Capital markets apply a discount on multinationals that combine multiple businesses under one roof. According to quantitative studies, their shares are priced 11%-21% below focused competitors. If you are part of a multinational, how can you structure your organization to improve agility and ultimately increase the company’s share price?
Authors: Markus Neier, Raphael Maccagnan
Digitalization and globalization led to highly competitive markets that demand customer-centricity, agility and strategic focus. As these trends continue, the term “conglomerate discount” becomes more relevant than ever. To tackle a valuation below its peers, organizations try to increase synergies through integrating functions or divesting certain non-core business units.
An alternative approach is to separate internally and change the organizational structure from a management holding to a financial holding of independent business units (BUs). Despite certain dis-synergies, this can lead to a significant increase in competitiveness and shareholder value through:
- More efficient decision making and an improved strategic focus: Decision makers and direct reporting lines are all in the same legal entity structure. Its strategy is fully focused and decisions will be made by a management solely responsible for the specific business.
- An optimized use of resources: Resources are fully dedicated to their business. They will be more efficient not having shared responsibilities and can adapt faster to the specific needs of their customers. Shared services are only provided if they are performed and priced competitively.
- The possibility of dedicated funding: While a conglomerate needs to prioritize between several BUs, an independent organization can manage its own capital. Additionally, it is more flexible sourcing new funds (e.g. through a separate IPO).
An illustration of a potential transition can be seen below:
A company can achieve such a new structure by transferring assets, people and processes into separate legal entities. Only a few corporate services at headquarter like corporate treasury, shared service centers or central IT might be provided to all BUs. Shared services between the BUs require a competitively priced service agreement or can be outsourced if this will be more cost effective. The new structure ensures clear roles and responsibilities and gives each management greater independence to develop the business.
Handelsblatt (Mai 2018) and NZZ (July 2018) call it a “separation wave” that is happening as a major trend and recent examples in Europe are Siemens, Deutsche Bank Asset Management (DWS) or Continental. The target is to make the organization more agile and competitive. While these organizations already started such a transformation, we believe that this trend will continue and more companies implement such a change in order to sustain a competitive edge.
Did we catch your interest and do you think your organization is ready to take a step into a more agile future? Contact us. We would be happy to have a conversation, discuss recent market trends and evaluate opportunities for your organization.
Ammann, Hoechle and Schmid (2011) from the University of St. Gallen found a statistically significant conglomerate discount of 11% to 21% in a quantitative study where they analyzed over 2,500 companies comparing diversified with focused companies. Further research on the theoretical concept can be found in The Journal of Finance in an article by Claudia Custodio (2014) or Montgomery and Wernerfelt, dating back to 1988.