Asia's Tech Pioneers - Matthew Miau and the MiTAC-Synnex Group

In my research and investing I stress three things: people, structure, and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. 

This post is about people, namely Matthew Miau and the Miau family. It’s due to his pioneering and entrepreneurial efforts that Taiwan has become one of the world’s leading producers of high-technology products.

Surprisingly there’s very little written in English about the Miau family. In fact my introduction to him was through an investment in Istanbul listed Arena Bilgisayar Sanayi ve Ticaret SA (Arena). Arena is a subsidiary of Mumbai listed Redington India Ltd, whose largest shareholder is Taiwan listed Synnex Technology International Corp. All three are among the largest IT distributors in their respective regions.

US consumers and investors may have heard of their North American operation, Synnex Corporation, the third largest tech products distributor in North America as well as the second largest “CX’, or ‘customer experience’ company. It’s ranked 130 on the Fortune 500 list with sales of over USD23b in 2019 (see here). Synnex Coropration’s shares have been traded in the US since 2003.

While there’s not much written in English about them, the Miau family is well known in Taiwan. Group head Matthew Miau kindly wrote two autobiographies and there’s at least one other book on him and the group. Matthew’s father, and the clan’s patriarch, Miau Yu-Siou, was known in Taiwan as the ‘Flour King’. 

My Chinese is pretty bad so the very capable Cindy Wan (萬庭瑋) did the heavy lifting reading three books on the group. She also helped map their holdings and did extra work on the history of this very interesting business group and family. 

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Before TSMC^[1]  This article is the combination of Cindy’s research on Synnex-MiTAC group and the review of the three books she read about the group: Win-win Strategy— The Story of Miau Feng-Chiang’s Strategic Alliances^[2] (雙贏策略—苗豐強策略聯盟的故事), Chess Game Win-Win— Miau, Feng-Chiang’s Global Strategy (棋局雙贏—苗豐強的全球化策略) and MiTAC Inc—The Story of a Pioneer in Taiwan's Computer Industry (大顯神通—台灣電腦業開路先鋒的故事).  Yours truly added some additional insight and is responsible for any mistakes or inaccuracies herein. 

The books’ main focus is the origin and early development of Synnex-MiTAC Group, a Taiwan-based conglomerate, which represents the interests of the Miau Family. Gradually transforming into a technology-centric, albeit diversified group, the family’s initial company was a wheat milling and flour processing business. It was not until Matthew Miau started a business in the technology industry that the group expanded into technology. It is now one of the world’s largest distributors of technology products.

From Shandong flour to Silicon Valley high tech The group could just as easily be referred to as the Lien Hwa group. Lien Hwa was established by Matthew Miau’s father Miau Yu-Siou (苗育秀). Born in 1919 in Shandong^[3] he was involved in the flour and barley processing industry in Qingdao and Yantai before joining the 1949 KMT retreat from the Mainland at the end of China’s civil war. He founded Lien Hwa to mill flour and rice in 1951. It grew into one of Taiwan’s largest flour mills and today has a market share of over 20%. Yu-Siou actively promoted flour as a substitute carbohydrate to rice in Taiwan. By the time of his passing in 2004 he was locally known as, “The Father of Flour”, or “Flour King”. He was one of the prominent entrepreneurs in Taiwan’s early business circles and appears to have had a good relationship with the government which was extremely important during Taiwan’s long period under martial law (1949 to 1987)^[4].

Not all rich kids are playboys His father’s thriving flour business meant that Mathew Miau was born in a well-to-do family. This meant that he could study abroad – a luxury now but even more so in 1960's Taiwan. He went to high school in Hong Kong and later the University of California at Berkeley, where he graduated with a bachelor degree in electrical engineering. One of his first jobs was at Intel, which in 1971 was a small start up where he rubbed shoulders with tech legends such as Andy Grove and Gordon Moore. He later got an MBA from Santa Clara University.

Family calling Matthew moved back to Taiwan in 1976 to work for Union Petrochemical Corporation (UPC), in which family company Lien Hwa was a large investor.

