Some large tech companies have recently created a holding company separate from their operating companies such as Alphabet and Google, among others. Reliance Industries Limited has opted for a route where the operating company functions as a holding company. Neither is an uncommon strategy; how businesses and the investing environment evolve and not corporate control influence success or otherwise
Abstract discussions of (corporate) value creation and the equally abstract discussions of its link to corporate control, or the specific type of control, don’t lead us anywhere. Ditto for the debate over how value is held in check within an entity and how greater value can be created only though separation. Amidst such ‘debates’, conglomerates (multiple businesses in a single entity), continue to be globally common amidst rising examples of creating a ‘pure’ holding company.
Changing investment environment
The holding company structure has been in the news in recent times with the setting up of Alphabet and Meta out of Google and Facebook. An investing holding & controlling company does not itself engage in a business activity; an operating company is engaged in some business activity. Many investment experts have argued that an operating company should not also be a holding company especially of unrelated businesses.
Historically, many new businesses were created within the womb of one ‘parent’, especially when it is cash-rich and also capable of raising capital at a relatively lower cost, a common phenomenon in many countries. This was also a time when investing had not yet become the specialised activity it is today, when the stock market had a limited number of suitors, when banks were the main source of funding and when most individuals preferred safe investments.
Over the last five decades, there has been a growing diversity of newer and newer institutional investors (PEs, VCs, LLPs) with different investment horizons & preferences and the rising popularity of stock exchanges among the general population (through mutual funds) as vehicles for directing savings to investment. It is this environment that has created the space for a ‘pure’ holding company, which can attract specific groups of investors for specific businesses. Similarly, PEs or VCs have different funds targeting different investors. However, business value creation is not a simple matter of changing forms of entities but is indexed to some underlying factors. One critical element is timing, as you will read a little later.
Global and Indian
Until the creation of Alphabet, Google contained within itself businesses such as Orkut, YouTube, Android, a range of businesses in some form of artificial intelligence and mobility (driverless cars). As an enormously profitable company, it made sense for Google to invest in new lines of businesses with unspecifiable gestation periods. Now, with the creation of Alphabet, Google will focus on its search and related advertising businesses across devices and channels (YouTube), and Alphabet can explore other businesses attracting specific groups of investors. Similar arguments are relevant in the case of FaceBook.
In India, Reliance Industries Limited (RIL) incubated Reliance Jio and Reliance Retail (among others), successfully nurtured them and turned them into independent entities, going by accepted standards of evaluating corporate performance. One off-spring, Jio, has even become an independent brand, arguably the biggest new brand in India in the last 30 years, and launching other businesses under its own brand. Born as Reliance Jio, it became just Jio, cutting off its umbilical cord when it reached a critical mass, and going on to launch a venture in financial services, become the brand for ecommerce (Jio mart), entertainment (Jio Cinema) and fashion too (Ajio). Reliance Retail too is grooming itself into something more with investments in designer fashion.
Of course, there is strategy at work here in an evolving space where telecom, internet, entertainment, financial services, and ecommerce can be folded under one powerful brand, because of the way telecom technology and internet have grown, transforming Jio into a ‘platform’. In 1999, Yahoo Finance was advertised as a platform for distributing (digital) financial products and services! It doesn’t pay to be ahead of its time.
To hold or not to hold
Timing is crucial. PayPal was part of eBay facilitating payments within but the growing payment business suggested it made sense to hive it off, although it needed shareholder activism to let that happen. Even internal divisions became separate entities when it became clear that they could grow into independent businesses. For example, Hughes Telecom arose out of General Motors as did their IT department becoming EDS (recently sold to Mphasis). Tech Mahindra is another example. TCS came out from being an internal division within Tata Sons.
This is an unfinished debate and the challenge for strategy is to grasp how different businesses are shaping up, whether they will coalesce so that they can be held together or will evolve in different ways when it would be sensible to hold them in different entities. Consider a single idea, mobility, which, by definition, spans multiple businesses. Or consider the number of new businesses that will emerge with the opening up of space to private sector investment. Is there one future or multiple futures?
This is a formidable forecasting challenge, but we must grasp it anew through a constellation of themes that combine technology evolution, maturing devices, legal inventions, investor sentiments and market behaviour. And regulation! Difficult to model but not difficult to think through, with one caveat: don’t fall prey to some abstract discussion of value.
Takeaways
Two kinds of holding companies have held sway
Staying within or separating is a function of many factors
Abstract discussions without understanding the underlying factor leads nowhere
Timing is of the essence
The question: is there one future or futures?
