During Oversea-Chinese Banking Corp’s 2024 AGM, chairman Andrew Lee likened OCBC to a financial conglomerate nine times.
On Feb 1, Loh Chin Hua, CEO of Keppel (it dropped Corp to distance itself from being a conglomerate), pointed out that during 2023, Keppel “unveiled the next phase of our Vision 2030 transformation, shedding our conglomerate structure to become a global asset manager and operator”. He had, years earlier, griped that Keppel suffered from a conglomerate discount.
According to Sebastien Canderle in his article Private Capital: Lessons from the Conglomerate Era, dated October 4, 2023, posted by the CFA Institute, conglomerates have rarely maximised long-term shareholder value. “Too often, whatever synergies they manage to create fail to compensate for the costs associated with the increased complexity. Such conglomerates seek out scope as well as scale, even when they lack expertise in the targeted sectors.”
He cites a couple of examples of one-time conglomerates. Hanson Trust, now known as Heidelberg Materials UK, once owned and operated lots of different businesses comprised lots of different businesses. Better known is AT&T’s attempt to be a conglomerate. It completed the acquisition of TimeWarner in 2018 but spun off the entity known as WarnerMedia in 2022, and in 2023 it right-sized further.
A former financial conglomerate
Former financial conglomerate Citigroup has shed its conglomerate structure. Back in 1998, Citicorp became Citigroup when it merged with Travelers Group, an insurance company. The rationale was to create a “one-stop financial shopping for consumers offering Citicorp’s strengths of traditional banking, consumer finance, and credit cards along with insurance and brokerage services from Travelers and its units”.
See also: OCBC ‘not in the business of providing liquidity’ for Great Eastern
The so-called financial conglomerate and/or financial supermarket was meant to offer products from traditional banking services to insurance policies. Citigroup was not quite a supermarket in that supermarkets don’t necessarily manufacture all their products. For instance, Magnolia provides drinks and dairy products. Seng Choon or some grower from Malaysia provides eggs, while balsamic vinegar is from Italy. Neither FairPrice nor Cold Storage rear chickens or operate vineyards. They just display these products on their shelves. Banks can be like a supermarket without being a financial conglomerate.
Nonetheless, global Citigroup started to divest Travelers in 2002. Market observers said the divestment represented “the symbolic end of the era of the financial supermarket, through which financial-services products, including banking, insurance, and investments, could be peddled by a single large institution and delivered through multiple channels such as branches, over the phone, and on the Web”.
Interestingly, in 2004, a Citigroup alumnus, David Conner, who was then CEO of OCBC, decided to make OCBC more like the Citigroup he had known. In 2004, Conner proposed a share swap and selective capital reduction to merge OCBC and Great Eastern Holdings G07 (GEH).
“The consolidation of GEH will represent an important milestone for OCBC Bank’s New Horizons Strategy, aiming to be a top three financial services provider in the combined Singapore and Malaysian markets. The transaction encourages a stronger alliance between OCBC Bank and GEH and will facilitate the development of greater synergies in product development, marketing and distribution, and customer services,” an OCBC press release said.
Do investors undervalue the conglomerates because the entities own many businesses and are unrelated? Are there no synergies? Is there really a conglomerate discount? Keppel’s Loh certainly thinks so. Loh's prepared remarks in the FY2023 results briefing wasn’t the first time he had referred to Keppel as having a conglomerate discount.
A conglomerate discount refers to the tendency of markets to value a diversified group of businesses and assets at less than the sum of its parts. A conglomerate, by definition, owns a controlling stake in a number of smaller companies that operate independently of other business divisions.
Has GEH been a bit of a drag on OCBC?
Interestingly, OCBC has outperformed both DBS Group Holdings D05 and United Overseas Bank U11 (UOB) since the beginning of 2023 till May 3 because current group CEO Helen Wong changed the way OCBC rewards its shareholders, which, obviously has endeared herself to shareholders. The dividend payout ratio is 50%. In FY2023, OCBC paid out 53%. OCBC shareholders are rooting for higher net profits this year so that their dividends can grow with the bank.
But OCBC owns 88.45% of GEH. Would OCBC have performed even better without the volatility of GEH? Granted GEH's attributable profit is less volatile with the advent of SFRS 17, but the mark to market movements have not disappeared completely.
Back in 2009 and 2010, GEH contributed more than 18% to OCBC’s net profit. As at FY2023, GEH’s contribution was around 9%.
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Data collated by The Edge Singapore’s in-house analyst shows DBS ahead from an ROE perspective, followed by UOB and OCBC.
Ong Chin Woo, a minority shareholder of GEH, is campaigning for OCBC to provide more liquidity for GEH shares by rewarding GEH top management with GEH stock options instead of OCBC stock options, and to distribute GEH shares to OCBC shareholders as a dividend-in-specie.
During OCBC’s AGM on April 30, chairman Lee said OCBC is not in the business of providing liquidity for GEH.
On his LinkedIn page, Ong says: “I attended the OCBC AGM with no intention of seeking 'redress or revenge'. Instead, I opted to quietly observe the proceedings. My friends asked some questions. I found the historical reflections shared during the meeting quite surprising. Given my interest in Chinese history, I couldn't help but draw parallels to some key lessons: 1. It's essential to learn from the successes and failures of the past and adapt for the future; 2. Nostalgia for past achievements can hinder progress; it's crucial to acknowledge that times have changed; 3. Addressing legacy issues head-on is imperative; brushing them aside only exacerbates the problem."
Conglomerates don’t resonate with investors
As for conglomerates, Ong wonders if they are remnants from the 20th century when big was beautiful. Recall Conner retired in 2012.
“The concept of conglomerates seems outdated, reminiscent of a bygone era with many failing to thrive in today's landscape. The straightforward perspective offered by the DBS CEO resonated with me, and I couldn't help but chuckle as I read about it,” Ong says, as he read accounts of DBS’s results briefing.
What was seen as a business model in the 20th century, and good for OCBC in the early 2000s, does not seem to resonate with bankers in the 2020s. For instance, in 2010, UOB divested its life insurance arm to Prudential.
During DBS’s results briefing on May 2, its group CEO Piyush Gupta, who was formerly a Citibanker, but of a different generation to Conner, answered a question about DBS not having a life insurance arm.
“I saw one of our competitors saying they like being a financial conglomerate, I think there are challenges to being a conglomerate. On the whole, the focus on the banking business for us has proven to be beneficial. We think manufacturing insurance takes a very different skill set. And if you're doing your own manufacturing, and distributing it, you still have to run two separate companies, an insurance company and a banking company. And there's no obvious synergy between running the two. And therefore, we've found that being just a distributor of insurance, as opposed to a manufacturer of insurance, has proven to be very, very good for us,” says Gupta.
He continues: “My point is, you can make a good ROI on insurance, but then I could also go into the jam making business and say that's a great business as well. So we have to pick and choose the businesses you want to be in based on your core competencies and where you think you can bring the greatest value for the shareholder. For us, focusing on the banking and the distribution part of the business, we think, is a better use of both our capital and our management capabilities.”
