a smaller footprint, operating in less than 10 countries on average, compared with over 60 countries for their global counterparts. The smaller footprint allows for greater focus on the management of the company and enables the portfolio companies to develop more focused, local strategies that help support deeper market penetration.
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Read moreGiven the unique characteristics of conglomerates in Southeast Asia, the EY-Parthenon study identified a four-pillar value creation strategy that can drive success for them in the next decade.
By developing an agile, well-defined capital allocation strategy and proactively managing their portfolios, conglomerates in Southeast Asia can overcome growth inertia.
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Read moreBuilding a digital ecosystem is another strategy that they can employ to increase value creation opportunities. A digital ecosystem is formed through the combination of platforms — or omnichannel architecture that delivers value to the customer through personalized products and services — and strategic partnerships. This is not just about partnerships and M&As; it also involves creating a network of enterprises that facilitates and encourages the sharing of data, applications, technology infrastructure and capabilities. Conglomerates can aim to create these network effects within existing businesses and are well positioned to ultimately become the digital ecosystem orchestrators. This would, in turn, allow them to get better control over the ecosystem dynamics and often outperform other entities in revenues and profits.
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Read moreThey should create a mindset to drive sustainable long-term value for all stakeholders. For example, they could look to introduce environmental, social and governance standards and frameworks into operations and have a dedicated workforce to review and select products that would deliver a positive environmental impact and foster sustainable practices.
They can attract higher valuation multiples by shifting toward asset-light business models. Leading real estate conglomerates in Southeast Asia recently implemented an asset-light strategy to enhance market perception by shifting away from being conglomerates with massive balance sheets to becoming asset managers with improved quality of earnings and stable cash flows.
By taking these actions, conglomerates in the region can gain superior value and ultimately regain their dominance.
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There is a significant slide in the annual average total shareholder return performance of conglomerates in Southeast Asia compared with that of their global counterparts over the past decade. To drive success in the next decade, they need to develop an agile capital allocation strategy and build digital ecosystems. It is also critical to create a mindset to drive sustainable long-term value and shift toward asset-light business models.
