Conglomerate discount is an economic concept describing a situation when the market values a diversified group of businesses and assets at less than the
sum of its parts. The explanation of this phenomenon comes from a
conglomerate's inability to manage various and different businesses as well as do
focused companies. Therefore, the market penalizes a multi-division firm and attaches a lower multiple to its earnings and cash flows, thus creating the discount. However, the opposite concept, called conglomerate premium, also exists.
Developed vs emerging markets
In the developed economies, the average value of the discount may be 13–15% relative to single-segment competitors. Because of the discount, conglomerates have become much less common in the developed markets than they once were. Only several star performers, such as
Berkshire Hathaway
Berkshire Hathaway Inc. () is an American multinational conglomerate holding company headquartered in Omaha, Nebraska. Originally a textile manufacturer, the company transitioned into a conglomerate starting in 1965 under the management of c ...
, have managed to escape the market’s critical assessment of overdiversification. However, conglomerates are still common in a number of emerging markets. The conglomerate discount is substantially bigger in the U.S. and Western Europe than is in Asian countries. This situation may be explained by the fact that in Asian countries a big conglomerate with political connections and an understanding of how to operate in a difficult market can spread its expertise across many industries. In fact, there is a conglomerate premium of 10.9% in Latin America, according to
Citigroup. This may be the reason why, in some markets, conglomerates are becoming even larger and more diversified. For example,
Samsung Electronics
Samsung Electronics Co., Ltd. (SEC; stylized as SΛMSUNG; ) is a South Korean multinational major appliance and consumer electronics corporation founded on 13 January 1969 and headquartered in Yeongtong District, Suwon, South Korea. It is curr ...
is moving into pharmaceuticals.
Calculation
The conglomerate discount is usually calculated by adding estimations of the intrinsic values of each of the subsidiary companies in a conglomerate and subtracting the conglomerate's
market capitalization
Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders.
Market capitalization is equal to the market price per common share multiplied by ...
from that sum. See
Sum-of-the-parts analysis.
Deconglomeration
Deconglomeration and focusing on one or a few businesses via various corporate restructurings may remove such discount and get better value recognition for each of the parts and may also help each business pursue independent strategies. Therefore, identifying and removing a conglomerate discount may be a profitable investment strategy. Recent examples of Deconglomeration in the US include
ITT,
Motorola
Motorola, Inc. () was an American multinational telecommunications company based in Schaumburg, Illinois. It was founded by brothers Paul and Joseph Galvin in 1928 and had been named Motorola since 1947. Many of Motorola's products had been ...
,
Fortune Brands,
Marathon Oil,
Genworth, and
Sara Lee Corporation. The results have generally been quite positive. For example, ITT’s shares went up by some 11% on the breakup announcement, creating roughly $1B in value.
See also
References
External links
Conglomerate Discount or Premium?Holding structure – from Conglomerate Discount to Management Value Added
{{Corporate finance and investment banking
Corporate finance
Restructuring
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