Before leaving the US he asked for exclusive distribution rights for Intel microprocessors in Taiwan. However, these had already been awarded to MiTAC Inc, a start-up Taiwanese company founded by Hou Qing-Xiong (侯清雄) and Lee Chen-Ying (李振瀛), electrical engineering classmates at the island’s top university, National Taiwan University. The two had invested NTD50 thousand respectively and got another NTD1.9 million from a family friend of Hou Qing-Xiang who owned an animal feed milling plant.

Originally established to distribute computers and perform systems integration work, MiTAC started to sell Intel’s microprocessors in Taiwan in 1975. At the time it was just a tiny team with about 12 employees and a total capital of NTD2 million, struggling to survive in an era when few people knew about computers, let alone microprocessors.

Sensing a good opportunity, Matthew sold his Intel shares and along with family money, invested USD150,000 in the struggling MiTAC. He became its largest investor, assumed the role of Chairman and oversaw management and financial planning. Matthew came with a lot of skills and experience. He had cutting edge technical knowledge and hands-on experience and relationships from his days at Intel. He also had an international background and outlook and, through family connections, a good relationship with Taiwan government officials. The MiTAC founders specialized in senior roles. Hou Qing-Xiong was responsible for business development, human resources and training. Lee Chen-Ying, was in charge of marketing and sales.

Taiwan's pioneering tech company MiTAC is likely the very first computer company in Taiwan – or at least one of the few that survived and is still around to claim bragging rights to being the first. 

Like other startups, MiTAC did many things in its early days. It developed chips for various products such as washing machines, air conditioners and chemical factories. The company collaborated with Taiwan’s highway department to automate traffic systems and build highway display boards. It also made electronic systems for Taiwan’s growing agricultural industry. This included automating pig auctions and grain inventory. MiTAC computerized local consumer goods giant Uni-President’s payroll process and invented the world’s first Chinese computer interface, which was used by Taiwan’s tax, police and other government departments.

MiTAC continued to expand in the 1970s and 1980s before settling into three main business lines more-or-less organized into three companies. Systems Integration remained under MiTAC, computer manufacturing under MiTAC International and technology distribution under Synnex. 

Overcoming hardship The group didn't always have a smooth path. As Taiwan’s tech industry grew it lost several early managers and employees to a talent shortage which occurred in the early 1980s. Foreign technology companies poached some of MiTAC’s best employees. It was a great loss for the company at that time.

One way to overcome the talent shortage was to recruit outside managers, which the group started to do in the mid-1980s. But things didn’t work out as they expected. According to the book, 大顯神通—台灣電腦業開路先鋒的故事 (MiTAC Inc--The Story Of A Pioneer in Taiwan's Computer Industry), the new managers had little understanding of both the group’s culture and the personal computer market in Taiwan. They were also not ready to be the hands-on, roll-up-their-sleeves guys to get things done like Matthew Miau and the older managers. The incident led Matthew Miau to place more emphasis on keeping and promoting from within rather than recruiting from outside.

Another crisis the group encountered also occurred in the 1980s. It was the era when the video gaming industry was booming in Taiwan. One of MiTAC Inc’s subsidiaries, Synnex Technology International, a distributor of electronic components, was selling many of its products to electronic game manufacturers. Reports of teenage addiction and their use in gambling led to harsh criticism of the games, and they were banned in the early 1980's. As a result, many of their customers went out of business and Synnex's debt load skyrocketed. Fortunately, MiTAC Inc had already built a strong foundation and was able to help its subsidiary survive the crisis.

Structure The Synnex group has a large number of corporate entities. We counted over 400 companies, subsidiaries and associates in MiTAC-Synnex related firms.

In Taiwan the three main companies are Lien Hwa Holding, MiTAC Holding, and Synnex Tech International. The group’s original company, Lien Hwa Holding still mills flour and also oversees most of the group’s non-tech related businesses including petrochemicals and specialized industrial gases. But like virtually all companies in the group, it also has some tech businesses, which in Lien Hwa’s case includes its domestic system integration business. MiTAC Holding mostly holds the group’s manufacturing businesses including computers, fasteners, magnesium alloy and other technology products. Synnex Tech International is its holding company for the group’s vast electronic components distribution business. It has subsidiaries in India, the Middle East, Turkey and South-East Asia. 

