Evaluating Industrial Conglomerates for Value Conglomerates make up one in six of the major industrial enterprises, and they often create less value than more specialized businesses. Value multiplication is more common among conglomerates that satisfy four requirements. Conglomerates make up around one out of every six sizable publicly traded industrial firms. Throughout the last ten years, how have industrial conglomerates performed? What makes certain corporations perform better than others? We examined the financial results of industrial conglomerates in order to provide answers to these queries, and we came to the following important conclusions. In the past ten years, industrial conglomerates have underperformed their peers in terms of revenue growth, earnings before interest, taxes, depreciation, and amortization (EBITDA), and free cash flow (FCF) margin expansions. However, their financial performance has been less volatile than that of other industrial companies (Exhibit 1). Conglomerates produced lower overall shareholder returns and lower multiples than peers, earning low multiples in relation to the sum of their parts. Exhibit 1 Within the three types of organizations under investigation—focused, diversified, and conglomerate— performance varied considerably. All significant financial measures, such as the rise in total shareholder returns (TSR), revenue growth, and EBITDA margin expansion, were outperformed by companies in the top quartile compared to those in the bottom quartile.
Value multipliers, or top-performing conglomerates, outperformed boat anchors, or poorest performers, in terms of TSR growth, with a difference of 1,510 basis points (Exhibit 2). There was either minimal or no "conglomerate discount" applied to value multipliers. Exhibit 2 Multiplying value is linked to four factors: effective capital allocation, a strong performance culture, outstanding portfolio management, including divestments, and the capacity to take advantage of the company's scale.