The Aditya Birla group's decision to merge two companies, each with an existing clutch of diverse businesses, flies in the face of the accumulated wisdom regarding conglomerates, says T N Ninan.
Illustration: Uttam Ghosh/Rediff.com
Investors have already hammered down the stock of both Grasim and Aditya Birla Nuvo -- one more than the other because of a perceived unfairness in the merger ratio.
The real issue though is about the future, and how well a conglomerate can be expected to perform on the market when it has such unrelated businesses as viscose fibre, cement, aluminium and telecom services.
The bundling of cash cow businesses with others that have growth potential is no different from the original sale of public sector shares in the early 1990s, as "bundles" of shares in unrelated businesses. As everyone knows, the sale did not do well in terms of valuation and bundling was quickly given up.
In terms of business operations, too, questions will be asked -- with Reliance Industries providing a good example of how bad decisions get taken in conglomerates. It is unimaginable that any stand-alone telecom company would have invested $20 billion over many years before the launch of its services, so why does it become a good idea when Reliance (which is primarily an energy and petrochemicals business) does it?
Just because it has the cash? The market leader in the business has a valuation of barely $20 billion, and it will take a long time for any new entrant to get there in a business where competition has been driving down tariffs and affecting valuations.
The country's leading conglomerate, Tata, has provided yet more evidence of how group logic can kill value.
For years, the group's holding company Tata Sons used dividend payments from its most successful business, Tata Consultancy Services, to shore up group shareholdings in other Tata companies, many of them with underwhelming track records.
There was group logic to such use of funds, in terms of acquiring firmer control of operating companies, just as there may be group logic to what the Aditya Birla group is doing just now -- though the group denies it, investors suspect that the proposed merger is to ensure that the Idea telecom business has the money to invest in order to face up to the expected competition from Reliance.
The difference in the case of Tata was that the money belonged to a private holding firm, which was free to do what it wished since no public shareholding was involved. In the Birla case, public shareholders are involved -- and they are not happy.
The history of the quarter-century since the start of economic reforms bears out the argument that conglomerates don't do as well as focused, stand-alone businesses.
Almost all the companies with the highest market capitalisations today are single-business or focused entities -- in areas such as pharmaceuticals, consumer goods, automobiles, financial services, energy, telecom and software services.
When a conglomerate like Mahindra diversifies into several unrelated businesses, it is unable to make much headway in some of the new areas -- though, in fairness, it should be added that some of the diversifications (as in solar energy and defence products) are in emerging sectors where there are no established players exercising dominance.
In India, multi-business conglomerates have run the additional risk of falling victim to family disputes; the resulting splits of group businesses have been along lines that often had no commercial logic.
When the Shriram family split into seven or more sub-groups, for instance, the group's sugar mills went to different sub-groups, as did the chemicals business and textiles. So it should not surprise that most of the multi-business conglomerates that were riding high in the early 1990s have fallen by the wayside, leading to the fading of many marquee names.
Nevertheless, group honchos enjoy the power of being at the helm of conglomerates -- and that seems to encourage them to ignore the lessons of recent corporate history.
