Specialization-1 vs. Diversification-0
There is an ongoing debate in the business world between specialization and diversification. Companies like Fitbit and Lululemon benefit from their expertise and innovation in niche markets, whereas companies like PepsiCo and Koch Industries benefit from their diverse product and service lines that appeal to a wide variety of customers in several unrelated markets. So which business strategy is more effective in creating value for the company and its shareholders? While this question is not entirely answered by a quantitative analysis, given that businesses are dictated by more than the numbers, this research report addresses the underlying question ...view middle of the document...
To address this debate, this analysis focuses on ten different conglomerates in various industries with at least three unrelated business segments. The goal of the analysis is to create a clearer picture of whether or not there is a conglomerate discount or premium, and if so, what the size of that deviation from the actual value of the company may be.
At its core, the analysis consists of comparing implied market values of ten different companies that were generated using a sum-of-the-parts valuation methodology with the current market caps of the respective companies. The analysis focuses on conglomerates in a number of different industries with market values that range from $64B to $283B. The ten companies were selected to specifically create a diverse landscape of companies that could yield a notable conclusion. Conglomerates were excluded that operate financial institutions like GE Capital since the valuation metrics for those companies vary tremendously and debt is not viewed in the same light as other institutions. Behemoth conglomerate companies, like Berkshire Hathaway for example, were also excluded because they operate more like hedge funds with over 50 subdivisions. Figure-1 below provides the list of companies included in this analysis.
Company | Market Cap (B) |
Johnson & Johnson | $282.7 |
The Walt Disney Company | $184.3 |
Comcast Corporation | $143.6 |
The Boeing Company | $96.6 |
3M Company | $96.1 |
United Technologies Corporation | $83.5 |
Honeywell International Inc. | $78.6 |
The Dow Chemical Company | $66.2 |
DuPont | $65.3 |
Danaher Corporation | $64.7 |
Figure-1 | |
To conduct the sum-of-the-parts (SOTP) analysis, relevant financial performance data was sourced from each company’s most recent 10-K SEC filing where financials are broken down by business segments. Segmented financials are oftentimes not broken down into full income statements, and the divisions may only report financials down to operating income (EBIT). For that reason, the most relevant measurements of performance that were readily available in the annual reports for each company were used. Figure-2 below shows which performance metrics were used for each company.
Company | Performance Metric |
Johnson & Johnson | Revenue |
The Walt Disney Company | EBIT |
Comcast Corporation | Revenue |
The Boeing Company | EBIT |
3M Company | EBIT |
United Technologies Corporation | EBIT |
Honeywell International Inc. | EBIT |
The Dow Chemical Company | EBITDA |
DuPont | EBIT |
Danaher Corporation | EBIT |
Figure-2 | |
In order to accurately value each segment of the conglomerate companies, the measure of performance from Figure-2 for each business segment was considered, and a relevant financial multiple was established depending on the industry that the division operates in. In the 10K filing, each business segment has a comprehensive description of the industry in which it...