DEFINITION of 'Conglomerate Discount'

The term conglomerate discount refers to the tendency of markets to value a diversified group of businesses and assets at less than the sum of its part. A conglomerate, by definition, owns a controlling stake in a number of smaller companies that operate independently of other business divisions.

Many believe that this setup is more of a burden on financial performance than benefit. Sure, controlling an army of companies generating revenues and earning profits look appealing, but it also creates issues with management and transparency. Each subsidiary employs senior leaders with different values and visions that may differ from the larger conglomerate's interest. Investors tend to view this negatively, compared with companies with a narrow focus. 

BREAKING DOWN 'Conglomerate Discount'

A conglomerate discount occurs from the sum-of-parts valuation and drives the decision of many conglomerates to spin off or divest subsidiary holdings. It is calculated by adding an estimate of the intrinsic value of each subsidiary company in the conglomerate and then subtracting the conglomerate's market capitalization. This value tends to be greater than the value of the conglomerates stock by anywhere between 13% and 15%. History shows that conglomerates can grow so large and diversified that it becomes difficult to manage effectively. As a result, many conglomerates divest or spin off assets to reduce the strain on upper management. 

Management may still play role in investor's decision to discount the conglomerate stock. Adding layers of management to oversee different subsidiaries helps resolve efficiency issues, but creates a substantial burden on overhead expenses. 

The discount can also vary between different regions. Large conglomerates in the US have traditionally experienced larger discounts than European and Asian countries. This can be due to their size and political influence. In Asia, conglomerates cover different industries and hold significant political connections that make it difficult for investors to discount. 

Examples of a Conglomerate Discount

Conglomerates have always played a substantial role in the economy. Some larger ones throughout history include Alphabet (GOOGL), General Electric (GE) and Berkshire Hathaway (BRK.A). Prior to becoming Alphabet, Google was criticized for not disclosing gains or losses from its moonshot investments. This point of contention did not necessarily punish shareholders but highlights the lack of transparency in conglomerates.

On the other hand, shares of General Electric have tumbled for the past five years from management's inability to focus the company and find meaningful value from each division. Berkshire Hathaway has managed to escape the market's inclination to discount over diversified companies.

RELATED TERMS
  1. 1%/10 net 30

    1%/10 net 30 is a way of providing cash discounts on purchases, ...
  2. Bank Discount Rate

    The bank discount rate is the interest rate for short-term money-market ...
  3. Volume Discount

    Volume discounts are financial incentives for individuals or ...
  4. Discount

    In finance, discount refers to a situation when a bond is trading ...
  5. Discount House

    Primarily operating in the United Kingdom, a discount house is ...
  6. Discount Yield

    Discount yield is a measure of a bond's percentage return, frequently ...
Related Articles
  1. Insights

    Conglomerates: Cash Cows or Corporate Chaos?

    Huge companies may not be as infallible as previously assumed. Find out why bigger isn't always better.
  2. Insights

    Conglomerates: Risky Proposition?

    Investing in a corporate giant may not be as safe as you think.
  3. Insights

    5 Conglomerates With Exposure to the Caribbean

    These five well-diversified conglomerates play a major role in the economies of the Caribbean.
  4. Taxes

    Warren Buffett's Berkshire Gains $37 Billion from Tax Cuts

    The recent changes to U.S. tax law will be a boon for Berkshire Hathaway's billionaire head, Warren Buffett.
  5. Investing

    Berkshire Hathaway Has Almost $100B in Cash

    The company could make acquisitions, but the market's bull run is a deterrence.
  6. Retirement

    Top Discounts For Seniors

    Here is a rundown of some of the best senior discounts across the country.
  7. Retirement

    Senior Discounts Alert: National Parks Pass Rises Aug. 28

    First, Social Security rose a measly 0.3%. Now, the national parks lifetime pass is going up 8 times. Yet another reason to save with senior discounts.
  8. Insurance

    Get Sale Prices On Healthcare With Discount Plans

    Medical discount plans can help the uninsured or underinsured afford better healthcare.
  9. Investing

    Berkshire Hathaway Shifts Strategy Away from Stock Picking

    Warren Buffett seems to be changing his approach, which has traditionally relied on excellent stock picks.
  10. Investing

    Berkshire Removes Cap on Share Buybacks, Stock Climbs

    The conglomerate has vowed to spend some of its excess cash on repurchasing shares.
RELATED FAQS
  1. What are the disadvantages of using net present value as an investment criterion?

    While net present value (NPV) calculations are useful when you are valuing investment opportunities, the process is by no ... Read Answer >>
  2. What is the difference between the cost of capital and the discount rate?

    Learn about the differences between the cost of capital and the discount rate as they relate to estimating a required return ... Read Answer >>
  3. How does a high discount rate affect the economy?

    A high discount rate causes loans to be more expensive and encourages people to save more money. This could be considered ... Read Answer >>
Trading Center