Outside of Taiwan the group’s key asset is it’s 10.2% stake in Synnex Corporation, which is its largest company by market capitalisation and revenue. At the end of June 2020 it’s USD5.8b accounted for 43.3% of the group’s total market capitalisation^[5], and its USD24b in revenue last year made it the 130^th largest company on the Fortune 500 list of the largest companies in the United States (see here). Synnex Corporation has two key businesses which, as this is being written, are due to be separated. Its electronics distribution business covers the parts of the world that its Taiwan-listed subsidiary does not: the Americas, Europe, Japan and South Korea. Its customer experience / digital services business is under Concentrix. 

Complex in Taiwan. Simple outside Although not highlighted in the books Cindy read, she found that Synnex’s Taiwan entities appear to have a complex holding structure, particularly in the ownership and cross shareholdings of its eight Taiwan listed entities (see ownership structure below). 

There are also many instances where we were unable to determine ultimate control of certain companies. The paper trail from our cursory research effort went dead. There is also substantial overlap among group companies with several engaged in the same business, albeit in different locations.

This contrasts with the relatively straightforward structure of its overseas subsidiaries and associates. As seen below, Synnex invested Redington's corporate structure is relatively straight forward (from their website. See here).

Mr. JV. Taiwan’s local press many times refers to Matthew Miau as “Mr. Joint-Venture”, or “JV King” as many companies were acquired or started as JV’s. He believed that multinational strategic alliances embodied his idea of “make full use of limited resources and do unlimited business.”^[6] For example, Synnex Tech International was established as a joint venture in 1988 between MiTAC group and Lex Services, a UK company that began life as an automobile factory, eventually becoming one of the largest distributors of electronic components and computer systems in Europe. The predecessor of Linde LienHwa, BOC Lien Hwa Industrial Co., Ltd., was founded in 1985 as a joint venture between Lien Hwa Industrial Corporation and UK's BOC Group Plc., one of the world’s largest industrial gas suppliers. GeTac Technology Corporation was established as a joint-venture between the group and GE Aerospace (50%-50%).

This pattern continues into the 2000's. Between 2001 and 2018, the US-listed Synnex Corporation made 23 acquisitions of companies outside of the group. 

 

Book Recommendation

According to Cindy, the two books written by Matthew Miau are fairly similar. They illustrate how Mathew Miao led the conglomerate to grow from a scrappy, local personal computer manufacturer and software developer, to a global electronic component distribution and technology powerhouse.

Despite being written 17 and 22 years ago, the two autobiographies provide lots of details that are germane to the group’s history. They also give a personal viewpoint of the inception and growth of Taiwan’s very successful and world-leading technology industry. Taiwan and its nascent technology industry were very different in the 1970's and 1980''s when there was no Internet or smartphones. 

His autobiographies also allow readers to have a better understanding of how Mr. Miao guided the group’s growth. Like other autobiographies, it’s more than likely biased toward the positives. However, Cindy feels they are still worth reading to get a better idea of how the companies within the group evolved.

The third book, MiTAC Inc--The Story of a Pioneer in Taiwan's Computer Industry, (大顯神通—台灣電腦業開路先鋒的故事), was written by Tan Zhong-Min (譚仲民) in 1995. Mr. Tan was a Commercial Times^[7] reporter who focused on the information technology industry. Cindy thinks it makes a good complement to Mr. Miau’s two autobiographies. She believes it’s more objective and unveils the story of several important founding members of Synnex in addition to Mr. Miau. 

Some of them are still key people within the group, such as Su Liang (蘇亮), Du Shu-Wu (杜書伍) and Francis Tsai Feng-Tsu (蔡豐賜), who all graduated at the same time from Chaio Tung University's computer engineering class. Su Liang was especially good at programming in the early days and currently holds several senior positions in group companies including the Chairmanship of MITAC Information Technology Group. Du Shu-Wu mainly took charge of the electronic component’s distribution segment. He’s now the President of Synnex Technology International Corporation, and holds other board and senior positions in group companies. Francis Tsai was in charge of the operation of MiTAC International and now holds several senior titles in the group including Chairman of Waffer Technology Corp.

