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-

average returns

Dec 07, 2006, 00:00 ET from The Boston Consulting Group

    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
     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
     (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
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SOURCE The Boston Consulting Group