United Technologies: Are the Parts Worth More than the Whole?
Posted: 30 Dec 2019
Date Written: November 15, 2019
After spending more than 50 years creating a diversified industrial conglomerate that Fortune Magazine described as “arguably the most profitable conglomerate in America” in 2014, UTC’s CEO Greg Hayes was under pressure from activist investors (Dan Loeb and Bill Ackman) to break the company into three standalone businesses in the spring of 2018. The activists claimed that a breakup would create at least $20 billion of incremental value (on top of a current market value of approximately $100 billion) and possibly considerably more. Hayes must decide whether a breakup makes sense — will it create significant incremental value and, if so, how much value and why? What factors explained why UTC currently traded at a discount to comparable single segment (pure play) firms? Was it an artifact of the valuation method, a reflection of mismanagement, or something else?
This case has four objectives. First, to illustrate the mechanics and underlying logic of sum-of-the-parts (SOTP) valuation analysis. Second, to practice valuing a division using multiples and wrestling with the concept of comparability. Third, to assess the strategic logic of a diversified industrial conglomerate — does the structure create or destroy value? Is a conglomerate discount (or premium) as measured relative to a set of pure play firms a valid measure of value destruction (or creation)? Illustrate the cross-sectional (across analysts) and time-series (one analyst over time) properties of diversification discounts. And finally, explore the motives, tactics, and economic impact of activist investors. Is activist pressure likely to result in sustained value creation?
Keywords: sum-of-the-parts (SOTP) valuation, activist investor, break-up, multiples, conglomerate discount, diversification discount, capital allocation, corporate strategy, value creation
JEL Classification: G31, G34; L25
Suggested Citation: Suggested Citation