Conglomerates Bounce Back; Borrowing clout gives large companies an edge in a financial crisis

Posted: November 14, 2013

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

Conglomerates Bounce Back

Bottom Line: The Great Recession had a positive effect on the stock prices of conglomerates around the world, especially in regions with well-developed capital markets and strong investor safeguards. 

Conglomerates lost much of their luster decades ago. Indeed, skeptical investors often factor in a “conglomerate discount” by valuing diversified companies at less than the sum of their parts. But the Great Recession has restored some of their shine.During the downturn, investors recognized that the size of these diversified companies gave them access to capital that smaller firms didn’t have, an important advantage when credit was drying up. This study found that the advantage varied by region, depending on the strength of the capital markets and the level of investor protection. The biggest advantage was found to be in the Asia-Pacific region, where the discount actually turned into a premium.

During the downturn, the size of conglomerates gave them access to capital that smaller firms didn’t have.

The authors analyzed a large sample of publicly traded firms in four regions—developed Asia-Pacific, the British Isles, Continental Europe, and North America—from 1998 to 2009. They defined conglomerates as having multiple businesses reporting total annual sales of at least US$20 million, with no single segment accounting for more than 90 percent of the sales.

To measure the level of capital market development, the authors took into account gross national income per capita, market capitalization and value of traded stocks as percentages of GDP, and the ratio of listed domestic firms to population.

After controlling for several factors, the authors found that conglomerates had significant discounts in three of the regions prior to the recession. In Asia-Pacific, the typical stock price was 6.7 percent lower than what the company’s individual businesses would have brought; the price was about 10.4 percent lower in the British Isles and 5.3 percent lower in North America. But during the recession, the discount was reduced by 10.9 percentage points in Asia-Pacific, putting the stock differential into positive territory. In the British Isles and North America, it was reduced by 5.8 points and 4.6 points, respectively—a healthy turnaround, though not quite enough to erase the discount completely. In Continental Europe, where, according to the authors, capital markets are the least developed and investor safeguards the least stringent among the four regions, the discount was much smaller to begin with, and the reduction was insignificant.

Overall, the authors write, the findings show that conglomerates can “create a competitive advantage over their standalone counterparts” by capitalizing on their “relatively better access to debt in order to seize smart investments while competitors are financially constrained.”

Source: Conglomerates on the Rise Again? A Cross-Regional Study on the Impact of the 2008–2009 Financial Crisis on the Diversification Discount, Christin Rudolph and Bernhard Schwetzler (both HHL Leipzig Graduate School of Management), Journal of Corporate Finance, September 2013, vol. 22

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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