Keeping It In the Family: Even though Isia has the largest economy in ASEAN, it remains a small stock market; Family-owned businesses are avoiding equity offerings to the public because they can raise money by borrowing from banks

Keeping It In the Family

By Dominic G. Diongson, Vanesha Manuturi and Dion Bisara on 09:02 pm Jun 10, 2014


A worker shorts Sido Muncul’s best seller herbal remedy Tolak Angin. (JG Photo/Dhana Kencana)

Some family-owned businesses are avoiding equity offerings to the public because they can raise money by borrowing from banks. They also don’t want to cede control or dilute ownership, because they believe that everything should remain in family hands.

In their journey to expand and develop, why do some family-run firms choose banks and loans over an initial public offering? Globe Asia examine the various factors at play.

Even though Indonesia has the largest economy in Southeast Asia, it remains a small stock market relative to other nations across the region.

Some of Indonesia’s biggest family-run businesses that trade on the local stock exchange include Indofood Sukses Makmur, the world’s biggest instant noodle maker, which is controlled by the Salim family.

The Salims have also been successful in expanding outside Indonesia – they also control businesses through the Hong Kong-listed investment management and holding company First Pacific, which has interests in Philippine property and telecommunications firms.

Yet few family-run businesses have gone through the listing process on the Indonesia Stock Exchange (IDX) in the past year to raise capital to fund future operations. Some family-owned businesses are avoiding equity offerings to the public because they can raise money by borrowing from banks. They also don’t want to cede control or dilute ownership in their companies, because they believe that everything should remain in family hands.

A professional face
“Generally speaking there are several factors that drive a company to list their shares at the stock market,” said Nurhaida, a commissioner at the Financial Services Authority (OJK).

One factor is the need to fund business expansion. The company is eager to expand its business but is hampered by limited funds or sources of funds. Therefore the company conducts an IPO.

“Another factor is that (the owners) want the company to be properly and professionally managed. A listed company is supervised by many: the regulators; the stakeholders such as public shareholders, partners, creditors. Management usually manages the company carefully, aware of many eyes that scrutinize them,” she said.

“So why are so many companies not listed? The answer is they are yet to require additional funds for expansion, or have not realized the importance of accountable management by professionals.”

Among those families that made the decision to go public recently was Irwan Hidayat and his family, who sold a minority stake in traditional herbal medicine maker Industri Jamu dan Farmasi Sido Muncul. The Semarang-based company went public in December and raised Rp870 billion ($74 million) from its initial public offering. It plans to use part of the proceeds to build a raw-materials factory at an estimated cost of Rp365.4 billion. Yet, after the IPO, the family still owns 90% of the shares in Sido Muncul.

“They (families) still have the funds without needing to go public,” said Destry Damayanti, chief economist at Bank Mandiri. “Also, if they are listed, there is a sharing of power with the public. From the management side, the business also tends to circle around the family members. Sooner or later, they must (list). They will need more funds when their business expands.”

Some family-run businesses have no plans to go public even if a listing would attract more investors and provide further financing for expansion plans. Aksa Mahmud said in an interview earlier this year that his oldest son Erwin Aksa was pushing for the family business, Bosowa Group, to sell shares in cement maker Semen Bosowa Maros to the public and list on the exchange.

But the family patriarch resisted the urge to go public, saying that the company could rely on funds via commercial loans, without having to reduce its ownership stake.

“I told Erwin not to do it,” Aksa Mahmud said.

“It is better to do business in conventional ways for the time being. If we need financing, we can always go to the banks. I don’t want to fall into the trap in the capital markets. When one is getting used to getting financing from the capital markets, it will be so easy to put your company’s shares as collateral for some money, just like some have done. Then, you will have your ownership diluted.

“It is OK for our smaller business like Bank QNB, but not for Bosowa Maros,” he said, referring to Bank QNB Kesawan, in which Bosowa owns a 20.12% stake. “For bonds, it is OK for our securities company like Bosowa Sekuritas, but not for our cement company. Erwin is still very young, he needs to be careful for now about bringing the company into the capital markets.”
Erwin is also chief executive at Bosowa Corporindo, the holding company of the conglomerate.

More parties to answer to
Families who do decide to list their companies on the exchange find themselves at the scrutiny of smaller stakeholders, who may want a bigger return on their investments such as larger dividend payments or have a say in the way business is conducted.

Some families have to turn over their businesses once they face problems as a publicly traded company.

The Soeryadjaya family used to control Astra International, but lost control of it when they had to rescue Bank Summa, run by Edward Soerjadjaya, which had bet too heavily on real estate that turned out to be overpriced.

After a series of changes in ownership, in 2000 a 38.4% stake was sold for $310 million to a group of investors led by a unit of the Jardine Matheson Group – a rock-bottom price in the aftermath of the 1997-98 financial crisis that pushed the rupiah to a record low against the US dollar and plunged many Indonesian companies into debt.

Astra, which started out in the 1940s selling fruit juices and groceries, is now one of the country’s biggest companies with interests that span from automobile distribution to palm oil plantations.

“There are different dynamics in a family business. By going public, family businesses would need to consider the interests of more parties, not just the family. The business would also need to comply with certain requirements when going public, such as providing audited financial reports,” said Arandi Nugraha, an analyst from Batavia Prosperindo Sekuritas.

“I think most family businesses find that entering the exchange is more loss than gain, comparing the money they will earn to the cost of meeting the requirements to go public. For example, when a company becomes listed, shareholders will have expectations of their return on investment. With bank loans, family businesses know exactly what to expect.”

Still, more family-run businesses are likely to become publicly traded companies due to the premise that compensation packages as a listed firm could attract more talent, particularly on the executive level, and that could lead to a better-managed firm.

As publicly traded companies, family-run businesses would be able to transform themselves into more professional organizations.

In Asia, some of the biggest publicly traded companies are run by families. In Hong Kong, property developer Hutchison Whampoa is controlled by billionaire Li Ka Shing. Philippine conglomerate Ayala Corporation is controlled by the Zobel family. Singapore-listed Thai Beverage, which makes and sells Chang beer, is controlled by Thai tycoon Charoen Sirivadhanabhakdi.

Even Thailand’s monarchy, led by King Bhumibol Adulyadej, has interests in some of that nation’s largest companies: Siam Commercial Bank and building materials and petrochemicals maker Siam Cement.

As companies expanded, so did the need for executives to manage their businesses.

“Across Asia we see a lot of family businesses, some listed, but many are not. That was also true in Europe and North America some time ago, and I think it is just a reflection of the special set-up,” said Hans Paul Burkner, global chairman of the Boston Consulting Group in an interview in Jakarta.

“Over time we will see more and more of them listing, or listing part of their companies. The current condition reflects the strong coalition of family businesses rather than a weakness. I think over time we’ll see the family business professionalizing – adopting better transparency in terms of information management, and professionalizing in creating outside manager succession training.”

With additional reporting by Muhamad Al Azhari

The article was first published in Globe Asia’s June 2014 edition


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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