In plain English
Corporate strategy asks a different question from business strategy. Business strategy asks how a unit wins in its market. Corporate strategy asks whether those units are worth more owned together than apart, and what head office actually adds beyond cost.
The advanced view
The parenting-advantage test: a corporate parent adds value only if it is a better owner of the business than any alternative owner, given the internal capital market, shared capabilities and governance it provides. Against this stand influence costs, cross-subsidisation of weak units, slower decisions and the diversification discount observed empirically in the 5–15% range for unrelated conglomerates.
Head office plays four possible roles: portfolio manager (buy, hold, sell, allocate capital), restructurer (fix underperformers then exit), skills transferrer (move a capability across units) and activity sharer (run shared operations or functions). Only the last two require ownership rather than a fund; the first two must be justified against what an investor could do alone.
The corporate value test
Value of group = Σ standalone unit values + synergies − corporate costs Parenting advantage exists if that sum > best alternative ownership Conglomerate discount = (Σ SOTP values − market cap) / Σ SOTP values Break-up creates value when discount > separation and dis-synergy costs
Frameworks
Parenting advantage (Goold & Campbell)
Fit between the parent's skills and the unit's parenting opportunities. No fit, no reason to own.
BCG matrix
Cash allocation heuristic on growth and relative share. Useful as shorthand, wrong when units share capabilities.
GE/McKinsey screen
Industry attractiveness against competitive strength on a nine-box. Richer than BCG, more judgemental.
Sum-of-the-parts
Value each unit on its own peer multiple, subtract net debt and corporate costs. The break-up case in one table.
Worked example — sum-of-the-parts
Step 1 of 8
- 1Industrial unit: EBITDA 400, peer multiple 8x, EV =
Essential vocabulary
- Parenting advantage
- The parent creates more value in a unit than any rival owner would.
- Internal capital market
- Head office reallocating cash across units. Efficient in theory, politically captured in practice.
- Influence cost
- Resources burned by units lobbying head office for capital and cover.
- Conglomerate discount
- Market value below the sum of the parts, attributed to opacity and cross-subsidy.
Common pitfalls
- ×Calling shared overhead a synergy — cost allocation is not value creation.
- ×Valuing a break-up without stranded costs, dis-synergies and separation capex.
- ×Using BCG on units that share a factory, a brand or a sales force.
- ×Assuming head office can pick winners better than the capital market.
Must know cold
- ✓Better-owner test: would anyone else pay more for this unit than it is worth to us?
- ✓Group value = Σ parts + synergies − corporate cost.
- ✓Cash cows fund stars only if the parent has no better external use of capital.
Exercises
Try each one on paper before revealing the worked solution.
Exercise 1
A group trades at 6.5x EBITDA. Two-thirds of EBITDA comes from a services unit whose pure-play peers trade at 11x, one-third from a commodity unit peers value at 4x. Total EBITDA 300. Is there a break-up case?