Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

New Report by BCG and HHL on Diversified Companies

22.04.2014

New Report by BCG and HHL on Diversified Companies Diversified Companies Can Shrink the Conglomerate Discount—or Even Turn It into a Premium—Through Better Capital Management and Portfolio Streamlining, Says Report by BCG and HHL Leipzig Graduate School of Management.

By combining better capital management and a strategic approach to portfolio streamlining, diversified companies can actively address the “conglomerate discount,” which reduces their valuations compared with pure-play companies, according to a new report by The Boston Consulting Group (BCG) and HHL Leipzig Graduate School of Management (HHL). The report, entitled Invest Wisely, Divest Strategically: Tapping the Power of Diversity to Raise Valuations, is being released today.

After shrinking during the financial crisis, the conglomerate discount rebounded to its typical range during the global economy’s tenuous recovery. Among companies publicly listed in the United States, the discount has increased to its precrisis range of 10 to 15 percent after shrinking to approximately 7 percent during the crisis. These findings are based on an extensive analysis of diversified and focused companies conducted jointly by BCG and HHL.

“While the conglomerate discount shrinks during recessionary periods and typically increase during economic recoveries, it does not disappear by itself over time,” says Jens Kengelbach, a Munich-based partner at BCG and coauthor of the report. “To improve their relative valuations, diversified companies need to actively employ means to overcome or reduce the discount. This effort begins with understanding what drives their undervaluation, which was a key focus of our research.”

Capital Allocation Efficiency Strongly Influences Lower Relative Valuations

“Our research points to inefficiency in allocating capital among their businesses as the major driver of diversified companies’ chronic undervaluation,” says Hady Farag, a Hamburg-based principal at BCG and another coauthor of the report. “All else being equal, companies that are better at matching capital investments to businesses’ attractiveness in terms of returns and growth prospects have higher valuations, whereas lower efficiency in allocating capital reduces relative valuation.”

Establishing capital allocation inefficiency as the link between diversification and the conglomerate discount has major implications for diversified companies seeking to improve their valuations. “Diversified companies suffer from lower relative valuations not because of diversification per se, but because their portfolio complexity makes it challenging to allocate capital efficiently,” explains Kengelbach. “This insight points to greater efficiency in capital allocation as the primary objective for diversified companies’ efforts to shrink the conglomerate discount or even turn it into a premium.”

Diversified Companies Can Drive Greater Efficiency in Capital Allocation

Excellence in capital management—steering capital flows among businesses to maximize returns—provides a powerful means for diversified companies to achieve higher relative valuations. In fact, many of the diversified companies studied have attained high relative valuations by maintaining highly efficient capital allocation.

This lever should be considered in combination with portfolio streamlining. The research found that reducing the number of businesses in a portfolio significantly increases diversified companies’ capital-allocation efficiency, while increasing the number of businesses significantly reduces their efficiency. This indicates that diversified companies may be able to reduce their capital-allocation disadvantages and drive substantially higher valuations by making strategic divestments.

“Diversified companies should also be particularly careful to consider how expansion into new business segments will affect their capital-allocation efficiency,” cautions Farag. “Expansion that initially can be accomplished at a reasonable cost could carry the unintended consequence of rendering capital allocation more difficult.”

Applying the Levers Requires a Plan Tailored to the Company’s Situation

A stringent, value-focused approach to portfolio management can be implemented through a role-based method of managing businesses and the capital flows among them. To apply such a method, the company determines specific roles for the individual businesses with respect to the outlook for cash generation and growth and sets investment guidelines for each role.

“If a diversified company finds that it has both attractive and unattractive businesses, the role-based approach will lead to a rebalancing of capital allocation in favor of higher-value businesses and to strategic divestments,” explains Kengelbach. “If its businesses permanently require larger investments than they generate in cash, the company should seek to raise additional capital or pursue joint ventures in order to fully capture the value from its priority segments.” Conversely, a company that lacks high-value investment opportunities for all the cash generated by its businesses should consider distributing excess cash to shareholders through dividends or buybacks.

“Our latest research supports BCG’s perspective that diversification in itself is not detrimental to value creation,” says Kengelbach. “Rather, it is how a company manages its diversified business that determines its performance. Although the management challenges are indeed significant, leading diversified companies have demonstrated that efficient capital allocation and a clear and consistent portfolio strategy can drive superior value.”

A copy of the report can be downloaded at http://www.bcgperspectives.com.

