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What is conglomerate discount, and why can demerger prevent conglomerate discount, pls?
Thank you.A conglomerate discount is the fact that the total market value of a conglomerate might be lower that the total of the market values of the individual companies. (The reason is mainly to do with risk – a potential advantage of a conglomerate is that but diversified the risk is reduced, however shareholders could have diversified the risk themselves by investing in a portfolio of shares.)
If the conglomerate is trading at a discount to the total of the individual companies (which is certainly not always the case – it might well trade at a premium) then a demerger would restore the value of the individual companies.
“Demerger or sell off can remove ‘co-insurance benefits from debtholders. “
What does this mean, pls?In a conglomerate, if one part of the business goes bad then hopefully the other parts will still be OK and so the debt lenders will still be OK.
But if there is a demerger and their lending is to the part that goes bad then they have problems and there is nothing else in the business to protect them.
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