20 June 2006
KUWAIT: Look through any Kuwaiti corporate directory and one of the first things you will notice is the number of holding companies in the list. There are dozens of them big ones, small ones, multi-purpose, single purpose, national, international, even one specialising in privatisation projects.
But what is a holding company? What does it do? And why are there so many of them? The Kuwait Times went in search of the answers. A holding company is one that owns enough shares in another company, or companies, to secure voting control of the subsidiary organization(s). It is like an umbrella that sits over the trading businesses it controls.
As to what a holding company does, it may trade itself, or it may be an investment company that exists simply to hold shares in trading subsidiaries. In this context, trading means any activities in a trade, profession, or vocation carried out on a commercial basis with a view to generating profits. If the holding company owns the trading businesses outright and is the principal entity in a group, it may also provide financial support and central services to its subsidiaries accounting, IT systems, marketing, HR and strategic management, for example, in order to reduce group operating costs.
Although there is no corporation tax in Kuwait - one of the key motives for forming holding companies in other parts of the world, there are a number of other reasons why such companies are popular here. We shall look at the special purpose companies later, but we begin with the principles and advantages that commonly apply to both trading and investment holding companies.
Like many countries, the commercial sector in Kuwait is made up of a few large and powerful corporations on one hand and a myriad of privately-owned small businesses, often engaged in a single activity, on the other.
Commonly, the large entities grow as much as they can in the business in which they began trading and then look for other activities in order to continue to expand. Apart from wanting to get bigger, they also do this to protect their profits in the event of a downturn in their core market. By being involved in different aspects of commerce, known as diversification, the theory is that if things go bad in one sector of business, they will still be good in others.
In order to diversify, a company can either start a new business, a long and expensive process in any jurisdiction, or, provided it is a holding company with a wide remit, buy an existing concern in the chosen field. The latter is generally the more popular route for several reasons.
First, the holding company directors and staff clearly are very good at whatever business they are in, construction for example, and know how to run a successful company. But they won't necessarily have very much knowledge about the operational aspects of the sector they wish to get into, let's say a car dealership. So it makes sense to buy a company already in the business because its directors and staff have the necessary expertise.
The second and perhaps more important reason for making acquisitions as a holding company (although this applies to any corporation with limited liability) is that the risk it takes in the new business is limited to the value of its investment in it. If the larger company were to buy a business as a private, unlimited company, it would risk everything if it all goes wrong.
Third, every company operates under what are known as Memorandum and Articles of Association. This is a legal document in which the company's trading scope, that is, the business it is registered to conduct, is set out. Therefore, in the case of our construction company, its Articles would cover all aspects of the building industry, but would be unlikely to include car dealing unless the directors had planned to move into that business from the outset.
Otherwise, it would have to amend the company's Articles, an administratively cumbersome process that often requires the approval of shareholders at an Extraordinary General Meeting.
A good example of a diverse trading company is Al-Wazzan Holding Group, which has five main operating divisions: automotive, healthcare, real estate and investment, construction, and retail and distribution. Al-Wazzan are authorised agents and distributors for Ford, Lincoln and Mercury vehicles, provide hospital facilities, develop and manage real estate both here and overseas, and is involved in the construction of buildings, waste management and recycling facilities. It also represents electrical contractors and lift manufacturers and distributes electrical goods, home appliances, car parts and accessories and computer systems.
One of the largest and most successful investment holding companies is Kuwait Projects Company (Kipco), which is 57 per cent publicly owned and has investments in financial services, media and telecommunications, real estate, healthcare and heavy industries. Net profits last year were in excess of KD 38 million.
Now, what about those special purpose holding companies? Some of these are themselves majority-owned subsidiaries of investment companies and were established to finance specific local activities or overseas projects, which are often property related.
Two specialist companies operating locally are Kuwait Medical Centre Holding Company, which is 56 per cent owned by Al-Safat Investment Company and was created to develop and manage hospitals, and the Educational Holding Group, which is listed on the Kuwait Stock Exchange in its own right. Not surprisingly, it concentrates on the establishment and management of schools, colleges, institutions and training centres.
As for those trading abroad, a good example is the Kuwait Sudan Holding Company, a 51 per cent owned investment subsidiary of National Investments Company. There are similar companies in the name of Africa, Iran (this one is multipurpose and owned by the Kuwait Government), Morocco (which, intriguingly, is involved in real estate development in Libya), the Kuwaiti Syrian Holding Company, and so on.
Are there any disadvantages to having all these holding companies? Well, clearly not for the corporations themselves at the moment, most of which took full advantage of the booming conditions last year, some doubling their already substantial profits and more. However, for the Kuwait economy as a whole there must be some concern at having so much corporate power concentrated in so few hands. Competition is essential for a healthy commercial sector and having such a high percentage of Kuwait's company assets in so few hands could act as a brake on growth.
Some analysts also question whether one management can control a broad portfolio of companies effectively. They argue that companies that stick to their knitting, rather than diversifying into many different, unconnected business areas, are more focused and thus more efficient.
And there is always the temptation for the holding company directors to divert funds from one company in the group that is doing well to another that is struggling, thus preventing the successful business from achieving its full potential.
As a result, they say, the individual parts of a group are often worth more separately than they are as a whole. Since these comments apply to any diverse conglomerate, whatever its corporate structure, this could be a bigger problem for Kuwait in the future than is revealed in a review of holding companies alone.
But for now, the country's big corporate guns are firing pretty effectively. And Kuwaitis are renowned for their business acumen, so we can be sure they will find ways to keep the good times rolling, even after the market is opened up to serious competition.
KUWAIT: Look through any Kuwaiti corporate directory and one of the first things you will notice is the number of holding companies in the list. There are dozens of them big ones, small ones, multi-purpose, single purpose, national, international, even one specialising in privatisation projects.
