Can keeping it in the family offer value for investors?
A family business can have significant advantages over its rivals, says Jenne Mannion
Saturday 12 June 2004
You can choose your friends, but you can't choose your family. History shows, however, that it pays to be choosy when investing in companies that have large family involvement.
You can choose your friends, but you can't choose your family. History shows, however, that it pays to be choosy when investing in companies that have large family involvement.
There are plenty of companies listed on the London Stock Exchange where the founding families own a big number of shares and are still involved in the management. One of the best known UK family-owned and operated businesses is French Connection, the successful high street clothing retailer. The company was founded by Stephen Marks, who continues to manage the business and owns more than half of the shares.
Other obvious names include Robert Wiseman Dairies; Fuller, Smith & Turner, the pub and brewing company; the drinks manufacturer AG Barr; and the furniture company DFS. Sainsbury's is another well-known example of a firm where the founding family retains a large shareholding, although it stepped back from the day-to-day management of the business more than a decade ago.
Stephen Ford, a stockbroker at Brewin Dolphin Securities in London, says there are good and bad family-run businesses. While he generally likes such a structure, he says a family-run company is not an instant recipe for success. However, those who have the ambition and entrepreneurial skills to bring a company to market are in most cases motivated and capable of taking the business forward, he adds.
One of the features that many private investors, analysts and fund managers look for when assessing a company is employee ownership. Staff ownership of shares often results in highly motivated teams with a vested interest in doing a good job, and this should be beneficial to the share price.
Andy Brough, manager of the Schroder UK Mid-250 fund, says: "Family ownership is the same principle. The family which has established the business and is running it has a big financial stake and wants it to be profitable. These family members realise that building shareholder value is the same as building their own wealth."
Mr Brough says employee ownership, or substantial investment by management, is one of the key criteria he looks for when choosing stocks for his portfolio. If there were two similar companies, one owned and managed by an entrepreneurial family and the other not, the former would almost certainly have the edge, he says.
Anthony Cross, a fund manager at Liontrust, is another fan of this type of share. He manages a somewhat unique fund called the Liontrust Intellectual Capital unit trust. Companies held within this fund must fit the criteria of having main board directors own at least 3 per cent of the shares. On average, companies within his portfolio have more than 24 per cent of their shares owned by employees and directors. The portfolio includes several family-run companies because they typically also hold a high percentage of their company's equity.
Mr Cross says studies in America have shown that ownership of equity can considerably improve share price performance over the longer term. In addition to management being highly motivated, there are two other beneficial characteristics of such companies, he explains. The first of those is that a high ownership of equity is likely to mean the family members are more conservative in the way they run the business.
"Companies with high amounts of employee and director ownership, and therefore family companies, tend to be less geared. They tend to take on less debt and have more net cash, compared with those businesses where there is not the same equity ownership. They are a lot more careful about preserving what they created. They tend not to be driven by bonuses and share options schemes and therefore more focused on trying to grow the business by acquisitions, which can often go wrong," he says.
Second, Mr Cross adds, management of such companies are happy to take longer-term views, rather than making decisions based on short-term trends in a bid to enhance their bonus that year.
Tim Steer, manager of the New Star UK Alpha fund, is less enthused about family-run companies, saying in many such cases too many people try to have an influence and emotions are often involved. He cites the example of Marshalls, the building materials company, which was previously managed by the founding family and was less than exciting. However in 1997, an outsider, Christopher Burnett, was appointed chairman and transformed the company into a highly successful business.
Indeed, there are risks associated with investing in family-run companies. The founding members cannot run them forever, and succession issues must be taken into account. One of the concerns, Mr Ford explains, is that if management is passed on to the next generation, the successor may not be as capable. Mr Brough agrees: "There is a lot of credence for the saying 'from rags to riches in three generations' when it comes to family-run companies."
Mr Ford says the concern with a family member taking over is that they have got the job because they happen to be there, not because they are good managers of businesses. Accusations of nepotism hung over BskyB last November, when James Murdoch, the son of Rupert, was appointed chief executive of the company.
In any case, the appointment of a family member will have less of an impact on the fortunes of a large company than it would on a small firm. "James Murdoch is surrounded by lots of external executives with proven track records. However, if you shrink that down to a smaller company with a new member coming into the business, only to be surrounded by other family members, then there is far more potential for things to go wrong," Mr Ford explains.
It is not only succession that is a risk, Mr Ford explains - some families may look to exit their big stakes in the company, causing shares to nosedive. EasyJet - although no longer run by the family - has had a turbulent time of late with two profit warnings within the month under the stewardship of chief executive Ray Webster.
