Radu Magdin is CEO of Smartlink Communications. Global analyst, consultant, passionate about leadership, communications and competition.
Large businesses often aim to expand, seeking either the benefits of scale in sales, production, purchasing power or development or the efficiencies that come with vertical or horizontal integration.
BYD, which remains, in many respects, a battery manufacturer with an automobile division, found success through vertical integration. Alphabet’s sprawling conglomerate, which remains mostly about putting ads in front of people as far as revenue is concerned, nevertheless benefits from the streams of data coming from sources like Gmail. Amazon’s operating income in the fourth quarter of 2024 from Amazon Web Services is higher than its operating income from North American sales.
Then, there are businesses that choose to split. Some successful family businesses make a conscious choice to separate into multiple entities controlled by different family members or multiple entities under a diversified conglomerate of ownership structures. These are an otherwise overlooked and often quite idiosyncratic category of businesses in themselves, and I’ve had the opportunity to speak with some of their leaders in my capacity as a risk consultant. These are my thoughts on what I’ve learned.
Origin Stories
Most of the companies I’ve spoken to in these situations are from Germany, Japan and South Korea. Many developed in a fairly particular set of circumstances, namely that of a previously agricultural, communitarian country that aimed to copy the Anglo-American model of industrialization despite not having what may be called functional equity markets.
The Anglo-American model of shareholder capitalism focuses on public equities as the primary mechanism for raising capital in terms of large companies. In this system, companies rely heavily on public equity financing—issuing shares to a broad base of often public investors.
In contrast, Germany, South Korea and Japan developed debt-focused models, sometimes referred to as bank-led capitalism. In these systems, long-term relationships with banks are central to a firm’s financial stability and growth. Rather than issuing equity widely, companies primarily fund operations and expansion through bank loans. These banks often hold equity stakes in the companies they lend to—as is the case with hausbanks in Germany and their counterparts in Japan—and often participate directly in governance by having board seats.
This environment meant that the older model of the family-owned, debt-financed business was on a more or less even keel with the equity-financed corporations that came to dominate mid-century America and, as their respective economies grew, diversified and developed, so did they.
Why Companies Split
The downsides to the businesses themselves, as well as their domestic economies, can be self-evident. From an economic standpoint, what might once have looked like smart, patient investing based on long-term relationships can turn into a problem like unfair insider dealing and poor money management. For example, in 1990s Japan, banks were writing off 7.5 trillion yen of bad loans per year, just as 7.9 trillion yen were being added to balance sheets simultaneously.
From a management perspective, managing a large company as a single entity may be the stuff of 1980s action movies but can be bleakly complex in practice. It may also be inefficient: Often, individual divisions allow for a mutually beneficial specialization that recreates the German ecosystem at smaller scales in the form of chaebols and zaibatsus, which are discrete but acting in unison.
Furthermore, since actual ownership often remains within the same family, the financing advantage of conglomerates in the context of declining credit availability or market downturns may be maintained.
Case Studies
I think the most famous example is the split between the Albrecht brothers of the Aldi retail chain into Aldi Nord and Aldi Süd. The split itself is, ultimately, a personal family matter, but it suffices to say that each manages its own supply chains under the same brand and does that quite successfully. Likewise, in the same sector, Kaufland and Lidl, two supermarket chains, are owned by the same family under the tutelage of the Schwarz Group, each specializing in specific market segments.
All of the above have made their respective splits into commercial successes, representing a natural experiment in optimization. Others have split due to the sheer difficulty of managing as a single company.
Samsung, a family conglomerate that together amounts to about 20% of South Korean GDP, has split into many distinct subsidiaries while maintaining family ownership of heterogeneously managed entities.
In the case of Reliance Industries, the ownership structure extends to over 300 companies of various sizes and over a multitude of industries and countries, to an extent representing a whole world unto itself while remaining very much a family business—a feat of financial and legal ingenuity over and above the businesses themselves.
Takeaway
It is rare for a single family to control a large, global business, but a few economic and social environments have given rise to a very particular breed of family businesses that stand shoulder-to-shoulder with the largest public companies of the Anglo-American world. By splitting into conglomerates, these companies often maintain the defensive financing advantages of relying on internal capital while allowing for corporate speciation of their divisions.
The corporate structures thus created can often come across as overly complex, but these are also multi-generational companies that have often been the spearhead of their respective economies on the global stage and, in many respects, represent their domestic economies’ success, making them worth studying.
At a minimum, I think it showcases the power of ownership structures, particularly the usage of overlapping general partnerships to maintain controlling interests without the need for majority ownership, which in turn allows both for the splits as well as maintaining control of what is often a family legacy.
Furthermore, it brings to focus the importance of internal capital in the financing of companies, both as a way of maintaining control as well as harnessing lower costs of capital during adverse market conditions—two lessons to inform any business leader.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
Read the full article here
