When corporations own underlying businesses that differ significantly in how they use capital and earn profits, the capital market will discount the value of the whole enterprise. For investors, the whole will be less than the sum of the parts. As a result, leaders of multi-business portfolios should ask themselves if their company’s portfolio is financially disparate and, if this disparity is not addressable through management actions, what portfolio actions (e.g. spin-offs, divestitures) could create the most value for shareholders.
The reason is that it’s extremely hard to manage disparate businesses. Businesses with disparate financial characteristics convert revenue to cash flows at different rates, presenting capital allocation challenges that are often difficult to tackle.
A key to unlocking shareholder value is to identify elements of your company’s portfolio that are financially disparate—especially those relating to growth, profitability, and asset intensity—and take action. Chief executives and C-suite teams need to be aware that financial disparities may be limiting shareholder returns. At the end of the day, you need to be asking yourself two questions—“What businesses are you really in? Are these the right businesses to own?”