A conglomerate discount refers to the tendency of markets to value a diversified group of businesses and assets at less than the sum of its parts. The sum-of-parts valuation is calculated by adding an estimate of the intrinsic value of each subsidiary company in the conglomerate and then subtracting the market capitalisation of the conglomerate. The intrinsic value (sometimes derived using discounted cash flow) helps to determine the underlying value of a company and how much cash it generates.
Jardine Matheson Holdings (JM), is rightly proud of its beginnings in China in 1832 when opportunities were plentiful and a single entity undertook many businesses. Fast-forward 200 years to the 21st century and the word “conglomerate” is often met with a valuation discount. JM is probably no exception and is unlikely to escape the conglomerate valuation discount.
Conglomerates own controlling stakes in several smaller companies that operate independently of each other’s business divisions.