About HHL Leipzig Graduate School of Management

Founded in 1898, HHL Leipzig Graduate School of Management was the first business school in Germany. Currently, HHL is one of the country’s leading graduate schools, offering a variety of academic programs for different graduate degrees, including MSc, MBA, PhD, as well as Executive Education. The Center for Corporate Transactions, headed by Prof. Dr. Bernhard Schwetzler, is HHL’s major research unit in the field of mergers and acquisitions. It is designed to bring together scientists of HHL and its research partners working in the areas of corporate finance, accounting, law, and game theory to analyze and discuss problems in corporate transactions. For more information, please visit http://www.hhl.de/finance.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 81 offices in 45 countries. For more information, please visit http://www.bcg.com.

About bcgperspectives.com

Bcgperspectives.com features the latest thinking from BCG experts as well as from CEOs, academics, and other leaders. It covers issues at the top of senior management’s agenda. It also provides unprecedented access to BCG’s extensive archive of thought leadership stretching back 50 years to the days of Bruce Henderson, the firm’s founder and one of the architects of modern management consulting. All of our content—including videos, podcasts, commentaries, and reports—can be accessed by PC, mobile, iPad, Facebook, Twitter and LinkedIn.

Weitere Informationen:

http://www.hhl.de/finance
http://www.bcg.com
http://www.bcgperspectives.com

Volker Stößel | idw - Informationsdienst Wissenschaft

More articles from Business and Finance:

nachricht Intelligent transaction tax could help reduce systemic risk in financial networks
11.04.2016 | International Institute for Applied Systems Analysis (IIASA)

nachricht Is there a bubble in the art market?
07.01.2016 | Universität Luxemburg - Université du Luxembourg

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Atomic precision: technologies for the next-but-one generation of microchips

In the Beyond EUV project, the Fraunhofer Institutes for Laser Technology ILT in Aachen and for Applied Optics and Precision Engineering IOF in Jena are developing key technologies for the manufacture of a new generation of microchips using EUV radiation at a wavelength of 6.7 nm. The resulting structures are barely thicker than single atoms, and they make it possible to produce extremely integrated circuits for such items as wearables or mind-controlled prosthetic limbs.

In 1965 Gordon Moore formulated the law that came to be named after him, which states that the complexity of integrated circuits doubles every one to two...

Im Focus: Researchers demonstrate size quantization of Dirac fermions in graphene

Characterization of high-quality material reveals important details relevant to next generation nanoelectronic devices

Quantum mechanics is the field of physics governing the behavior of things on atomic scales, where things work very differently from our everyday world.

Im Focus: Graphene: A quantum of current

When current comes in discrete packages: Viennese scientists unravel the quantum properties of the carbon material graphene

In 2010 the Nobel Prize in physics was awarded for the discovery of the exceptional material graphene, which consists of a single layer of carbon atoms...

Im Focus: Transparent - Flexible - Printable: Key technologies for tomorrow’s displays

The trend-forward world of display technology relies on innovative materials and novel approaches to steadily advance the visual experience, for example through higher pixel densities, better contrast, larger formats or user-friendler design. Fraunhofer ISC’s newly developed materials for optics and electronics now broaden the application potential of next generation displays. Learn about lower cost-effective wet-chemical printing procedures and the new materials at the Fraunhofer ISC booth # 1021 in North Hall D during the SID International Symposium on Information Display held from 22 to 27 May 2016 at San Francisco’s Moscone Center.

Economical processing

Im Focus: Trojan horses for hospital bugs

Staphylococcus aureus usually is a formidable bacterial pathogen. Sometimes, however, weakened forms are found in the blood of patients. Researchers of the University of Würzburg have now identified one mutation responsible for that phenomenon.

Staphylococcus aureus is a bacterium that is frequently found on the human skin and in the nose where it usually behaves inconspicuously. However, once inside...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Networking 4.0: International Laser Technology Congress AKL’16 Shows New Ways of Cooperations

24.05.2016 | Event News

Challenges of rural labor markets

20.05.2016 | Event News

International expert meeting “Health Business Connect” in France

19.05.2016 | Event News

 
Latest News

Rutgers scientists help create world's largest coral gene database

24.05.2016 | Earth Sciences

New technique controls autonomous vehicles on a dirt track

24.05.2016 | Information Technology

Programmable materials find strength in molecular repetition

24.05.2016 | Materials Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>