{"id":20642,"date":"2011-10-14T13:06:20","date_gmt":"2011-10-14T11:06:20","guid":{"rendered":"http:\/\/beta.next-finance.net\/note\/listed-family-controlled-businesses-an-equity-investment-case\/"},"modified":"2019-12-30T22:18:36","modified_gmt":"2019-12-30T21:18:36","slug":"listed-family-controlled-businesses-an-equity-investment-case","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/note\/listed-family-controlled-businesses-an-equity-investment-case\/","title":{"rendered":"Listed family controlled businesses: an equity investment case"},"content":{"rendered":"

According to a recent INSEAD research, more than half of French listed companies have family shareholders. When talking about family owned businesses, one very often thinks about mom and pop\u2019s diner; it is counting without the international brands such as LVMH, Peugeot PSA, or even Microsoft. Recent events show how ferocious battles between these firms can be.<\/p>\n

In the first edition of Family Business Review, Lansberg, et Al. (1988) were trying to define what a family business was. Two main criteria emerged; family ownership and family involvement in management (Handler, 1989). A third criterion could be added but Smith & Amoako-Adu (1999) and P\u00e9rez-Gonzales (2001) showed that the existence of an appointed family heir could be interpreted as nepotism and might not be well regarded by the stock market. Another definition given by Sharma (1999) helps defining a family business as one that is \u201cgoverned and \/ or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by a family\u201d. This definition shows what makes a family business different from its counterparts; a controlling family (or more) and the willingness to transmit it to the next generation.<\/p>\n

More often than none, family businesses rely on a strong branding strategy (e.g.: LVMH, BMW, \u2026) and are facing problems that are specific to their peculiar structure and corporate governance. However they exhibit interesting features.<\/p>\n

– Use of anti-dilution safeguards to keep control<\/strong><\/p>\n

As the family tries to keep control over the firm, its members can not issue shares when in need of liquidity for that it would dilute the family stake and allow competitors to target them. Most family firms have agreements shaping the do\u2019s and don’ts among family members. These agreements very often regulate the exchange of securities held by family members; i.e.: when they can sell, to whom\u2026 These protective measures are indeed good anti-dilution systems.<\/p>\n

– Good resilience in the long run<\/strong><\/p>\n

Even though family conflicts such as siblings rivalry and power competition arise among potential family managers (Gomez-Mejia et Al., 2001), family feuds and other relationship issues are not mentioned as being potential troubles in the Pricewaterhouse Coopers survey[[\u00ab Kin in the game, PwC family Business Survey \u00bb – PwC \u2013 2010\/11]].<\/p>\n

\"CRV.png\"<\/p>\n

The chart above, representing two indices, shows that it is not by being fully diversified that one could achieve prosperity. It seems that the most resilient firms are family owned. The following chart shows that an equally weighted family-owned-businesses portfolio outperformed a global index (MSCI AC World); the index is composed of all the family owned businesses covered by the Soci\u00e9t\u00e9 G\u00e9n\u00e9rale Private Banking Equity Research Team regardless of their current recommendations. The data, taken from Bloomberg, were normalized with March 7, 2006 as base. On Oct. 3, 2011, the generated index showed a performance of 16.95% while the MSCI Index showed a performance of -3.32%.<\/p>\n

– Good vehicles to come back to markets<\/strong><\/p>\n

We notice that the chart encompasses two crises; the 2007 \u2013 2008 subprime crisis and the 2011 European and American sovereign debt crisis. In both cases, and because of uncertainties, we observe massive market sell-offs before coming back to a cautious stance very often characterized by a return to fundamentals and stock- picking. In both cases family-businesses, with their high corporate standards, are chosen as a safe way back on markets.<\/p>\n

– Very specific issues<\/strong><\/p>\n

The news echoed on the market as if \u201cbarbarians were at the gate\u201d[[B. Burrough and J. Helyar, Barbarians at the Gate, 1990. This book covers the Leverage Buy-Out (LBO) of RJR Nabisco by KKR (1988).This book was considered as one of the most influential business books of all time.]]; on October 23rd 2010, LVMH was in possession of 14% of Herm\u00e8s. Three days later, the stake reached 17.1%. It took two years for Bernard Arnault, CEO of LVMH, to become the largest single shareholder of the company; the majority stake being in the hands of three different families. Thanks to that operation, we can observe issues that are related to family businesses. The assets of a family are not always enough to sustain growth which very often leads to opening the company to investors via the market; the family loses some of its grip on the firm. Another issue comes from relationships in the said business; when feuds arise, the unhappy family member becomes a target for raiders, thus allowing a rampant acquisition.<\/p>\n

– How to implement a strategy based on family controlled businesses<\/strong><\/p>\n

The very first step is to to screen the universe based on commonly accepted criteria, then one must have a strong knwoledge on the ties that exist between these firms and their founding families. Of course, ultimately, one must proceed to classic firm’s fundamental analysis.