Executive SummaryStern Stewart Research // Volume 36
The whole is less than the sum of its parts. This is how the situation of many holding companies can be outlined. The reason: The capital market values holding companies with a conglomerate discount of 5 to 10% on average, and even up to 20% according to pan-European surveys. In view of the main function of the holdings i.e. to increase the synergistic effects by means of co-ordination, capital procurement, and allocation, this deduction seems surprising at first glance. However, efficient capital markets do not make mistakes. Therefore, what is the cause of all this?
If we inspect the current group structures more precisely it can be clearly seen that those holdings operating on a global basis are frequently characterised by decentralised decision-making processes and strong operative business fields. A large portion of them are structured as weak management holdings. In contrast to financial holdings, they do not only have an investment in subsidiaries, but should ensure that they manage them strategically. It is precisely this management demand, however, that they frequently fail to execute. The active management of the portfolio of activities is either carried out too hesitantly or is restricted to the disposal of unprofitable business units. The target setting and allocation of capital resources are both based on budgets or bottom-up plans and are frequently politically motivated. The stars in portfolios are not or are insufficiently promoted by means of demanding goals. Many holding company head offices, therefore, have to face up to the question of whether they actually create added value or merely represent an additional consolidation level.
In order to compete with financial holdings’ head offices of holding companies must fulfil three management functions, i.e.
- Seting top-down value added targets
- Focusing investment funding and
- Securing the operationalisation of the portfolio strategy in the respective business divisions.
Conversely, all support functions from the holding should be relocated to in-house shared service centres. Fulfilling these management tasks consequently is honoured by the capital market so that the whole creates more value than the sum of its parts.
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