Friday, February 06, 2009

Corporate Complexity

In the entire world of companies and businesses, a quick glance would immediately tell a casual observer that some companies are simpler than others. By the use of the term “simple”, I imply that some companies have business models and structures which are relatively easier to comprehend than others, and so are easier to subject themselves to comprehension and scrutiny in order to assess if it is a viable investment target. These companies are often producers or providers of a type of product or service respectively, as compared to global conglomerates who may be providing multi-industry products and services. As we shall see next, this can have positive and negative impacts on one’s investment thought process as well.

Using just the examples of Singapore-listed companies, one can find many companies which are focused on just one main type of business. For example, Capitaland is dealing in property development, SPC is doing oil refining and DBS is providing retail and corporate banking. To slot these companies into defined categories is easy due to the specialized nature of their principle activities and also based on the fact that they operate within popularly categorized industries such as property, oil and gas as well as financial companies. Of course, things start to get a little hazy and complicated when we observe companies which have multiple units or are into multiple industries and/or business segments. One example would be Keppel Corp, whose main business is in the building and provision of oil rigs for major oil companies. At the same time, it also has a property arm (Keppel Land) and it also owns part of SPC as well. Another pertinent example is one of the companies I own – Boustead Holdings. It has operations spanning oil and gas, real estate, water and wastewater as well as Geo-Spatial Services.

When we broaden our horizons further past Singapore and look to USA companies, one can easily find companies which are multi-industry conglomerates. Take 2 components of the Dow Jones Industrial Average for example – 3M and General Electric. These companies manufacture everything from post-its to electrical appliances to doing financing for loans (just check out their respective websites). These companies have a worldwide presence and their intangible goodwill probably values them far above their current market capitalization. So the question to pose here is: how does one go about analyzing companies of such complexity ?

Companies which are operating in a single industry often are much easier to analyze as there are peer comparisons to be made, and the business itself is also easier to comprehend. However, that said, the brand name may not be synonymous with the common man at all, and thus there may not be a premium to be paid in terms of brand recognition for the products sold by the company. Famous brand names such as Proctor and Gamble, Coca-Cola and Gilette are very specialized companies which produce a very specific product or set of products, but still manage to retain worldwide recognition.

If we turn our attention to conglomerates and companies in multiple industries (e.g. General Electric), most of the time, sum-of-the-parts analysis is used to”break-up” the company into its constituent parts, where they are then separately analyzed. A PER valuation is assigned to each component, which is then weighted according to the stake held by the parent company (e.g. 50% or 20% stake). These individual values are then added up to give a final “value” for the entire firm. While this approach is not wrong per se, it fails to take into account synergies and intangibles between the separate components of the Group. This would usually mean under-stating the true value of the conglomerate if we just base it on the individual sum of parts. Similarly, disparate business units may also not have much synergies and thus a discount ought be factored in. Hence, corporate complexity may be a hindrance when one tries to analyze and value the company as there are so many factors to account for, while one may also not realize or be aware of potential synergies within or among the business units.

That said, in my current investment journey, I have not yet ventured to value such complex entities with global reputations and reach. The closest I have come is to owning Boustead which is multi-industry but since they only have 4 distinct divisions which are quite separate from one another, this job is somewhat easier. If readers have tried analyzing a complex conglomerate for potential investment before, please do share your thoughts on the process and the factors one should look out for.


Miguel said...


Great post. Also, thank you for constantly delivering great content . I enjoy linking to your blog in my nightly investment links. Have a great weekend & take care.

Best Regards,

Miguel Barbosa
Founder of

musicwhiz said...

Hello Miguel,

Thanks for visiting and your good wishes. You have a great week too !