A conglomeration discount exists if the share price is below the calculated intrinsic value. In practical terms, this result means that a spin-off (such as a spin-off or carve-out) of certain parts of the business might be useful.
In detail, Siemens intends to spin off three large business units (or divisions, as the business units at Siemens are called) from the group:
The Mobility segment is to be incorporated into a joint venture with Alstom
The wind power division (Wind Power) has already been brought together with the Spanish Gamesa
The Healthcare division was listed on the stock exchange as Siemens Healthineers
Siemens is thus taking into account the fact that for certain segments or businesses, the advantages of independence far exceed the advantages of belonging to a group. For Healthineers this could be better access to capital, for wind power and the train division the industrial structure improved by the joint ventures (keyword: consolidation and economies of scale).
For Siemens itself, the advantages lie in the reduced complexity. CEO Keaser’s management now only has to focus on three areas instead of six.
In addition to the examples already mentioned, there is currently one class of conglomerates that are not rated by the market either with a conglomeration discount, but instead with a (significant) premium. These are (of course) the big technology companies or tech conglomerates, ie Amazon, Microsoft etc.
The following figure gives some clues that differentiate the tech conglomerates from the traditional conglomerates:
I think that makes it easy to see why, in the case of technology companies, the sum of the parts would actually be worth less than the whole.
Let’s take a concrete example: After Amazon successfully launched its online bookstore, the people in charge around Jeff Bezos quickly discovered that the server capacities were underutilized especially at night. Of course that was because not so many people came to Amazon’s website at night and ordered books. Out of these free server capacities, AWS emerged (Amazon’s cloud service), today one of the company’s key earnings drivers.
In essence, we have a platform that i.W. is being continuously expanded and a very flexible organization with many innovative shops around it.
Conclusion: What we as Value Investors can learn
What can we, as value investors, now learn from all this information? For one thing, that conglomerate is not the same conglomerate. And that not every conglomerate earns directly a conglomerate discount.
Dividing value drivers into leadership, synergies and services can help us to better understand the true value of a corporate structure or corporate headquarters … and to understand how sustainable this value contribution actually is or can be (and of which that depends). For example, in the case of Berkshire Hathaway, with a resignation from Warren Buffett and / or Charlie Munger, I’d be less concerned about selecting the right investments for Berkshire in the future, but more about the core role of “corporate”, namely, efficient and value-added leadership the individual shops.
Looking at a tech conglomerate like Amazon can also give us a blueprint for what characteristics we should look at when analyzing a conglomerate. Of course, in the end, it will be up to us to analyze and assess the sustainability of certain value drivers (for example, the innovative power of 3M).