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Eastern Europe: Turkish delight

Paul Amery reports on three family-owned conglomerates at the forefront of Turkey's new-found corporate optimism

At the World Economic Forum in Davos, held in January each year, the three-day programme culminates in the lavish gala event, a high-profile evening attracting the world's most powerful business leaders and politicians.

This year, the gala was co-sponsored by four Turkish family-owned conglomerates, Dogus, Dogan, Sabanci and Koc, and the scene was set for them by their country's recent impressive economic performance.

"For decades, Turkey has been regarded as a developing or an emerging nation," said Ferit Sahenk, the second-generation chairman and CEO of Dogus Holdings. "But business growth and economic development have transformed the country. And the fact is, Turkey has emerged."

Since the economic crisis and currency devaluation of 2000–01, Turkey's annual economic growth rate has averaged 7%, and the country continues to attract high levels of foreign direct investment, receiving more than $20 billion in 2007, at least $5 billion more than India, which has over 15 times Turkey's population and nearly three times its GDP.

Turkey's historical importance as a nexus for ancient trade and cultural routes – the Silk Road, leading eastwards to Central Asia, Iran and China and tying Asia to Europe, and also the "vertical axis" leading to Ukraine, Russia and the Baltics, and the Levant and North Africa in the South – has again come to the fore.

With the recent oil price boom and the rapid economic development of surrounding countries, the country has been ideally placed. As Suzan Sabanci, the granddaughter of Sabanci Holding's founder, put it earlier this year: "Turkey is where East and West come together, and where North meets South," she said. "Turkey is the historic crossroads of civilisation. It's the place to be right now."

Conglomerates lead the way
Family-owned businesses in Turkey represent the most common type of corporate structure outside the government sector, and the largest conglomerates have a significant share of the country's economy.

Sabanci Holding operates in financial services, automotive, tyre and tyre reinforcement materials, retail, cement and energy, with 2007 revenues of $15 billion and around 57,000 employees.

Koc Holding reported $39.5 billion of revenues in the same year, with around 80,000 employees, and interests covering the automotive, consumer durables, energy, financial services and retail sectors.

The Dogus group's revenues totalled $4.9 billion, with 20,000 employees, and subsidiaries involved in financial services, automotive, construction, media, tourism, real estate and energy.

The reach and operational complexity of these enterprises – with Koc's revenues alone constituting 9% of the country's GDP last year – has attracted critics. In a 2006 report, Morgan Stanley criticised the family-owned conglomerates for being "irrationally diversified", and contributing to an unbalanced industrial composition for the country as a whole, as well as creating operational and financial bottlenecks for small businesses.

Gurhan Bilgin, a Turkish venture capitalist, explained that the family-owned holdings have long been a source of finance within the country, but that this tends to put off entrepreneurs, who are reluctant to approach the conglomerates for fear of being bought out, or because the families may wish to take their idea and run with it themselves.

In a recent OECD report, Corporate Governance in Turkey: A Pilot Study, the OECD Secretary-General also commented on such issues as the cross-ownership between companies within the family-owned conglomerates and the roles of the controlling shareholders, noting that "Without effective safeguards, there is potential for abuse." The recent rise and fall of the Karamehmet family empire, whose difficulties stemmed from the use of group-owned banks to prop up related companies, is a case in point.

On the other hand, diversified corporates go into and out of fashion. In the 1980s and 1990s a frequent Western business school mantra was a focus on "core competencies", but in some markets conglomerates are beginning to regain some of the popularity that they had during their heyday of the late 1960s and 1970s, when the rationale for their construction was to eliminate the effect of business cycles on the parent company by having many divisions in unrelated fields.

For Turkish business leaders, accustomed historically to operating in an unstable macroeconomic environment, the advantages of owning a broad spectrum of businesses might seem even greater.

Good and bad news for holding companies
In fact the reason for the Turkish family holding companies' predominance and their diversity of activities is, as often happens, a mixture of accident and design. An Istanbul-based management consultant pointed to the relatively closed nature of the Turkish economy from the creation of the Turkish Republic in 1923 to the 1980s.

