Study by the Boston Consulting Group Shatters the Myth That Conglomerates Would Produce Higher Shareholder Returns by Focusing on Fewer Businesses
Study identifies ten levers diversified firms can use to generate above-
BOSTON, Dec. 7 /PRNewswire/ -- The popular belief that conglomerates would generate higher shareholder returns if they focused on fewer business is not only empirically unfounded, it is also potentially counterproductive, according to a new study by The Boston Consulting Group (BCG) published today. Many conglomerates already outperform the stock market average, generating higher returns than many of the top focused firms. Moreover, diversified companies that do focus do not necessarily create additional value. Based on an analysis of 300 of the world's largest diversified, slightly diversified, and focused companies in the United States, Europe, and Asia, BCG found that 52 percent of conglomerates beat the stock market average, measured by relative total shareholder return (RTSR). Of the eight European diversified companies that focused in the past five years, only three created significant additional value. This reinforces the findings of an earlier BCG study (1) that only 30 percent of breakups create value and 45 percent destroy it. In its latest report, Managing for Value: How the World's Top Diversified Companies Produce Superior Shareholder Returns, BCG identifies ten key "levers" that the top conglomerates use to create superior long-term value creation. These range from efficient internal capital allocation to a clear and consistent portfolio strategy, from rotating management skills among business units to strict corporate governance (based on the model used by many private equity firms). "It's not a company's degree of diversity that determines its shareholder returns, it's how the firm manages its diversity that matters," says Dieter Heuskel, one of the report's authors. "Provided the right levers are pulled, all conglomerates can produce above-average returns. Consequently, all diversified companies should resist external pressure to focus from investment analysts and other commentators." The conglomerate discount is almost exclusively a European phenomenon - and the pressure to focus is largely confined to Europe. However, U.S. conglomerates could also come under fire if their comparatively stronger fundamentals deteriorate. So too could diversified firms in Asia: these companies already have relatively low profitability and are likely to come under pressure to focus as the region's capital markets mature and become more demanding. This study is intended to give diversified companies the confidence to resist calls to focus, as well as the insights needed to produce superior returns. The study demonstrates that there are limited occasions when focusing can add value, notably when there is a clear strategic growth opportunity. It also shows that there are many more opportunities for conglomerates to add value by managing their diversity more effectively. Copies of the report, Managing for Value: How the World's Top Diversified Companies Produce Superior Shareholder Returns, can be obtained via the Publications section of BCG's Web site at www.bcg.com. Note: Diversified companies (also known as conglomerates) are defined as companies that have three or more unrelated businesses, each accounting for at least 10 percent of total revenues. To qualify as an unrelated business, a unit must have fundamentally different products and customers from the other units and require different management capabilities and know-how. (1) Conglomerates Report 2002: Breakups Are Not the Only Solution About The Boston Consulting Group Since its founding in 1963, The Boston Consulting Group has focused on helping clients achieve competitive advantage. Our firm believes that best practices or benchmarks are rarely enough to create lasting value and that positive change requires new insight into economics and markets and the organizational capabilities to chart and deliver on winning strategies. We consider every assignment to be a unique set of opportunities and constraints for which no standard solution will be adequate. BCG has 61 offices in 36 countries and serves companies in all industries and markets. For further information, please visit our Web site at www.bcg.com.
SOURCE The Boston Consulting Group
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