A new generation of companies is challenging the ‘conglomerate discount’ logic; new communications strategies are required to highlight their benefits
The virtues of advantages of being part of a large conglomerate have traditionally been restricted to the so-called emerging markets.
Research published in the Harvard Business Review epitomises this thinking: “Companies belonging to the largest Indian business groups generated higher returns on assets from 1997 to 2011 than the rest of the companies listed on the Bombay Stock Exchange, according to a study we conducted, and more than 60% of those groups generated better returns than a comparable portfolio of standalone companies did.” Here, diversified groups still dominate private enterprises, accounting for nearly 30% of overall BT 500 market capitalisation in 2014.
The concept of a ‘conglomerate discount’ was traditionally associated with sprawling diversified companies from the West, which were consistently beaten to the growth markets by leaner, nimbler specialists.
However, thinking is evolving; alternatives and nuances are emerging. For different reasons, US firms such as Berkshire Hathaway, Alphabet and – in reality – Amazon (whose portfolio ranges from Cloud infrastructure to online retail) have been able to avoid the dreaded conglomerate discount; each bringing a distinct value logic into play.
“Laissez-faire” holding groups like Berkshire Hathaway hold a portfolio of usually listed companies for the long term. The group centre leaves the individual companies to manage on their own without any active search for synergies between its different businesses. They see themselves as an investment company and, consequently, the headquarters have few employees (Berkshire Hathaway has fewer than 30 people at its group centre). While they can easily exit any business by simply selling their holding in it, they tend to hold for the long term.
Private equity firms make a virtue of being effective conglomerates; usually acquiring companies and taking them out of the market’s view to restructure or ‘repair’ them. This process is based on the culmination of a particular (and diversified) set of market experience, finance, management skills; in effect, a process of ‘diversified capabilities’ that extract value from the exercise.
It could be argued that Elon Musk provides the perfect, modern-day example of the benefits of ‘new conglomerate logic’; loosely connected companies such as Tesla, SpaceX, Solar City, etc. all operating independently, yet constantly looking for synergies. The audacious move to blast a Tesla Roadster II to Mars aboard a SpaceX ‘Falcon Heavy’ rocket last month is the perfect demonstration of such collaboration.
In each case, the communications function will be tasked with communicating the value of such associations, creating a ‘virtue’ of these new types of conglomerates. Such an exercise is extremely delicate and complex; one set of new conglomerates (such as Amazon, Alphabet and Tesla) are closely identified with their founders, an association which can be a blessing and, sometimes a liability.
In other cases, the ‘new conglomerate’ will want to leverage its brand, reputation and experience to add value to a new acquisition; but too much association (and perceived dependency) could potentially compromise its valuation as a standalone company when it’s time to exit.
The above is a new science for the communications world. This is the first time in my career that investors and journalists in the US and Europe are considering conglomerate logic as a potential asset rather than a liability to be discounted.
Apart from the amazing Virgin group, of course, which have been making a virtue out of its own brand of conglomerate logic for nearly half a century! But Richard Branson really is a brilliant outlier in every sense!
So – Virgin aside – for a new generation of conglomerates, it looks like a case of the West catching up with the East. The PR industry in the US and Europe is rediscovering the virtues of being a conglomerate and figuring out how best to convey them.