While there is some speculation that the founder, Stelios Haji-Ioannou, may look to take the company private, the City has been concerned for some time over what would happen if the family were to sell its 41 per cent stake in the company. Mr Ford explains: "Although the share prices have struggled of late, the impact would be severe if the family looked to cash in their chips. As well as giving a negative signal about the company's prospects if they did sell, there would be a vast amount dumped on the market."
There are other instances of founding families that retain their stakes in the company but hand over management. J Sainsbury is a good example, it has not been managed by a Sainsbury since the late 1980s, and the shares have struggled ever since, Mr Ford says.
Mr Steer says one factor to be taken into account with family-owned and managed companies is that their dividends are generally safe. "They tend to look after the cash and like to see the cash generated within the business as many family members rely on dividends being paid." Sainsbury is a good example of a company where the family relies on the dividend being paid so investors in this company have good reason to feel safe about the income produced by these shares, he adds.
Among key holdings in Mr Brough's Schroder portfolios are Chrysalis, the radio station operator founded by the chairman, Chris Wright, who owns about 27 per cent of the company. Mr Cross holds the pub and brewing company Fuller, Smith & Turner. He says this company takes a long-term strategic view. "They steadily invest away in their pubs and brewing, even if unfashionable at the time, and do not take views on short-term trends or whims of the stock market. Rather, they focus on where they expect they can get a good return on capital," he says.
Davis Lis, a UK fund manager at Morley Fund Management, is a big fan of Alba and Daniel Harris, its chief executive. Morley bought a 4 per cent stake in the company last year, but took profits when the share price spiked up in January following the acquisition of Grundig. Mr Lis is now looking for an opportunity to buy more shares, describing Alba as having a good business model that is well managed. He says while family-run companies can present problems, in Alba's case the father and son team are beneficial to the business. "Daniel Harris is a very capable chief executive," Mr Lis says.
'We have served shareholders well'
The Alba Group is a family success story which spans more than 40 years. It started as Harris Overseas Limited in 1963, and in 1987 was floated on the London Stock Exchange and renamed Alba Plc. The company is often cited as one of the most dynamic and successful father and son business relationships in the City.
The current chairman, John Harris, 72, founded the electronics group, which in the UK includes the popular brands Alba, Goodmans and Beko. John started importing confectionery into the Far East in the early 1960s. From his travels, he recognised the potential of bringing electronic products back to the UK and he formed a company to concentrate on this area.
His son Daniel, 44, is chief executive of the company, which now has a market value of £400m. But John explains that Daniel, a graduate from the London School of Economics, didn't have an easy ride. "He did stints in the service department, warehousing, deliveries, sales and returns. You name it, he did it. He did every job until he knew the company through and through," John explains.
John believes their relationship has been beneficial to shareholders, primarily because he and Daniel share each others' way of thinking.
"We do not have to second guess each other. This has facilitated the easy running of the company and its expansion over the years," he adds. "There are some instances where families running a business are not successful, but the relationship in our case has served the shareholders very well."
* AG BARR
Family ownership 38%
Chris St John, UK Smaller Companies fund manager at Isis Asset Management, said of the Glasgow-based beverages company: "This is a well-run company with strong brands such as Irn-Bru, above, and Tizer. The company produces strong cash flow and is prudently managed in the long-term interests of shareholders."
One year share price: +44% (FTSE Beverages average +18.6%)
Five year share price: +66.33% (index +11.2%).
Family ownership (Chris Wright) 26.1%
Andy Brough, manager of the UK Mid-250 fund at Schroder, is one of the largest shareholders in the independent music company. "The management ethos of this company is excellent. At an industry level I expect more consolidation among radio stations and Chrysalis will be a beneficiary of this."
One year share price: +16.29% (FTSE Media index: +17.8%)
Five year share price: +12.39% (index -28.4%)
* FULLER, SMITH & TURNER
Family ownership 10%
On this pubs and brewing company, Mr St John said: "Management is rigorously focused on the returns made from capital employed within the business. It's best-known for producing London Pride, but much of the value comes from the pubs which it owns."
One year share price: +20.19% (FTSE Leisure Index +39.8%)
Five year share price: +16.89% (index -7.1%)
* FRENCH CONNECTION
Family Ownership 52.4%
Alistair Currie, manager of the Premier UK Smaller Companies fund, said: "This is a great long-term story. Management have proven themselves to be top-level retailers over many years. The share price has however risen in the past year and is now slightly expensive."
One year share price: +74.34% (FTSE General Retailers Index +24.8%)
Five year share price: +253.7% (index -7.5%).
* ROBERT WISEMAN DAIRIES
Family ownership 48%.
Analysts are divided over the prospects for the dairy company after it was notified in May that it would lose the contract to sell to Wal Mart stores. Offsetting this, the group has been successful in winning contracts elsewhere.
One year share price: +11.6% (FTSE Food sector average +6.8%)
Five year share price: +20.4% (index +0.8%)
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