Of the three books Cindy prefers the later autobiography and the more objective group history by Mr. Tan, the Commercial Times reporter. She thinks together they provide thorough insight into the conglomerate from both an inside and outside point of view.

Many thanks to Mr. Miau for sharing his life story and also to Mr. Tan for writing about the group. Most of all thanks to Cindy Wan for her thorough research and insight into a surprisingly complicated corporate structure.

Book List:

     Win-win Strategy— The Story of Miau, Feng-Chiang’s Strategic Alliances (雙贏策略—苗豐強策略聯盟的故事), by Matthew Miau, published by Commonwealth Publishing Co. Ltd in 1997

-   Chess Game Win-Win— Miau, Feng-Chiang’s Global Strategy (棋局雙贏—苗豐強的全球化策略), by Matthew Miau, published by Commonwealth Publishing Co. Ltd in 2002.

-    MiTAC Inc--The Story of a Pioneer in Taiwan's Computer Industry (大顯神通—台灣電腦業開路先鋒的故事), Tan Zhong-Min (譚仲民), published by Business Weekly in 1995.

 

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^[1] TSMC is short for Taiwan Semiconductor Manufacturing Company. Listed in Taiwan with ADRs traded in the United States, it is one of the largest companies in Taiwan and one of the world’s largest manufacturers of integrated circuits and semiconductors. It was founded in 1987 by another technology pioneer, Morris Chang Chung Mou (張忠謀). Its importance and size is underscored by its almost 24% weighting in the largest Taiwan ETF (EWT, iShares MSCI Taiwan Index). This is more than four times larger than its next largest constituent (Hon Hai Precision Industry, 5.2%).

^[2] Only Chinese editions of all these books are available. English translation of the titles by Cindy Wan.

^[3] An interesting side note in early Taiwan business circles, is the ‘Shandong Gang’. The gang bundles together several leading Shandong-born businessmen. In addition to Miao Yu-Siou, other people commonly grouped in this ‘gang’ include the chairman of Ruentex Group, Samuel Yin Yen-Liang (尹衍樑)’s father, Yin Shu-Tian(尹書田), the founder of Liu Huo (六和) textile group, Zong Ren-Qing (宗仁卿), the founder of DaChan (大成) group, Han Hao-Ran (韓浩然) and the founder of Baolong (寶隆) International Corp, Zhao Chang-Shu (趙常恕).

^[4] Taiwan’s 38 years under martial law was one of the longest in modern history. According to a Wikipedia entry only Syria’s was longer at 44 years (1967-2011). (see here)

^[5] Market capitalization values a company based on the current price of its stock. It is a company’s total number of outstanding shares multiplied by the current share price. It’s usually what comprises the biggest component of rich individuals’ net worth.

^[6] MiTAC Inc—The Story of a Pioneer in Taiwan's Computer Industry (大顯神通—台灣電腦業開路先鋒的故事),It is also appears on MiTAC Synnex Group’s website (see here)

^[7] Commercial Times one of Taiwan’s leading business media companies (see here)

Book Review: Critical Generations – Out of the Succession Dilemma of Chinese Family Businesses (关键世代：走出华人家族企业传承之困) by Prof. Joseph P. H. Fan

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below intrinsic levels if not outright cheap.

Academia is one of my favorite sources for information on corporate leaders and business structures.  There are a handful of academics in various business sub-disciplines that look at corporate structure, and objectively research leaders' backgrounds and relationships.  While most write for entrepreneurs and a public policy audience, many times their studies contain helpful information for investors.

Professor Joseph Fan who works at the Chinese University of Hong Kong is one such expert.  Individually and with others he has authored and published many studies and articles on what works and does not for family owned businesses in Hong Kong, Taiwan, Mainland China and other Asian countries. (Prof. Fan's research and personal homepage is here).

This book – like many of his other studies – is geared more toward helping entrepreneurs and wealthy families structure with their succession plans.  Intergenerational gaps many times lead to failing businesses, broken extended families and sometimes both.

