The truism that a diversified conglomerate trades at a discount to more focused companies drives the market for cutouts and spin-offs. But some market theorists argue that the spell has broken for the so-called “conglomerate curse.” We took the debate — conglomerate discount: alive or dead? — to four financial experts in industry and academia.
Todd Moody, managing partner at Ernst & Young’s Transaction Analysis Services unit, which does valuations in support of M&A, financial reporting and tax planning.
ALIVE!
“In one recent media example — where the company was broken into two separate publicly traded companies — the stock price of the one considered to be high-growth languished; the slower-growth company’s stock has performed better. This could be a case where the latter, with more concentrated market focus, was in a better position to deliver on shareholder expectations. As diversified companies look to increase shareholder value, they will increasingly divest or carve out non-core assets. There are billions of private-equity dollars chasing viable acquisition targets; it’s hard for management
not to pay notice to this market dynamic.”
Kenneth Kay, chief financial officer at global commercial real-estate service firm CB Richard Ellis
DEAD!
“The huge volume of LBOs and M&A activity means there’s a tremendous amount of liquidity in the market that will get placed. The conglomerate discount becomes less of a factor as firms want to invest in growth. The presumption: The acquirer is confident it can convince the market of the value proposition, thus mitigating the potential for conglomerate discount.”
Randolph Beatty, dean of the University of Southern California’s Leventhal School of Accounting
ALIVE!
“In theory, managers should do what they know, and markets should be used to diversify risk. Private-equity firms give managers incentive to get back to basics, identify the firm’s comparative advantage and eliminate unrelated business entities. But you don’t want to stay in buggy whips right till the end. There are some advantages to diversifying if you have a dying business. Managers need to be ready to move underlying resources into new companies where they’ve found higher market demand.”
Matt Delaney, CEO and CPA at the Delaney Group, a privately held conglomerate with operations in real-estate development, M&A, student tours and event marketing
DEAD!
“The rationale for buying a subsidiary
is to capitalize on synergies and economies of scale of that business, which should lead to more efficiency and, with luck, lower cost of capital
as your asset base and cash position grow. Take the ‘mini-Berkshire,’ Leucadia, which is well-diversified with mining and drilling, telecommunications, health care, manufacturing, real estate and wineries. It’s a conglomerate that continues to increase shareholder returns, as evidenced
by its executive-compensation plans.”
