The findings of a new study by Boston Consulting Group suggest that, over time, many tech companies are guilty of mission-creep, especially large ones. And when that happens, those companies do not provide the shareholder value they could if they were leaner and more focused.
As part of its study, BCG analyzed total shareholder return, defined as the bottom-line return from capital gains and cash flow contribution. When it did so, it found little distinction between large-cap and small-cap companies:
“The clear takeaway is that regardless of company size, the more diverse the portfolio, the more difficult it is to generate high TSR—and the greater the set of management skills a company needs in order to handle that diversity. Companies must therefore be more deliberate and more explicit in rationalizing each element of their portfolio.”
BCG likens the strategy to the 3 R’s, in this case, Resize, Reform and Rejuvenate. Marc Andreessen, the founder of Mosaic (later Netscape), put it this way: “If they’re more than 20 years old, then [companies will] probably benefit from being broken up, and many of them will probably be forced to break up if they don’t do it voluntarily.”
So for the EMS pseudo-conglomerates (Foxconn, Flextronics, Sanmina, etc.), what this means is there are arguments to be made — indeed, being made — that having bare boards, assemblies, design services, box build, ODM products, and a host of other products and services under a single umbrella is not an optimal strategy.
There’s always been some debate over whether publicly traded EMS firms should be compared to other tech firms like Cisco and Microsoft or to traditional manufacturing companies (say, Caterpillar). It’s tough for a mid-size or larger contract manufacturer to attain repeated organic double-digit topline growth, and their margins are never going to be Wall Street pretty. Dumbing down the peer group makes sense.
But the bigger question being asked is whether their size is actually a hindrance. There must be a point at which that happens. Can the data analysis pinpoint that yet? And will market impatience make all of this moot?