While investors are not the target audience Critical Generations does contain some interesting observations:

• Many companies listed in greater China are still led by the founder. In many instances the founder is quite old and close to retirement age. The next ten years will see a lot of changes in corporate leadership as their founders and key builders step down (at least the ten years after the book’s 2012 publish date).

• Share prices decrease in anticipation of the founder leaving the company.  In a study that looked at 250 family-owned companies listed betweeen 1980 to 2000 in Hong Kong, Taiwan and Singapore, Prof. Fan found that share prices decreased over 50% in the five years before the founder retired.

• The transition does not mark the end of share price fall.  In the five years before and three years after the succession, the market value of 200 family owned listcos in Hong Kong, Singapore and Taiwan went down by 60% on average. In other words, if an investor bought shares valued at $100 five years before the succession, the value of their shares would be reduced to an average of $40 three years after the succession.  Hong Kong companies dropped the most losing some 80% on average with Taiwan and Singapore family owned companies falling about 40% and 20% respectively.

• Founders bring intangible benefits. Owing to their personal attributes such as creativity, leadership style, craftsmanship, and personal connections with company stakeholders, the founder is a major ‘intangible’ asset and many times the essential asset.  Think of Li Ka-Shing and Steve Jobs Prof. Fan writes.  The book goes on to note that rarely does the company do better under the second generation than it did under the founder.

• Market notices the passing of founder.  Not all successions result in a decline in market value. In some cases, the passing or a rumor circulating around the poor health of the leader leads to positive market response.  A year after the Hong Kong industrialist Lim Por Yen passed away in 2005, share price of his Lai Sun group companies increased by some 50%. (For a more recent example, Sincere’s shares increased by 40% after its founder’s death – see article here).

• Political connections hurt in China.  In another study Prof. Fan tracked the post-IPO performance of 630 state-owned Chinese enterprises.  He found that firms with politically connected CEOs (i.e. CEOs who are current or former government officials) on average exhibited a 40% loss on market-adjusted stock returns over the three-years subsequent to their IPOs, while those without politically connected CEOs deteriorated by just 10%.

• In contrast government connections can help in Thailand.  Prof. Fan’s study on prestigious Thai-Chinese families reveals that a marriage between the offspring of government officials and business leaders led to a 4% increase in the family firm’s market value. Contrastingly marriage to ordinary families contributed nothing to the share price.

• Trust-held companies trade at lower valuations. Fan’s research finds that among 216 family owned listcos in Hong Kong, one-third are controlled by trusts, but the performance of these companies is no better than those that are directly controlled by family members.  Financial performance of businesses that are controlled by trusts tend to be worse off when family members have a dispute.
• During the financial crisis the price-to-book value of businesses held directly by family members fell to 0.97 while for businesses controlled by trusts the ratio fell to 0.87.
• Companies controlled by trusts are more reluctant to invest on improving business efficiency, and have slower growth rate in the number of employees and sales.
• Family owned companies controlled by the trust structure tend to distribute more dividends. 

• More firms to use capital markets to spread wealth.  If greater China entrepreneurs take Professor Fan’s advice, there should be a lot more public companies. He wrote that a stock market listing is a good way to distribute ownership to family members. 

The above bullet points account for a small part of the book.  The bulk of it provides research, insights and tools families can use to improve their structure and, with luck and foresight, the firm’s transition to the next generation.

Note that the book was originally written in Chinese, although several of Prof. Fan’s studies have been published in English.  My very capable assistant JC Ho read and summarized the Chinese version from which this blog post is based.

Critical Generations can be ordered from the Chinese University of Hong Kong (link is here)

Prof. Fan’s new book The Family Business Map: Assets and Roadblocks in Long Term Planning is in English and is due to be published toward the end of October 2014 (link here).

Why the US Does Not Have Business Groups

My favorite research projects are analyzing and writing about business conglomerates in Asia.  For me it is an easy way to quickly come-up to speed on a country's key people, capital allocation structure, and power chain.  After completing the reports I feel I know who is actually in control, their background and their relationships with important business and government personalities and entities.  I also get a sense of the who the good groups are and who the not-so-good groups are.  So far I've mostly been correct (see a case study type write-up here).


