Why pasta plus tumble-driers equals a happy family

Recently we wrote a story about conglomerates, and why they have survived – especially in Asia – despite economists’ doubts about them. But there is another question: why do families want them in the first place? The first answer is: it stops family members demanding that businesses are sold.

Conglomerates are perplexing because they are sprawling, untidy entities. They seem to be getting more so. A McKinsey report found that between 2000 and 2010 Chinese and Indian conglomerates entered a new business sector every 18 months, and “nearly half of the companies favored businesses that were completely unrelated to the parent companies’ operations.”

This might seem odd, and some of these conglomerates do look out of control. The Turkish Koc family owns a pasta-maker, a tumble-drier manufacturer and several banks. Mexico’s Grupo Elektra, controlled by the Salinas family, is spread across finance and retail. India’s Reliance Industries, run by the Ambani family, stretches from convenience stores to oil refineries via radio stations.

That might seem crazy. But it depends on your point of view. Anglo-Americans often see a business as something to be built, then sold. But in emerging markets, where buyers are hard to come by and where stock markets are perhaps not so developed, liquidity events are not always an option.

Even if a family releases the money, they might not be able to invest it in a sufficiently diverse way. People still prefer to invest in their own countries, but emerging market economies tend to be dominated by a small number of industries.

The solution is to diversify the operating business itself. That way you get exposure to many sectors and geographies, and hopefully the family can live off profits and dividends. So a conglomerate is a tool for preserving wealth.

There is a second reason families want conglomerates: to give family members jobs. That’s not just about nepotism. Prof Kavil Ramachandran of the Indian School of Business recently told Family Capital: “There is always a shortage of talent in emerging markets. Family businesses give you access to resources, either technical or emotional, that you can’t find elsewhere.”

It is imperative not to lose family members’ valuable skills, and a broad, diverse business group should mean that everyone can find something to keep them happy. If that means bolting an app-development business on to an oil-drilling company, then so be it – that’s a price worth paying to keep the talent in the group.

A conglomerate is also a tool for keeping a family together.