Conglomerate discount is an economic concept describing a situation when the
stock market
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
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 corporation, multinational conglomerate (company), conglomerate holding company headquartered in Omaha, Nebraska, United States. Its main business and source of capital is insurance, from ...
, 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
Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking ...
. 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. (, sometimes shortened to SEC and stylized as SΛMSUNG) is a South Korean multinational corporation, multinational electronics corporation headquartered in Yeongtong-gu, Suwon, South Korea. It is the pinnacle of ...
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 t ...
from that sum. See
Sum-of-the-parts analysis
Sum of the parts analysis (SOTP), or break-up analysis, is a method of valuation of a multi-divisional company, holding company, or a conglomerate.
The essence of the method is to determine what divisions would be worth if the conglomerate is br ...
.
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 corporation, multinational telecommunications company based in Schaumburg, Illinois, United States. After having lost $4.3 billion from 2007 to 2009, the company split into two independent p ...
,
Fortune Brands,
Marathon Oil
Marathon Oil Corporation is an American company engaged in hydrocarbon exploration incorporated in Ohio and headquartered in the Marathon Oil Tower in Houston, Texas. A direct descendant of Standard Oil, it also runs international gas operations ...
,
Genworth, and
Sara Lee Corporation
The Sara Lee Corporation was an American consumer-goods company based in Downers Grove, Illinois. It had operations in more than 40 countries and sold its products in over 180 countries. Its international operations were headquartered in Utrecht ...
. 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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