Banca March and IE Business School present a report focused on Family Business

Madrid, June 20, 2012.  Listed European family businesses   have created more value for their shareholders over the last decade than non-family concerns, achieving far higher prices on the stock exchange.  This is the main finding of a report focused on “The creation of value in listed European family business (2001-2010)” undertaken jointly by IE Business School and Banca March.

The report reveals that an investment of €1,000 made in 2001 would have secured €3,533 in a portfolio comprising European family businesses listed on the stock Exchange, while a portfolio made up of listed non-family businesses would have produced €2,241 over the same period. This works out at an additional 500 basic points of additional profit per year and an accumulated annual average rate of return of 13.6% for the family business portfolio, while the non-family firms would have generated 8.6%, in spite of their lower market risk (beta).

The study examines a sample of 2,423 European firms with more than €50M of stock market capitalization, of which 27% are family businesses. They include giants like Roche, LVMH and Volkswagen. By countries, Italy is the country where there is the largest percentage of family businesses (52%) among listed firms, followed by France (49.6%), Portugal (45.83%) and Spain (42.11%). However, in the ranking of the 25 largest family businesses in terms of stock market capitalization, there is only one Spanish family company, Inditex, although FCC, Prosegur and Ferrovial are among the listed family firms with the largest workforces.

Other key data provided by the report includes the fact that family businesses are capable of generating more profits with their assets (the average value of ROA for family businesses is 4.6% compared to 4% for non-family companies). Moreover, they are able to secure funding at a lower cost, given that the rate of interest they pay on their debt is lower.

During the presentation, Cristina Cruz, professor of family business at IE Business School and co-author of the report underscored the fact that “these results suggest that listed family businesses offer the best of both worlds. Firstly, the positive effects of the greater commitment of family business stakeholders to the business project and their longer-term vision, and  secondly, transparency regarding information, monitoring and control required by the markets, which reduces the chances of a conflict of interest between achieving the family’s objectives and the remaining non-family shareholders.”

Nevertheless, the data appear to indicate that the market does not place such a positive value on the “family effect”, given that despite these clear advantages when it comes to creating value for shareholders, the shares of family businesses in 2010 were lower than those of non-family businesses, with lower price-per-share (PPS) values over practically the entire period (the average PPS for family businesses was 18.8 while the average PPS of non-family businesses stood at 22.8).

More value and more employment

The study also demonstrates that listed family businesses not only created more value for their shareholders, but also generated more employment than listed non-family companies from  2001-2010, averaging a growth rate of 3.4% compared to 0.8% for non family concerns. In fact, these companies not only created more jobs in the period covered by the survey, but also had a stabilizing effect given that they maintained or even increased their number of employees during turndowns, while non-family businesses destroyed jobs. “The intrinsic values of the family businesses (long-term vision, loyalty, motivation, low debt levels, etc.) made them a better bet during periods of crisis,” explained Jose Luis Jimenez, General Director of March Gestion, during the presentation.

This stabilizing effect could explain the findings of the report, which point to greater work productivity and lower salary costs in family businesses, which would seem to be offset by greater job stability.

Finally, the BANCA MARCH-IE report examined the top listed 100 family businesses in terms of highest rate of return on share price between 2001-2010, including companies like Puma, Audi and Arcelor Mittal. In addition to Inditex, these top 100 family businesses include other Spanish companies like Prim S.A., Duro Felguera, Obrascón Huarte, Vidrala, Prosegur and  Compañía Española de Viviendas en alquiler.

In most of these top-earning 100 family firms the founder is longer present, which means they have survived the generational transfer of leadership. These companies also have higher share prices than the firms were founders are still there. The authors of the report suggest that this might be due to the fact that only 4% of all family businesses survive to be led by a third generation because of conflicts that arise in the succession process, as seen in some famous family businesses spotlighted by the media, meaning that those who do survive the process are very strong. Whatever the reason such companies do not make it to the third generation, it is not the case of the listed European family business, 20% of which are more than a hundred years old, and are also typically the most profitable.