The Conglomerate Discount

The case against conglomerates is a strong one. Consequently, the market usually applies a haircut to the piecewise, or sum-of-parts, value − that is, it frequently values conglomerates at a discount to more focused companies. This is known as the conglomerate discount. According to a 2001 article in CFO Magazine, academic studies have suggested in the past that this discount could be as much as 10−12%, but more recent academic inquiries have concluded that the discount is closer to 5%. Of course, there are some conglomerates that command a premium but, in general, the market ascribes a discount.
The conglomerate discount gives investors a good idea of how the market values the conglomerate as compared to the sum value of its various parts. A deep discount signals that shareholders would benefit if the company were dismantled and its divisions left to run as separate stocks.

Conclusion: What to Look For
The big question is whether investing in conglomerates makes sense. The conglomerate discount suggests it does not. But there may be a silver lining. If you invest in conglomerates that break up into individual pieces through divestitures and spinoffs, you could capture an increase in value as the conglomerate discount disappears. As a general rule, you stand to get greater returns when conglomerates break up than when they are built.

That said, some conglomerates do command a valuation premium − or at least a slim conglomerate discount. These are extremely well-run companies. They are managed aggressively, with clear targets set for divisions. Underperforming companies are quickly sold, or divested. More importantly, successful conglomerates have financial rather than strategic or operating objectives, adopting strict approaches to portfolio management.
If you choose to invest in conglomerates, look for ones with financial discipline, rigorous analysis and valuation, a refusal to overpay for acquisitions and a willingness to sell off existing businesses. As with any investment decision, think before you buy and don't assume that big companies always come with big returns.

(Source: http://www.investopedia.com)

Could you explain what the following terms mean?

§ diversification

§ diworsification

§ share underperformance

§ the counter-cyclical argument.

Assignment 4. In small groups, brainstorm for pros and cons of such investment. Make up a list of all the advantages and disadvantages mentioned in the text and supplement it with your own arguments.

Assignment 5. Board Meeting Simulation. We'll use a fictional conglomerate called DiversiCo, which consists of two unrelated businesses: a beverage division and a biotechnology division. Split into 2 groups. One team represents corporate executives who are in favour of keeping hold of both businesses (they think that the value and performance of two companies combined will be greater than the sum of the separate individual parts), members of the other group (investors) prefer to sell them off (according to them, this multi-business company could be worth significantly more if it were broken up into individual businesses).

Assignment 6. Working in small groups, brainstorm for pros and cons of multinational corporations. Use the text below to check if your lists of advantages and disadvantages can be expanded.

Date: 2015-09-23; view: 365; Нарушение авторских прав