The market does not value conglomerates as highly as the sum of the parts if separated. For instance, if division Z, on its own would command $10 in the market and division X $20, the company that owns both should sell for $30, but it does not. It sells at a discount to the sum of the parts, if the two divisions seem to be in totally different lines of business. Discounts in the current market are as high as 30%. Maybe it doesn’t make sense, but that’s the way it is.
In this market, let’s say that cloud companies sell at higher valuations than legacy information Technology outsourcing ITO companies.
ITO companies that invest in cloud, then, probably won’t see the full value of the cloud in their stock prices because of the discount. They might do their stockholders a favor by giving them cash dividends to make their own cloud investments or by hiving off the renewable divisions as soon as they get some scale.
Keeping ITO might stabilize share price versus cloud volitility ...
- ... but running an ITO plus cloud company does not look like a good way to create shareholder value.