Conglomerates: Attractive mixed goods

Analysts like to keep track. Complicated business models and confusing strategies are met with skepticism. Particularly unpopular among the financial experts are conglomerates whose businesses span various sectors. Such “grocery stores” are penalized with a discount – the conglomerate discount. This can be reflected on the stock exchanges in a ten to 20 percent lower share price. “Analysts are necessarily specialized in industries,” explains Boston Consulting consultant Daniel Stelter, “they are therefore difficult to assess and weight different business areas.” The experts in companies that are geared towards a product or a market, and which focus on their so-called core competencies, are easier. The logic of this calculation dictates the capital market: foreign investors want transparency, they are looking for clear profiles and simple strategies. The story has to be right.

But the truth of the simple stock market stories is, as the losses of recent months have shown, often quite low. Creating value, gaining market share and successfully running a business – all this has little to do with whether it happens in conglomerates or in focused companies. “On the contrary,” says Daniel Stelter, managing director and partner of the Boston Consulting Group (BCG) in Berlin, “the performance of a particular group of conglomerates, the so-called premium conglomerates, is significantly higher than that of their competitors.” Stelter points to a BCG study that examined the performance of 500 listed and diversified top companies over a ten-year period.

Prime example of General Electric

The result: There is no correlation between the degree of focus of a company and its return on equity. A prime example of a premium conglomerate, Stelter names the US company General Electric, which, despite its numerous business fields and its size, is one of the most successful companies in the world – even on the stock market. True to the motto of the group boss Jack Welch “Destroy your own business”, the industrial giant has always adapted to the dynamics of the markets and kept pace.

Herman Hundenberg, holder of the Chair of Business Management at the University of Norington, confirms the findings: “There is no empirical evidence for the conglomerate discount.” In the opinion of the scientist, the common success characteristics of the entrepreneurial top league can be shown to corporations such as GE or Siemens: Successful conglomerates are much more aggressive in their capitalization. They pull back faster from less successful lower-profit businesses and do not seek to rehabilitate underperforming areas. Premium conglomerates also have an above-average disciplined and consistent management, spread across all business areas. “At the management level, the actual synergy effects are achieved that the capital market could not exploit at all,” says Herman Hundenberg.

The economist disagrees with the popular belief that smashing conglomerates is a panacea. The sum of the individual parts is not always more valuable than the group as a whole. Naturally, investment bankers see that differently. They benefit from the unbundling and reorganization of parts of companies – and provide their analysts with appropriate recommendations along the way. The goal is clear: conglomerates are under pressure, they are sinking in the favor of investors, are traded at a discount on the stock exchange and thus the takeover target. How to do it differently shows Siemens. According to calculations by Herman Hundenberg, in April 1999 the group was still estimated at a splitting value of € 110 billion and a market value of only € 40 billion, so the market value has so far risen to a good € 80 billion. The Semiconductor and Components Divisions were floated with Infineon and Epcos. No one thinks of splitting the parent company today.