Chasing Value In Industrial Conglomerates

About one in six large publicly traded industrial companies are conglomerates. How have industrial conglomerates fared over the past decade? What separates high-performing conglomerates from the rest?

To answer these questions, we studied the financial performance of industrial conglomerates and made the following key observations.

Industrial conglomerates’ financial performance was less volatile than that of other industrial companies, but over the last 10 years, they lagged their peers behind on revenue growth, earnings before interest, taxes, depreciation, and amortization (EBITDA); and free cash flow (FCF) margin expansions (Exhibit 1). Conglomerates earned low multiples relative to the sum of their parts and delivered lower total shareholder returns and lower multiples than peers did.

Exhibit 1

Performance varied significantly within each of the categories of companies studied—focused, diversified, and conglomerate. Top-quartile companies outperformed their bottom-quartile peers on all key financial metrics, including growth in total shareholder returns (TSR), revenue growth, and EBITDA margin expansion.

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Top-performing conglomerates, which we call value multipliers, delivered TSR growth that was 1,510 basis points higher than that of the bottom performers, or boat anchors (Exhibit 2). Value multipliers were subject to little or no “conglomerate discount.”

Exhibit 2

Four factors are associated with multiplying value: superior portfolio management, including divestments; efficient capital allocation; a strong performance culture; and the ability to exploit the company’s scale.

Divestments create value when they are strategic and well managed. Conglomerates looking to create value from divestments have two paths to consider—either spin-offs/split-offs or carve-outs. In recent divestitures, majority carve-outs have been most popular and have yielded higher returns for the parent (Exhibit 3). Within majority carve-outs, divestitures involving strategic or operational partners have performed better for the parent than those with a financial buyer.

Exhibit 3

The bottom line, according to our findings, is that conglomerates can succeed at creating value, but this requires a disciplined approach to avoid common pitfalls and capitalize on structural advantages (e.g., lower volatility, higher scale, cross business synergies). In addition, it is critical to develop the capabilities to create value by both acquiring and, equally necessary, divesting businesses that can create more value outside.