Welcome!

News Feed Item

New Research Points to Ways Diversified Companies Can Overcome the Conglomerate Discount

Diversified Companies Can Shrink the Conglomerate Discount -- or Even Turn It Into a Premium -- Through Better Capital Management and Portfolio Streamlining, Says Report by BCG and HHL Leipzig Graduate School of Management

MUNICH, GERMANY -- (Marketwired) -- 04/22/14 -- By combining better capital management and a strategic approach to portfolio streamlining, diversified companies can actively address the "conglomerate discount," which reduces their valuations compared with pure-play companies, according to a new report by The Boston Consulting Group (BCG) and HHL Leipzig Graduate School of Management (HHL). The report, entitled Invest Wisely, Divest Strategically: Tapping the Power of Diversity to Raise Valuations, is being released today.

After shrinking during the financial crisis, the conglomerate discount rebounded to its typical range during the global economy's tenuous recovery. Among companies publicly listed in the United States, the discount has increased to its pre-crisis range of 10 to 15 percent after shrinking to approximately 7 percent during the crisis. These findings are based on an extensive analysis of diversified and focused companies conducted jointly by BCG and HHL.

"While the conglomerate discount shrinks during recessionary periods and typically increases during economic recoveries, it does not disappear by itself over time," says Jens Kengelbach, a Munich-based partner at BCG and coauthor of the report. "To improve their relative valuations, diversified companies need to actively employ means to overcome or reduce the discount. This effort begins with understanding what drives their undervaluation, which was a key focus of our research."

Capital Allocation Efficiency Strongly Influences Lower Relative Valuations

"Our research points to inefficiency in allocating capital among their businesses as the major driver of diversified companies' chronic undervaluation," says Hady Farag, a Hamburg-based principal at BCG and another coauthor of the report. "All else being equal, companies that are better at matching capital investments to businesses' attractiveness in terms of returns and growth prospects have higher valuations, whereas lower efficiency in allocating capital reduces relative valuation."

Establishing capital allocation inefficiency as the link between diversification and the conglomerate discount has major implications for diversified companies seeking to improve their valuations. "Diversified companies suffer from lower relative valuations not because of diversification per se, but because their portfolio complexity makes it challenging to allocate capital efficiently," explains Kengelbach. "This insight points to greater efficiency in capital allocation as the primary objective for diversified companies' efforts to shrink the conglomerate discount or even turn it into a premium."

Diversified Companies Can Drive Greater Efficiency in Capital Allocation

Excellence in capital management -- steering capital flows among businesses to maximize returns -- provides a powerful means for diversified companies to achieve higher relative valuations. In fact, many of the diversified companies studied have attained high relative valuations by maintaining highly efficient capital allocation.

This lever should be considered in combination with portfolio streamlining. The research found that reducing the number of businesses in a portfolio significantly increases diversified companies' capital-allocation efficiency, while increasing the number of businesses significantly reduces their efficiency. This indicates that diversified companies may be able to reduce their capital-allocation disadvantages and drive substantially higher valuations by making strategic divestments.

"Diversified companies should also be particularly careful to consider how expansion into new business segments will affect their capital-allocation efficiency," cautions Farag. "Expansion that initially can be accomplished at a reasonable cost could carry the unintended consequence of rendering capital allocation more difficult."

Applying the Levers Requires a Plan Tailored to the Company's Situation

A stringent, value-focused approach to portfolio management can be implemented through a role-based method of managing businesses and the capital flows among them. To apply such a method, the company determines specific roles for the individual businesses with respect to the outlook for cash generation and growth and sets investment guidelines for each role.

"If a diversified company finds that it has both attractive and unattractive businesses, the role-based approach will lead to a rebalancing of capital allocation in favor of higher-value businesses and to strategic divestments," explains Kengelbach. "If its businesses permanently require larger investments than they generate in cash, the company should seek to raise additional capital or pursue joint ventures in order to fully capture the value from its priority segments." Conversely, a company that lacks high-value investment opportunities for all the cash generated by its businesses should consider distributing excess cash to shareholders through dividends or buybacks.

"Our latest research supports BCG's perspective that diversification in itself is not detrimental to value creation," says Kengelbach. "Rather, it is how a company manages its diversified business that determines its performance. Although the management challenges are indeed significant, leading diversified companies have demonstrated that efficient capital allocation and a clear and consistent portfolio strategy can drive superior value."

A copy of the report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or [email protected]."

About HHL Leipzig Graduate School of Management
Founded in 1898, HHL Leipzig Graduate School of Management was the first business school in Germany. Currently, HHL is one of the country's leading graduate schools, offering a variety of academic programs for different graduate degrees, including MSc, MBA, PhD, as well as Executive Education. The Center for Corporate Transactions, headed by Prof. Dr. Bernhard Schwetzler, is HHL's major research unit in the field of mergers and acquisitions. It is designed to bring together scientists of HHL and its research partners working in the areas of corporate finance, accounting, law, and game theory to analyze and discuss problems in corporate transactions. For more information, please visit www.hhl.de/finance.

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 81 offices in 45 countries. For more information, please visit bcg.com.

About bcgperspectives.com
Bcgperspectives.com features the latest thinking from BCG experts as well as from CEOs, academics, and other leaders. It covers issues at the top of senior management's agenda. It also provides unprecedented access to BCG's extensive archive of thought leadership stretching back 50 years to the days of Bruce Henderson, the firm's founder and one of the architects of modern management consulting. All of our content -- including videos, podcasts, commentaries, and reports -- can be accessed by PC, mobile, iPad, Facebook, Twitter and LinkedIn.

More Stories By Marketwired .