But what is a holding company? What does it do? And why are there so many of them? The Kuwait Times went in search of the answers. A holding company is one that owns enough shares in another company, or companies, to secure voting control of the subsidiary organization(s). It is like an umbrella that sits over the trading businesses it controls.
As to what a holding company does, it may trade itself, or it may be an investment company that exists simply to hold shares in trading subsidiaries. In this context, trading means any activities in a trade, profession, or vocation carried out on a commercial basis with a view to generating profits. If the holding company owns the trading businesses outright and is the principal entity in a group, it may also provide financial support and central services to its subsidiaries accounting, IT systems, marketing, HR and strategic management, for example, in order to reduce group operating costs.
Although there is no corporation tax in Kuwait - one of the key motives for forming holding companies in other parts of the world, there are a number of other reasons why such companies are popular here. We shall look at the special purpose companies later, but we begin with the principles and advantages that commonly apply to both trading and investment holding companies.
Like many countries, the commercial sector in Kuwait is made up of a few large and powerful corporations on one hand and a myriad of privately-owned small businesses, often engaged in a single activity, on the other.
Commonly, the large entities grow as much as they can in the business in which they began trading and then look for other activities in order to continue to expand. Apart from wanting to get bigger, they also do this to protect their profits in the event of a downturn in their core market. By being involved in different aspects of commerce, known as diversification, the theory is that if things go bad in one sector of business, they will still be good in others.
In order to diversify, a company can either start a new business, a long and expensive process in any jurisdiction, or, provided it is a holding company with a wide remit, buy an existing concern in the chosen field. The latter is generally the more popular route for several reasons.
First, the holding company directors and staff clearly are very good at whatever business they are in, construction for example, and know how to run a successful company. But they won't necessarily have very much knowledge about the operational aspects of the sector they wish to get into, let's say a car dealership. So it makes sense to buy a company already in the business because its directors and staff have the necessary expertise.
The second and perhaps more important reason for making acquisitions as a holding company (although this applies to any corporation with limited liability) is that the risk it takes in the new business is limited to the value of its investment in it. If the larger company were to buy a business as a private, unlimited company, it would risk everything if it all goes wrong.
Third, every company operates under what are known as Memorandum and Articles of Association. This is a legal document in which the company's trading scope, that is, the business it is registered to conduct, is set out. Therefore, in the case of our construction company, its Articles would cover all aspects of the building industry, but would be unlikely to include car dealing unless the directors had planned to move into that business from the outset.
Otherwise, it would have to amend the company's Articles, an administratively cumbersome process that often requires the approval of shareholders at an Extraordinary General Meeting.
A good example of a diverse trading company is Al-Wazzan Holding Group, which has five main operating divisions: automotive, healthcare, real estate and investment, construction, and retail and distribution. Al-Wazzan are authorised agents and distributors for Ford, Lincoln and Mercury vehicles, provide hospital facilities, develop and manage real estate both here and overseas, and is involved in the construction of buildings, waste management and recycling facilities. It also represents electrical contractors and lift manufacturers and distributes electrical goods, home appliances, car parts and accessories and computer systems.
One of the largest and most successful investment holding companies is Kuwait Projects Company (Kipco), which is 57 per cent publicly owned and has investments in financial services, media and telecommunications, real estate, healthcare and heavy industries. Net profits last year were in excess of KD 38 million.
Now, what about those special purpose holding companies? Some of these are themselves majority-owned subsidiaries of investment companies and were established to finance specific local activities or overseas projects, which are often property related.
Two specialist companies operating locally are Kuwait Medical Centre Holding Company, which is 56 per cent owned by Al-Safat Investment Company and was created to develop and manage hospitals, and the Educational Holding Group, which is listed on the Kuwait Stock Exchange in its own right. Not surprisingly, it concentrates on the establishment and management of schools, colleges, institutions and training centres.
As for those trading abroad, a good example is the Kuwait Sudan Holding Company, a 51 per cent owned investment subsidiary of National Investments Company. There are similar companies in the name of Africa, Iran (this one is multipurpose and owned by the Kuwait Government), Morocco (which, intriguingly, is involved in real estate development in Libya), the Kuwaiti Syrian Holding Company, and so on.
Are there any disadvantages to having all these holding companies? Well, clearly not for the corporations themselves at the moment, most of which took full advantage of the booming conditions last year, some doubling their already substantial profits and more. However, for the Kuwait economy as a whole there must be some concern at having so much corporate power concentrated in so few hands. Competition is essential for a healthy commercial sector and having such a high percentage of Kuwait's company assets in so few hands could act as a brake on growth.
Some analysts also question whether one management can control a broad portfolio of companies effectively. They argue that companies that stick to their knitting, rather than diversifying into many different, unconnected business areas, are more focused and thus more efficient.
And there is always the temptation for the holding company directors to divert funds from one company in the group that is doing well to another that is struggling, thus preventing the successful business from achieving its full potential.
As a result, they say, the individual parts of a group are often worth more separately than they are as a whole. Since these comments apply to any diverse conglomerate, whatever its corporate structure, this could be a bigger problem for Kuwait in the future than is revealed in a review of holding companies alone.
But for now, the country's big corporate guns are firing pretty effectively. And Kuwaitis are renowned for their business acumen, so we can be sure they will find ways to keep the good times rolling, even after the market is opened up to serious competition.
One anomaly in Kuwait is that because national involvement is required in any enterprise operating outside the Free Trade Zone in Shuwaikh Port, some companies here are 51 per cent owned by Kuwaiti interests, but are controlled de facto by the minority shareholders; the people who actually operate and manage the business. In such cases the majority shareholder is known as a 'sleeping partner'.
By James Fuller
© Kuwait Times 2006
