Posted on February 10, 2009 - by musicwhiz

Corporate Complexity

Photo by kevindooley

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 ? Read more…

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