Copyright © 2009 Marketwired. All rights reserved. All the news releases provided by Marketwired are copyrighted. Any forms of copying other than an individual user's personal reference without express written permission is prohibited. Further distribution of these materials is strictly forbidden, including but not limited to, posting, emailing, faxing, archiving in a public database, redistributing via a computer network or in a printed form.

Latest Stories
For financial firms, the cloud is going to increasingly become a crucial part of dealing with customers over the next five years and beyond, particularly with the growing use and acceptance of virtual currencies. There are new data storage paradigms on the horizon that will deliver secure solutions for storing and moving sensitive financial data around the world without touching terrestrial networks. In his session at 20th Cloud Expo, Cliff Beek, President of Cloud Constellation Corporation, w...
DevOps is often described as a combination of technology and culture. Without both, DevOps isn't complete. However, applying the culture to outdated technology is a recipe for disaster; as response times grow and connections between teams are delayed by technology, the culture will die. A Nutanix Enterprise Cloud has many benefits that provide the needed base for a true DevOps paradigm.
SYS-CON Events announced today that Progress, a global leader in application development, has been named “Bronze Sponsor” of SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Enterprises today are rapidly adopting the cloud, while continuing to retain business-critical/sensitive data inside the firewall. This is creating two separate data silos – one inside the firewall and the other outside the firewall. Cloud ISVs ofte...
Existing Big Data solutions are mainly focused on the discovery and analysis of data. The solutions are scalable and highly available but tedious when swapping in and swapping out occurs in disarray and thrashing takes place. The resolution for thrashing through machine learning algorithms and support nomenclature is through simple techniques. Organizations that have been collecting large customer data are increasingly seeing the need to use the data for swapping in and out and thrashing occurs ...
SYS-CON Events announced today that Outscale, a global pure play Infrastructure as a Service provider and strategic partner of Dassault Systèmes, will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Founded in 2010, Outscale simplifies infrastructure complexities and boosts the business agility of its customers. Outscale delivers a secure, reliable and industrial strength solution for its customers, which in...
Cloud applications are seeing a deluge of requests to support the exploding advanced analytics market. “Open analytics” is the emerging strategy to deliver that data through an open data access layer, in the cloud, to be directly consumed by external analytics tools and popular programming languages. An increasing number of data engineers and data scientists use a variety of platforms and advanced analytics languages such as SAS, R, Python and Java, as well as frameworks such as Hadoop and Spark...
SYS-CON Events announced today that DivvyCloud will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. DivvyCloud software enables organizations to achieve their cloud computing goals by simplifying and automating security, compliance and cost optimization of public and private cloud infrastructure. Using DivvyCloud, customers can leverage programmatic Bots to identify and remediate common cloud problems in rea...
Amazon started as an online bookseller 20 years ago. Since then, it has evolved into a technology juggernaut that has disrupted multiple markets and industries and touches many aspects of our lives. It is a relentless technology and business model innovator driving disruption throughout numerous ecosystems. Amazon’s AWS revenues alone are approaching $16B a year making it one of the largest IT companies in the world. With dominant offerings in Cloud, IoT, eCommerce, Big Data, AI, Digital Assis...
Interested in leveling up on your Cloud Foundry skills? Join IBM for Cloud Foundry Days on June 7 at Cloud Expo New York at the Javits Center in New York City. Cloud Foundry Days is a free half day educational conference and networking event. Come find out why Cloud Foundry is the industry's fastest-growing and most adopted cloud application platform.
While some vendors scramble to create and sell you a fancy solution for monitoring your spanking new Amazon Lambdas, hear how you can do it on the cheap using just built-in Java APIs yourself. By exploiting a little-known fact that Lambdas aren’t exactly single threaded, you can effectively identify hot spots in your serverless code. In his session at 20th Cloud Expo, David Martin, Principal Product Owner at CA Technologies, will give a live demonstration and code walkthrough, showing how to ov...
SYS-CON Events announced today that delaPlex will exhibit at SYS-CON's @CloudExpo, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. delaPlex pioneered Software Development as a Service (SDaaS), which provides scalable resources to build, test, and deploy software. It’s a fast and more reliable way to develop a new product or expand your in-house team.
Most DevOps journeys involve several phases of maturity. Research shows that the inflection point where organizations begin to see maximum value is when they implement tight integration deploying their code to their infrastructure. Success at this level is the last barrier to at-will deployment. Storage, for instance, is more capable than where we read and write data. In his session at @DevOpsSummit at 20th Cloud Expo, Josh Atwell, a Developer Advocate for NetApp, will discuss the role and value...
In order to meet the rapidly changing demands of today’s customers, companies are continually forced to redefine their business strategies in order to meet these needs, stay relevant and continue to see profitable growth. IoT deployment and development is integral in this transformation, and today businesses are increasingly seeing the value of investing their resources into IoT deployments. These technologies are able increase ROI through projects such as connecting supply chains or enabling sm...
SYS-CON Events announced today that Cloudistics, an on-premises cloud computing company, has been named “Bronze Sponsor” of SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Cloudistics delivers a complete public cloud experience with composable on-premises infrastructures to medium and large enterprises. Its software-defined technology natively converges network, storage, compute, virtualization, and management into a ...
New competitors, disruptive technologies, and growing expectations are pushing every business to both adopt and deliver new digital services. This ‘Digital Transformation’ demands rapid delivery and continuous iteration of new competitive services via multiple channels, which in turn demands new service delivery techniques – including DevOps. In this power panel at @DevOpsSummit 20th Cloud Expo, moderated by DevOps Conference Co-Chair Andi Mann, panelists will examine how DevOps helps to meet th...