Holding company structure

From the conglomerate discount to value added management

Stern Stewart & CO. GmbH
Salvatorplatz 4
80333 Monaco

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The whole is less than the sum of its parts – the situation of many holding corporations can be described in this way. This is because the capital market assessment of holding corporations includes a conglomerate discount of an average of 5–10 percent, and in pan-European studies of as high as 20 percent. Given the main role of every holding, namely to obtain synergies through coordination, capital procurement, and capital allocation, this discount may seem surprising at first glance. But efficient capital markets do not make mistakes. What, then, is the reason for this?

Upon closer examination of today’s corporate structures, it is evident that holdings that operate on a global scale are often characterized by decentralized decision-making processes and strong operational business divisions. A large proportion are set up as weak management holding companies. By contrast, with financial holding companies, the former not only hold the interests in the subsidiary companies, but are also expected to manage them strategically. However, it is precisely this management requirement that they fail to satisfy consistently. Active management of the business division portfolio is either only hesitant, or limited to eliminating problematic issues. Goal-setting and allocation of the capital resources are based on budgets or bottom-up plans, and are more often than not politically motivated. In particular, the cash cows in the portfolios are not challenged, or are not sufficiently challenged, with ambitious goals. Many holding company head offices must therefore answer the question of whether they are really creating added value or merely represent an additional consolidation stage.

In order for the holding company head office to actively make a contribution to value creation in competition with financial investors, it must in particular realize three managerial functions, namely:

1. Setting top-down value creation targets

2. Focusing investment funds

3. Ensuring that the portfolio strategy is put into practice in the divisions.

By contrast, all of the support functions should be taken out of the hands of the holding company and transferred to its own shared service center. Such consistent fulfillment of the management requirements is rewarded by the capital market, so that in the end the whole is worth more than the sum of its parts.

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