If you think of the word ‘conglomerate’, you might picture the mustachioed corporate robber barons of the late 19th century or 1960s giants like Gulf and Western and Ling-Temco-Vought. These multi-industry models may be outmoded, but diversification can still bring many benefits.
As Forbes points out, many of North America’s most successful companies have multiple lines of business that have little in common (think of Amazon’s online consumer goods and cloud computing arms). It’s also true that conglomerates continue to thrive in many forms around the world, especially in emerging economies.
The merger of seven IT companies in 1999, with a focus on IT solutions, internet connectivity, and distributing and selling consumer electronics, formed one such company: Raya Holding. Over the years, Raya has diversified both geographically and into new sectors. By 2020 the company had 13 lines of business, including food, manufacturing, smart buildings, and payments.
But what are the benefits of a diversified conglomerate structure that allowed Raya to thrive? And how does diversification (in terms of lines of business and geography) work for companies in emerging markets?
Raya built its diversified conglomerate structure quickly, but incrementally. In 2002, the company expanded outside its original remit with the purchase of a contact center. After going public on the Egyptian Stock Exchange in 2005, the company carried out a corporate restructuring that formed three lines of business (IT services, contact center, and retail and distribution) into separate businesses, each reporting to the parent company. The next major advancement in Raya’s growth came in 2011, with a multi-sectoral expansion into plastics recycling, transportation, fast-moving consumer goods, manufacturing, financial technology, and restaurants.
Raya co-founder and former CEO Medhat Khalil instilled a strong entrepreneurial culture in the business, which meant each business line developed independently and distinctly. While the holding company provided advisory HR, legal, and business support, the CEOs were given a high level of control over talent recruitment, bonuses, and compensation for employees, with compensation closely tied to the success of the business. Because of this freedom, each one had different practices around staff management and culture, ranging from hierarchical top-down leadership to startup approaches.
Raya has found success by establishing a strong presence in the Egyptian market through a diversified spread of businesses. But conglomerates draw markedly different assessments in markets around the world. The question is: Why?
Many conglomerates in the US and Europe died out in the early 1980s, as they struggled to offer the same value to shareholders as that found in more streamlined businesses. In the past few years, some of the US’s last few remaining conglomerates, including Kellogg’s, General Electric, and Johnson & Johnson, announced that they would break off parts of their businesses. The reasons behind this were diverse, but there is a general perception in the US that conglomerates are worth less than the sum of the individual businesses within them, which would perform better as individual, streamlined companies – a phenomenon known as conglomerate discount.
However, this narrative is found in few other markets. South Korea’s chaebols (family-run conglomerates such as Samsung and Hyundai) are still dominant in the country’s business landscape, with the 10 largest family-run conglomerates jointly accounting for 60% of South Korea’s GDP in 2021. Another example of a thriving conglomerate market is India, where the “big five” – Reliance Group, Adani Group, Tata Group, Aditya Birla Group, and Bharti Airtel – have seen their market share grow over the past decade.
Raya’s conglomerate structure delivered consistent growth, with revenue reaching $535m by 2020. This was especially striking given that, during this period, the conglomerate had weathered both political upheaval and economic instability. In 2011, when the Egyptian revolution upended both the political order and the economy, Raya was undergoing a major expansion, adding several new lines, including Raya Restaurants. This business would grow to encompass three restaurant chains, bringing in E£60m by 2020 under the leadership of Ahmed Khalil, Medhat’s son and future Raya CEO.
Khalil felt that the conglomerate structure was important in developing economies such as Egypt, enabling businesses to move talent around between business lines to concentrate growth in areas of opportunity as they arise.
Raya’s diverse business structure also helped weather instability in its home market and provided a springboard for international expansion. By 2003, Raya had established Raya Gulf, Raya Saudi, Raya USA, and Raya Algeria. Raya’s strong base in Egypt and the lessons it had learned from doing business there enabled this expansion. International expansion also provided a more stable base for Raya’s business by reducing its exposure to political events in its domestic market.
A good example of these opportunities is Raya Foods. This line of business manufactures foods for the local Egyptian market, as well as exporting. Raya Foods also taps into its local expertise to provide sales and distribution support for international brands including Nestlé and PepsiCo in Egypt. As an additional branch of diversification, Raya Foods owns a 20% stake in Polish pasta manufacturer Makarony Polskie.
“Raya Holding’s quarter-century success highlights that diversified business models are effective, especially in emerging markets.”- Niccolò Pisani
Countries in markets with weaker currencies can also use this to their advantage, as it makes them a much more attractive supplier to overseas businesses. Raya has engaged with suppliers internationally, notably in 2018 when it signed an agreement with Piaggio, a leader in the scooters and motorcycles segment, to manufacture light transport equipment for the Egyptian market.
While the conglomerate model may be outmoded in some parts of the world, Raya’s example shows it can still pay dividends when paired with an open and entrepreneurial mindset.
To follow Raya’s example and make the most of opportunities for diversification, businesses should follow these pointers:
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