Posted: 12 Nov 2007 Last revised: 21 Dec 2011
Date Written: October 2006
The Ayala Corp. case focuses on three unique aspects of the company's financial and corporate strategy from which there are important lessons to be drawn. First, for a company that has been owned and managed by the same family for seven generations, Ayala is remarkably open to public investors. This financial strategy is in stark contrast with that of many other family firms, which choose to stay private and shy away from public capital markets even when they are qualified to access them, as illustrated for instance by the Kohler Co. case (HBS 205-034). The Ayala case thus provides a useful counterpoint to the Kohler case in facilitating a discussion of the benefits and costs for family firm owners and managers of partnering with public investors.
Second, like many other companies around the world, Ayala Corp. has a very diversified portfolio of businesses. What is more unusual about Ayala is the fact that both the parent company and its largest subsidiaries and affiliates are publicly traded. Because of this structure, the Ayala group offers a unique opportunity to measure and discuss the value implications of corporate diversification for family and non-family shareholders.
Third, Ayala's business diversification contrasts with its almost total lack of diversification in a geographical sense of the company's revenues come from the Philippines. The contrast is all the more striking given that the Philippines is not only an emerging market, but one with a notorious history of sociopolitical instability, which leaves Ayala's investors heavily exposed to country risk.
The combination of these three factors provides a rich setting in which to analyze corporate finance and strategy in family-controlled firms. Ayala Corp.'s mixed shareholder base - local family shareholders, local or regional non-family shareholders, and global shareholders - suggests that the company's cost of equity capital can best be thought of as a weighted average of the different returns that each of the three investor groups require. As a result of these cost differences, the net benefits of Ayala's corporate strategy also differ across the three investor groups.
Keywords: Family firms, business groups, diversification discount, conglomerate discount, valuation, emerging markets
JEL Classification: G32, G34, G3
Suggested Citation: Suggested Citation