Who doesn't remember the fashion faux pas of their youth? Flared trousers, Glencheck suits, stone-washed jeans – the fashion world is constantly changing, and people are always on the lookout for the latest craze. What we all encounter in our everyday lives is of course also present on the capital market. This time, however, we are not talking about fashion in the investment sector, but about investors‘ seasonal preferences when it comes to the structural positioning of companies. Here, too, investors’ preferences do indeed change again and again, albeit in longer cycles than in the short-term fashion world with its latest craze from Paris or Milan.
In the 1960s and 1970s, companies that were broadly positioned and had a diversified portfolio of activities as conglomerates were valued for their ability to cushion themselves well against economic and sector cycles. So, in a manner of speaking, there was a preference for supertankers that could brave the waves. A classic example of this was the American conglomerate ITT in the 1960s and 1970s. In addition to electronics, the company invested in insurance, hotels, car rental companies and automotive suppliers, to name just a few of its many business areas.
It was only in the 1980s, under pressure from junk bond raiders, that an increasing focus began, with a large number of corporations still diversified. These included large corporations such as Siemens in Europe, and around the turn of the millennium, General Electric was still the company with the largest market capitalisation in the world. In addition to aircraft turbines, household appliances and media, the company also offered its customers financing.
Since the global financial crisis of 2008 at the latest, investors' fashion sense has changed significantly and become increasingly radical over time. The broad-based group has been hung in the wardrobe in terms of fashion. Instead of supertankers, investors have since preferred speedboats. Spin-offs, sales of divisions or IPOs of parts of the company are now all the rage.
Both institutional and activist investors prefer focused companies and give them a higher valuation. The well-known conglomerate discount should no longer apply in the long term. Not only parts of General Electric are now successful on the stock market; there is also an increasing focus on core businesses in Europe. And Siemens is not alone in reflecting this trend with the IPOs of its subsidiaries Siemens Energy and Healthineers; spin-offs at Novartis (Sandoz) and ABB (Accelleron) also underscore this thesis. At the beginning of February, Honeywell, the ‘last conglomerate’ according to press reports, announced plans to split into three separate parts.
It is safe to assume that this trend will continue for some time yet and that the management of companies with a broad base, such as Bayer, BASF, DHL or OC Oerlikon, will have to repeatedly face critical questions from investors. The only lasting remedies are cross-industry synergies and an attractive valuation. The trend towards restraint in capital market transactions in the wake of the war in Ukraine and the rise in interest rates should increase significantly as the economy normalises. In addition, a business-friendly coalition in Germany could trigger the necessary confidence and reinforce this effect. In addition to cross-regional takeovers, acquisitions and IPOs by private equity firms, spin-offs and partial IPOs are also likely to remain in vogue.
Siemens significantly increased its market capitalisation by spinning off parts of the company to create Siemens Healthineers and Siemens Energy, and by focusing on industrial automation, building technology and mobility. Every company, but especially conglomerates, should regularly review their structure and positioning and critically question their capital allocation. The spun-off companies have the opportunity to specialize further and manage their resources much more efficiently. The Covestro spin-off from the Bayer Group in 2015 is one example of this. We expect that spin-offs will also become more noticeable in the automotive sector. In particular, the transformation from traditional powertrains to electric mobility will present suppliers with immense challenges and make spin-offs necessary.
Currently, there is little to suggest that fashion preferences for specialised companies will change, but who knows: who would have thought that bell-bottoms would experience a revival?
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