Driven by a low interest rate environment, ample liquidity from the oil boom and a continuous search for growth, many family owned corporations in the Middle East, suddenly found their structure transformed into that of a large conglomerate.

Whilst a conglomerate structure has the seeming appeal of diversifying sector concentration risk and mitigating cyclical trends at a group level, the reality is that in many such enterprises a handful of star divisions fund inefficiencies and losses of the underperforming ones in the conglomerate.

Typically, the group value of the conglomerate may be substantially lower than the sum of its parts.  In this article, we examine ways in which inherent trapped value can be released for shareholders and the group.

Key reasons why the conglomerate may be valued as less than the sum of its parts may include the increased overhead and inefficiencies within group monitoring, longer lead times for decision making, and group funding of subsidiaries that may not match the profile of the individual businesses thus creating financial and operating strains.

This can reduce the group value in some cases by as much as 20-30% relative to the sum of its parts.

How to release value in family conglomerates

All too often, a conglomerate structure is rarely deliberate with family businesses typically starting off with core legacy assets and then seeking geographical expansion, growth through acquisitions and different types of product and service offerings relevant to the economic cycle of the time.

Key towards reaching an optimized structure is determining the core competencies of the corresponding subsidiaries, the market value on a standalone basis, and the overhead costs associated with the group management of them.  

So, what are the options?

  1. Divesting non-core businesses. There are a few options to consider
    • Trade Sale – selling a non-core asset to an acquirer whose core business it is would more likely realise enhanced value for the business.
    • Management Buy Out – Quite often, selling a non-core subsidiary to the existing management team (part funded by debt or vendor loans) has a significant performance enhancing effect on the business which in turn creates significant value for both the conglomerate and management team over a number of years of profit earnout.  For more on management buy-out click here.
  2. Merging assets and divisions operating in the same or complementary sectors to benefit from economies of scale, to remove any excessive overhead layers.
  3. Spinning-off cost centers – and turning them into shared service centers. Rather than having a sole in-house focus, and depending on the sensitivity of the task at hand, specialist support centers may be spun off as independent, with a service agreement to the conglomerate, which in turn, expands its business to providing services to third party clients and becoming profit centers in their own right.




George Traub

Managing Partner | Lumina Advisers

George is a senior banker, finance professional and entrepreneur who has enjoyed a global career as a Managing Director, a CEO and a Partner at multinational investment banks, global advisory firms and regional financial institutions.

Having spent a substantial part of his career and personal life living and working in diverse geographies, he has a proven ability to lead culturally and geographically diverse teams across borders, markets and products to deliver exceptional performance. His professional career spans 10 years in London, 5 years in South Korea and 8 years in the Middle East.

Jessica Estefane, CFA

Director | Lumina Advisers

Jessica has been working with the firm for the last 3 years playing an integral role in closing a number of deals in the Education, Healthcare and Food and Beverage sectors, before joining full-time in October 2016. Jessica continues to play a vital role on all key mandates in the Transaction Advisory and Funding Solutions divisions.

Jessica is an experienced transaction advisory professional with 10 years of experience in the UAE. A former sell side Equity Research analyst with SHUAA Capital, Jessica ranked among the top analysts in the Middle East region for equity research in the telecommunication, energy and utilities sectors for four consecutive years by Euromoney Middle East until 2012.