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A Brief Perspective on Conglomerates

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The brave take it all Throughout history the creation of conglomerates have

all followed a familiar pattern. A few enterprising individuals start with a single entity, corner a market, make a success of it and use the capital, value and experience gained to grow and corner other sectors of an economy to create large dominant entities across a broad myriad of sectors. The above scenario however can only be played out in virgin or infant economies where opportunities abound at every corner for those who can spot them. Names like Carnegie and Rockefeller were synonymous with the creation of great industrial empires in the early days of America. In recent times the same phenomenon is seen repeating itself in India, South America, Korea, Russia, and in more recent times, Africa.

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The Evolution of a Conglomerate

From Diversity to Consolidation

All conglomerates eventually end up consolidating into a few flagship areas of business due to a number of key similar factors: •  Increased competition in low barrier sectors forcing a

diminishing return in the sector

•  Government and legislative developments regarding monopolies and anti competitive behavior

•  Deregulation of certain industries

The above key factors force conglomerates to start focusing on: •  Core businesses where they still have a competitive

advantage

•  Efficient deployment of capital and resources for equitable returns

•  Key issues of continuity and legacy as the founders or more specifically the patriarchs move on

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Leveraging Equity in

Conglomerates Synergies, Diversity and Hedging

The valuation of a conglomerate is normally based on the above three key factors: •  Synergies: Both operational and financial, how does

the conglomerate leverage its balance sheet, income streams and management of capital across the various business units.

•  Diversity: Probably the most critical factor which analyses sector and industry exposure which then influences the earnings mix of the conglomerate. The challenge is finding the optimal mix of industries which results in an optimal earnings matrix.

•  The Hedge Factor: The optimal earnings matrix will to a large extent influence the hedge factor of a conglomerates earnings. This factor plays a critical role when determining where the true value lies in what is often a mish mash of businesses and operations.

All of the above have to be optimally aligned

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The Conglomerate

Brand Where the equity lies

Most conglomerates end up being synonymous with a particular business which carries its branding. This is influenced by •  The most public facing or most prolific in their sector of their businesses

•  They may not necessarily be the most profitable

•  Depending on the synergies, diversity and hedge mix , the lead brand can influence of hinder the growth of other entities within the conglomerate.

•  The business of branding conglomerates should always strive to answer the question – “where does our equity lie and what is the short, medium and long term strategy and exit”

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Case Studies

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Global Trends

Hyundai

The Hyundai brand has become synonymous with passenger cars but operates across a myriad of industries including: •  Banking

•  Aerospace

•  Ship Building

•  Real Estate

•  Property

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Global Trends

Tata

Also synonymous with vehicles however has formidable exposure in: •  IT and Strategy Consulting

•  Heavy industry

•  Retail

•  Coffee shops (Starbucks in India)

•  Financial Services

•  Mining and Petrochemicals

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Global Trends

Reliance Industries

Reliance Industries is probably the classic case of an unbundling of assets after a Patriarch passes on. •  Founded by Ambani

•  Built it into India's most profitable and diverse conglomerate operating in sectors from power generation to mobile phone sector.

After the passing of Ambani, the conglomerate was split into two and each part given to two sons. •  Reliance Industries (industrial holdings, power and

petrochemicals)

•  Reliance Corp (telecommunications, media, financial services and retail)

Note: The brothers have a long standing feud that often affects global stock markets and the Indian economy when there is a dispute.

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