With pre-republic, Ottoman-era business life often dominated by non-Turkish ethnic groups – Italians, Greeks, Jews – the new state wanted to give a helping hand to Turkish-owned businesses from its inception, setting the scene for the growth of the family conglomerates.

In particular, the patriarchs of the Koc and Sabanci families – Vehbi Koc and Haci Omer Sabanci – laid the foundations for their businesses during the early years of the Republic.

The last 25 years have seen a substantial shift in Turkish economic life, away from the closed, state-sponsored model, with the liberalisation of foreign trade, the introduction of currency convertibility and the disposal of many state assets.

This has presented challenges, as well as opportunities, for the large family holding companies, not least through the emergence of newer competitors.

The recent Forbes magazine list showed a sharp rise in the number of Turkish dollar billionaires, with 35 people making the list in 2008, up from 22 in 2007. While many of the 35 names derive their status from the established families and their businesses, a number have emerged from outside their ranks, notably from the Anatolian region, and deriving their fortunes from energy-related activities and from trade with the states of the former USSR.

The best of turkish
For Sabanci group, the financial services activities, concentrated in Akbank, have grown to contribute around 80% of the holding company's profits, and the company has made a commitment to developing and servicing the domestic loans business.

While 10 years ago Turkish banks held most of their assets in short maturity government bonds, whose high interest rates offered some protection against inflation and currency instability, consumer and private-sector loans have grown rapidly, and Akbank's loan book is now fairly evenly-balanced between state and non-state business.

In the short run, Sabanci's Akbank faces the fall-out from the credit crunch, which has severely hit banking competitors in more developed markets. As Suzan Sabanci, the bank's chairman, put it recently, "Now the big boys are having trouble, and when they start coughing, everyone catches a cold".

The bank's share price has reflected the global financial sector downturn, declining by as much as 65% from last October's peak at its low point in early July.

Once credit market conditions ease, according to Sabanci, foreign acquisitions offer opportunities for the bank, with the successful overseas expansion of Spain's Banco Santander being offered as an example to emulate.

Ferit Sahenk explained the rationale of his company's portfolio approach in a recent interview, emphasising that a balance in activities provides a healthy foundation for the group. In his view, the businesses best placed to do well in boom times – construction, car sales, for example – are complemented by those that can provide revenues in tougher times – food businesses, service and after-sales activities, and automotive.

The Dogus group's financial sector activities, which in recent years have provided the biggest group revenues, have been streamlined to emphasise fee- and commission-based services, which should provide better revenue streams in uncertain economic times.

At the same time, Dogus continues to explore opportunities in surrounding countries, such as Iraq, Bulgaria and Ukraine, particularly in the construction sector, the group's original core activity.

Koc Holding, Turkey's largest conglomerate, has undergone a series of acquisitions and divestitures over recent years, resulting in a substantial reorientation of its business. With Mustafa Koc, the grandson of the group's founder, in charge since 2003, the group has decided to concentrate on four main areas, energy, consumer durables, automotive and finance.

Two substantial acquisitions in 2005, of Tupras, Turkey's refinery monopoly, from the state, and Yapi Kredi Bank, from the Karamehmet group, have propelled Koc to its current status as the largest of the family-owned holding companies. More recently, Koc sold its stake in the retailer Migros, reducing the group's debt burden from the 2005 purchases.

In a 2006 interview, Rahmi Koc, the son of the holding group's founder and the father of the current leader, Mustafa, gave a frank and revealing insight into the company's evolution over the 80 years since its inception, admitting that the group hadn't always got involved in the right sectors at the right time. For example, Koc missed out on the boom in the shipping and banking industries in the 1960s and 1970s, and more recently overlooked opportunities in mobile telecommunications.

Yet in admitting such mistakes Koc was at the same time highlighting one of the Turkish family conglomerates' key strengths – the ability to take such a dispassionate and long-term view of different business areas and their relative attractions.

With Western economies heading for recession and complex political forces in play throughout the Eastern Mediterranean and the Middle East, and as the world's superpowers jostle for the control of energy resources, there may be plenty of instability ahead.

Yet Turkey's family-owned holding companies can draw strength both from their country's strategic position, and from their experience as successful entrepreneurs and managers in a wide range of business sectors. 

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