To split up or not? Conglomerates should never go by off-the-shelf answers

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Subscribe to enjoy similar stories. Activist shareholders have revived the ‘core competence’ debate and are targeting conglomerates to get more out of their businesses. Heeding long-standing shareholder demands, the management of ITC Ltd has finally carved out its hotels business into a separate entity.

This demerger is expected to unlock some value for the ITC scrip, given that the hotel division’s capital appropriation from the company’s cash flows was disproportionate to its contribution to the total revenue pie. While ITC has succumbed to shareholder pressure after years of resisting calls for a split-up, discovery of the true value of ITC shares is still some distance away; even after the hive-off, ITC still retains conglomerate characteristics, with consumer goods, its agri-business and paper division co-existing with tobacco products. Unilever is another conglomerate faced with break-up pressure from restive shareholders.

This multinational has achieved top-line growth over the decades through a string of mergers and acquisitions. It now has an eclectic portfolio of nearly 400 brands, with money-spinners subsidizing others. When Unilever decided a year ago to hive off its ice-cream business, critics said it was not enough.

Wall Street activists asked for a complete slice-up by market focus, arguing that the sum of its parts would be worth more than the whole. Time was when conglomerates were the accepted corporate structure. However, the rise of institutional and activist investors since the mid-1980s pitted this structure as antagonistic to emerging standards of corporate finance, which had started taking a closer look at returns on capital invested.