In the past several years I've been investing my own money using much of the same research methodology I used in writing the reports. The best example is my trip to Greece last year.  Other investments closer to home and based on recent reports have also done well.

So far I've been content doing my bottom-up research and have not really looked into why Asia and the rest of the world's corporations are organized differently than companies in the US and the UK.  The few US and UK companies I've looked at have a very flat corporate structure, and I've been told that neither country has business groups. 

However virtually all of my analysis and investment experience has been outside the US and UK, and the group structure is my base case when looking at companies.  Because of this, my research and investment methodology doesn't really fit with the US and UK's flat corporate structure.

I've always been a bit curious as to why the US and UK are different than the rest of the world.  But like a myopic-race-horse-with-blinders, I've accepted the structure for what it is and concentrated on trying to make good investments and recommendations.  

Thanks to to UC Berkeley PhD candidate Matthew Sargent for turning me onto the very well written, but long-titled, "How To Eliminate Pyramidal Business Groups - The Double Taxation of Inter-Corporate Dividends and Other Incisive Uses of Tax Policy". 

Written by Dr. Randall Morck in 2004, the paper states that a key reason that US corporations do not have the pyramidal business group structure is due to the 1935 imposition of inter-corporate taxes.

Apparently after the 1929 US stock market crash many business groups defaulted on their loans, and the public blamed the large conglomerates for causing the crash and subsequent depression. It sounds like this gave President Roosevelt's administration enough political capital to change how America's corporate sector is taxed and, by extension, organised.

The new tax regulations made dividend payments from a company to all the entities that owned it subject to taxes.  Each layer is subject to pay taxes on the dividends it receives from companies that it has a stake in.  If a conglomerate has many layers, each layer is subject to tax charges.  This makes each additional layer very expensive. This creates a  tax penalty on the pyramidal structure of business groups.  

America's utilities were given special attention.  The Public Utilities Holding Company Act (PUHCA), also passed in 1935, subjected utilities to US federal regulation and did not allow an owner with more than two corporate levels to hold any public utility.

After the two new rules were implemented, the group structure that was so prevalent in the US, was quickly broken up.  According to the paper, stock liquidations surged in 1936.   America has had a flat business structure ever since.

The paper attributes the UK's flat business structure to pressure from British institutional investors who were 'dismayed over corporate governance problems in business groups'.  As a result, the London Stock Exchange Takeover Rule was issued in 1968.  The rule said that any acquisition greater than 30% of a listco needed to be at least a 100% acquisition.  This forced the parent company of a listco to own all 100% of its subsidiaries or less than 30%. 

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What I found very interesting is that the pyramidal business group structure that I'm used to was very common in the United States.

They were so common, that in 1928 the US Federal Trade Commission wrote a report on the abusive nature of business groups.  The report found the same transgressions of business groups that I focus on when investigating corporate structures.  Morck notes that the 1928 report on US business groups said that US conglomerates had '...widespread instances of tunneling, poor governance, and monopolistic practices'.

Other government reports in the 1930s noted that many groups transferred profits between entities to avoid taxes.  "Listed companies in a business group could trade with, finance or insure each other at artificial prices, transferring taxable income from companies with few deductions to companies with many".

In other words, many business groups were ripping off the government as well as minority shareholders.  

This is very similar to what I've seen amongst many, but certainly not all, business conglomerates that I've researched. 

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This is a great paper, and I sincerely appreciate Matt for bringing it to my attention

But most of the thanks and appreciation goes to the author, Dr. Randall Morck, for researching and writing it.

Asian Conglomerates As PE Replacements?

I've heard from several sources that returns from private equity (PE) funds investing in Asia, and their fund-of-funds equivalents, have had poor returns.

At the same time, many family owned and controlled conglomerates in Asia are criticized for 'asset-trading', which sounds like PE-type investment strategy.

My question is the following: what if one viewed, invested and valued Asian conglomerates like a PE alternative rather than an operating company?

This would involve not just looking at current business lines but also the conglomerate's investment track record.  Instead of evaluating the CEO/Chairman as an operator, perhaps look at the group's long-term investment returns and prospects, and how much of this is distributed to minority investors.  As compared with PE investments investors in listed companies have a timing advantage and an information advantage as the investor can buy when shares overshoot on the downside (late 1998/early 1999), and company insiders need to disclose when they buy and sell shares. 

