Investors in Asean conglomerates have had a rough ride. A hundred dollars invested in the asset class in October 2014 would have produced a total return of 8%. This figure includes the dividends. The return compares poorly to that of investing in the Asean index, and is an appalling return compared to the Nasdaq. A hundred dollars invested in the Nasdaq would be worth $360 today.
The glory days before the Asian Financial Crisis were different. A hundred dollars invested in 1987 in a basket of conglomerates like Jardine Matheson, Keppel, Salim Group, and San Miguel would have quintupled in value by 1997.
The efficiency that a conglomerate could generate has been a magnet for investors. For instance, San Miguel operates a broad range of businesses from beer to petroleum refining. Its potential was believed to be superior to its more specialised rivals.
Asean is now back in vogue after a difficult decade. The region is seen as a haven from China and India. China is floundering. India’s red hot market is expensive. Will the conglomerates lead the Asean rally?
Harold Geneen, an American executive who died in 1977, may have the answers. He hardly visited this region but his approach is relevant. He served as the CEO of ITT, the world’s largest conglomerate for two decades.
Geneen was trained as an accountant. However, he was no bean counter. ITT was a telegraph equipment producer with U$765 million in revenue in 1959. In just over a decade, it became a conglomerate with US$17 billion in revenue in 1970. This is about U$133 billion in today’s money. It is larger than the revenues of today’s conglomerates like General Electric (GE), Itochu, Marubeni and the Korean chaebols.
See also: Foreigners dump Thai bonds as BOT signals no further rate cuts
In its prime, ITT held insurance, hotels, and real estate businesses. It was one of the largest landowners in the US and controlled the Sheraton Hotel.
Geneen was a relentless acquirer of businesses. He completed almost 400 acquisitions and mergers in 80 countries. This was in an era when interest rates were in double digits in the US. Geneen’s philosophy was that conglomerates generate efficiency. These diverse businesses had nothing in common except the holding company that owned them.
A conglomerate could borrow cheaply. Also, it could cut costs and apply a standard culture. Litton Industries, GE and the Japanese conglomerates followed ITT’s formula.
See also: Surprise Thai rate cut highlights worries across Asia
Geneen was a determined worker who ruled by fear. His working hours were that of a convenience store — from 7am to 11pm. His managers were held to account. His New York Times obituary described him as “a man who always needed to know everything”. He would hear a pin drop in the conglomerate.
The ITT senior executives had to send him weekly reports on their budgets. These were so detailed that it took days to prepare. Collecting figures was not easy in the pre-Excel era.
Geneen read 146 reports in an average month with a total of 2,537 pages. The reports came from managers who were based around the world, from Greenland to New Zealand. The reports were sent to him directly. There was no prospect of tampering by middle managers.
But Geneen was an outstanding manager in terms of stock market timing. He also left at the right time. By 1977, conglomerates no longer had a monopoly on efficiency. Their relative returns started to falter. Siloed companies like Microsoft became more popular.
By 1995, the conglomerates had become obsolete. ITT became a mid-level producer of industrial and aerospace parts. There were a series of splits and takeovers that reduced ITT’s size. Other American conglomerates declined in a similar manner.
Asean conglomerates may rise again if they take a leaf out of Geneen’s book. The P/B valuations of the pure play companies like Thai Beverage Y92 (or ThaiBev), Olam and Seatrium are at a 10-year low. Asean’s top 10 pure play companies are cheaper than the conglomerates in P/B terms. Some pure play companies like Wilmar have destroyed value. Others have been averse to risks like Singapore Airlines C6L , partly because of Covid.
The conglomerates may want to use the lower interest rates to make hay while the sun shines. The top five conglomerates have a net cash pile of U$12 billion. They also have a lower leverage rate than a decade ago. Its bosses may also want to replicate Geneen’s style and work round the clock. Perhaps, then, they will lead the Asean rally.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
