Conglomerate discount is an economic concept describing a situation when the stock 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.
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, 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 is moving into pharmaceuticals.
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 from that sum.
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, 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.
Mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.
A conglomerate is a combination of multiple business entities operating in entirely different industries under one corporate group, usually involving a parent company and many subsidiaries. Often, a conglomerate is a multi-industry company. Conglomerates are often large and multinational.
ITT Inc., formerly ITT Corporation, is an American worldwide manufacturing company based in White Plains, New York. The company produces specialty components for the aerospace, transportation, energy and industrial markets. ITT's three businesses include Industrial Process, Motion Technologies, and Connect and Control Technologies.
Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets. Price discrimination is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy. Price differentiation essentially relies on the variation in the customers' willingness to pay and in the elasticity of their demand. Price discrimination, very differently, relies on monopoly power, including market share, product uniqueness, sole pricing power, etc.
Economies of scope are "efficiencies formed by variety, not volume". In economics, "economies" is synonym to cost saving and "scope" is synonymous with broadening production/services through diversified products. For example, a gas station that sells gasoline can sell soda, milk, baked goods, etc. through their customer service representatives and thus gasoline companies achieve economies of scope.
A chaebol is a large industrial conglomerate that is run and controlled by an owner or family in South Korea. A chaebol often consists of many diversified affiliates, controlled by an owner whose power over the group often exceeds legal authority. The term is often used in a context similar to that of the English word "conglomerate". The term was derived from the Japanese zaibatsu, sharing a similar structure and origins. The first known use was in 1972. Several dozen large South Korean family-controlled corporate groups fall under this definition.
In finance, valuation is the process of determining the present value (PV) of an asset. Valuations can be done on assets or on liabilities. Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability.
Financial Services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises. Financial services companies are present in all economically developed geographic locations and tend to cluster in local, national, regional and international financial centers such as London, New York City, and Tokyo.
Debt restructuring is a process that allows a private or public company or a sovereign entity facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts to improve or restore liquidity so that it can continue its operations.
Loews Corporation is an American conglomerate headquartered in New York City. The company's majority-stake holdings include CNA Financial Corporation, Diamond Offshore Drilling, Boardwalk Pipeline Partners, Loews Hotels and Consolidated Container Company.
Sime Darby Berhad is a Malaysian trading conglomerate. Its core businesses operate in and serve the industrial, plantation, motors and logistics sectors as well as the healthcare, insurance, and retail segments.
Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest. In some cases, the court would appoint a forensic accountant as the joint expert doing the business valuation.
Wesfarmers Limited is an Australian conglomerate, headquartered in Perth, Western Australia, with interests predominantly in Australian and New Zealand retail, chemicals, fertilisers, coal mining and industrial and safety products. With AU$65.98 billion in the 2016 financial year, it is the largest Australian company by revenue, overtaking Woolworths and BHP. Wesfarmers is the largest private employer in Australia, with approximately 220,000 employees.
A corporate spin-off, also known as a spin-out, or starburst, is a type of corporate action where a company "splits off" a section as a separate business.
A corporate group or group of companies is a collection of parent and subsidiary corporations that function as a single economic entity through a common source of control. The concept of a group is frequently used in tax law, accounting and company law to attribute the rights and duties of one member of the group to another or the whole. If the corporations are engaged in entirely different businesses, the group is called a conglomerate. The forming of corporate groups usually involves consolidation via mergers and acquisitions, although the group concept focuses on the instances in which the merged and acquired corporate entities remain in existence rather than the instances in which they are dissolved by the parent. The group may be owned by a holding company which may have no actual operations.
A control premium is an amount that a buyer is sometimes willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company.
Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value.
ITT: The Management of Opportunity is a non-fiction book about ITT Corporation by American business writer and historian Robert Sobel. The book was initially published by Times Books in 1982.
Minority discount is an economic concept reflecting the notion that a partial ownership interest may be worth less than its proportional share of the total business. The concept applies to equities with voting power because the size of voting position provides additional benefits or drawbacks. For example, ownership of a 51% share in the business is usually worth more than 51% of its equity value—this phenomenon is called the premium for control. Conversely, ownership of a 30% share in the business may be worth less than 30% of its equity value. This is so because this minority ownership limits the scope of control over critical aspects of the business. Share prices of public companies usually reflect the minority discount. This is why take-private transactions involve a substantial premium over recently quoted prices.
Alphabet Inc. is an American multinational conglomerate headquartered in Mountain View, California. It was created through a corporate restructuring of Google on October 2, 2015, and became the parent company of Google and several former Google subsidiaries. The two founders of Google assumed executive roles in the new company, with Larry Page serving as CEO and Sergey Brin as president. Alphabet is the world's fifth-largest technology company by revenue and one of the world's most valuable companies.