Li & Fung needs to focus on its core businesses - and get rid of the rest
Instead of building a conglomerate, the firm should extract value from sourcing operations
Investors should be sceptical of any company that heavily depends on a strategy driven by acquisitions and restructuring, but Li & Fung's appetite for deal-making, which chief executive Bruce Rockowitz claims offers "huge synergies", is looking less credible by the year.
While outsourcing and trade generate revenues, Li & Fung's own business model may be dying, and the Fung brothers and Rockowitz may be incapable of transforming it because they are stuck in their old habits.
Today, the company's shares trade at half their price two years ago and continue to languish at their lows despite improved performance. Investors have downgraded the forward price-earnings ratio from 26 times to 16.
During a difficult business turnaround, shareholders deserve the best managers, not necessarily family members
The glory days of bolting on numerous cheap acquisitions in exchange for more earnings are becoming more difficult to replicate.
Li & Fung's recent results announcement included a proposed spin-off that should have been done years ago instead of ignoring analysts' call for an easier-to-understand business structure.
Still, it doesn't go far enough. The company should sell its non-core businesses. But before doing so, senior management needs to decide what the core business is - and convince investors it can focus on operations.
Management's response to a 42 per cent fall in core operating profit from 2011 to 2012 was a spurt of 10 acquisitions last year valued at US$541 million, with an aggregate turnover of US$557 million.
And if that was not enough for most teams to effectively integrate, they included a global licensing agent in Europe with a portfolio of brands.