Conglomerates retain optionality. A key advantage for conglomerates is retaining the option of when to sell. Unlike PE funds, conglomerates are not subject to exiting their investments in a predetermined time period, which is typically 7-10 years for PE funds.

Thus the PE fund is giving up the option to hold its investments past the life of the fund. To raise the next fund, there is a powerful incentive for managers to realize capital gains quickly rather than holding on for a higher value.  Forced, or pressured selling, is not a very good way to get top dollar.  (This is not my thinking but rather from reading a study on the subject as part of the CAIA program.  But logically this makes sense).

Asian markets tend to be more volatile than those in the US so putting a time-frame on selling could lead to additional diminished returns for Asian PE investors.

Options have value and PE fund managers are under pressure - internally and externally - to give up this option.

People like Li Ka-shing and his Cheung Kong Holdings, as well as many other family-run conglomerates, have done very well by retaining and acting on this 'option' at the right time.  (It has also been written that Li Ka-shing very rarely losses money when he buys shares in companies he controls.  I suspect, but don't know, that this is the case for similar insiders).   

Operating Knowledge.  Another advantage is inside operating knowledge.  Most Asian conglomerates focus on one or two key business lines with a healthy dose of property somewhere in the mix.  This likely means they have insiders' knowledge when investing in a competing or complimentary business. This may give them an advantage over a PE fund which are more than likely more interested in the financial returns only rather than strategic, longer-term returns.

This can be is different then Silicon Valley and the US where many funds are started by ex-entrepreneurs and/or businessmen.  In Asia, most PE funds are started and staffed by bankers and financial types, rather than operators.  This puts them at a disadvantage in many instances.  Conglomerates thus may have an edge in buying and building businesses.

There are a lot of risks to investing in Asia-based conglomerates.  Taking money out of the listco via negative transfer pricing; long-term operational pump-and-dumps; selling and buying assets from the parent; valuation difficulties from multiple business lines, lack of business line concentration, replication of fund manager's diversification, etc.

But at the same time, there could be several unrecognized - and therefore likely undervalued - embedded options in the conglomerate that investors can ultimately benefit from. 

CAIA - Smart Moves Submission

Smart Moves – Dec 2011

Michael McGaughy, CAIA, has had his new book published.  Called Inside China’s Corporations, it maps and explains the corporate structure and control of China and Hong Kong’s conglomerates - both family and government-owned.  It highlights their key people, structure, and business lines at both the parent and listco levels.   The role of China’s communist party in corporate control is explained through both bottom-up and top-down charts and examples. All HK, Shanghai and Shenzhen listed entities over US$2bn in market capitalization are mapped to their parent group. (Sample pages can be seen at (http://www.asianom.com/samples/index.html). It can be purchased direct form the publisher Amazon, or IND-X Securities where it can be paid for through brokerage commissions. 

The book follows several other similar reports he has written on ASEAN, Indonesian and Malaysian conglomerates and prominent business families.

Said Michael, “The CAIA program rounded out my fundamental buy- and sell-side analysis and manager selection background.  Having been based in Asia for most of my career it was particularly useful to understand new products and investment styles that are new to the region and many times not here yet.  The designation and networking opportunities at local chapter events has expanded my network and has altered my way of looking at investments and investing. “

Michael McGaughy, CAIA, consults to asset allocators, funds and research organizations on manager and product selection, marketing and fundamental equity, ETF and index analysis, through his company Kairo, Ltd.  An award winning analyst, Michael has a diverse financial background spanning buy- and sell-side equity research, private-equity fund management, fund- of-hedge funds management, business development and investor relations. He first came to Asia as an exchange student in 1985 and has been involved with the region ever since, having lived and worked in Beijing, Hong Kong, and Singapore, for different companies including HSBC, the old Crosby Group and StoneWater Capital.  He earned a bachelor’s degree in economics from the University of Vermont.  He has been a CAIA member since November 2010 and currently sits on the Hong Kong chapter’s executive committee.