Abstract The conglomerate has been a widely debated topic in academic research since the late 1960s. With neo-classical and managerial scholars on either side, diverging evidence has been presented on the effect of diversification and mergers on shareholder value. The heterogeneity of these empirical results paves the way for causal rationalizations that form the contemporary theories on conglomerate valuation. This is the point of departure for the thesis, which investigates these theories and tests them on a conglomerate case study. To frame the analysis, two simplified tests are performed to establish the relevance of conglomerates in today’s corporate environment. Insinuating a valuation discount for U.S. conglomerates, in general, and for the case company, General Electric, the thesis attempts to validate the latter by conducting an analysis and valuation of the company. By adhering to publicly available data, the analysis scrutinizes strategic, accounting, governance and financial aspects of the case company, forming the foundation for a valuation. Applying two types of multiples analysis, this thesis estimates General Electric’s implied share price as of March 2nd, 2018, and finds that the firm is trading at a conglomerate discount in the range of 2.4% to 46.0%. The main underlying rationales for this discount are, i) financial complexity and opacity of reporting, ii) mismatch between analyst expertise and conglomerate’s multifaceted operations, and iii) inefficient corporate governance and inactive shareholders. The fundamental sources of these rationales are discussed, with the authors suggesting the conglomerate’s financial division, GE Capital, and the absent disciplining of management as the ultimate roots. Conclusively, the thesis addresses the conglomerate structure’s raison d’être, signifying and preparing the stage for further empirical research on this topic. I List of Abbreviations BHGE: Baker Hughes, a GE Company IFRS: International Financial Reporting Standards BoD: Board of directors JV: Joint venture CAGR: Compounded annual growth rate KPI: Key performance index CAPEX: Capital expenditure M&A: Mergers & acquisitions CCC: Cash conversion cycle MW: Megawatt CEO: Chief executive officer NOPAT: Net operating profit after tax CFO: Chief financial officer NPV: Net present value CHE: Current healthcare expenses OECD: Organisation for Economic Co-operation & Development COGS: Cost of goods sold OEM: Original equipment manufacturer COSS: Cost of services sold OLS: Ordinary least squares D&A: Depreciation & amortization OPEC: Organization of the Petroleum Exporting DCF: Discounted cash flow Countries DIJA: Dow Jones Industrial Average P&L: Profit & loss DoJ: U.S. Department of Justice PESTLE: Political, economic, sociological, technological, legal, environmental EBIT: Earnings before interest & tax PPE: Property, plant & equipment EBITDA: Earnings before interest, tax, depreciation & amortization R&D: Research & development EPS: Earnings per share ROIC: Return on invested capital EV: Enterprise value RPK: Revenue passenger kilometers FASB: Financial Accounting Standard Board SEC: Securities & Exchange Commission FDA: U.S. Food & Drug Administration SG&A: Selling, general & administrative FTK: Freight tonne kilometers SIC: Standard industry classification GAAP: Generally Accepted Accounting Principles SOTP: Sum of the parts GDP: Gross domestic product SWOT: Strengths, weaknesses, opportunities & threats GE: General Electric TARP: Troubled Asset Relief Program GECAS: GE capital aviation services TWh: Terawatt hours GW: Gigawatt WACC: Weighted average cost of capital H1: First half of year YoY: Year-over-year H2: Second half of year II List of Figures Figure 1.1: Thesis structure Figure 5.26: GE Ren. En. relative to competitors & peers Figure 2.1: Regional differences in the conglomerate discount Figure 5.27: GE Healthcare revenue split 2017 Figure 2.2: No. of conglomerates in the U.S. Figure 5.28: Current health expenditure as % of GDP Figure 4.1: Stock returns 2001-2018 Figure 5.29: MRI scanners per million population Figure 4.2: GE's historical revenue split Figure 5.30: Healthcare expenditure growth EU 28 Figure 5.1: GE Aviation revenue split 2017 Figure 5.31: Demographic development EU 28 Figure 5.2: World passenger traffic and load factor Figure 5.32: GE Healthcare total addressable market Figure 5.3: Geographical traffic split and growth Figure 5.33: Market split of top-3 players (revenue) Figure 5.4: Jet fuel and crude oil historical prices Figure 5.34: GE Healthcare rel. to competitors & peers Figure 5.5: Jet fuel and crude oil price changes Figure 5.35: GE Transportation revenue split 2017 Figure 5.6: Global commercial engines split on OEMs Figure 5.36: U.S. rail freight market development Figure 5.7: Global military engines split on OEMs Figure 5.37: Global mining industry development Figure 5.8: GE Aviation relative to competitors & peers Figure 5.38: Global rolling stock OEMs market split Figure 5.9: GE Power revenue split 2017 Figure 5.39: Revenue growth in 2017 Figure 5.10: World consumption of gas Figure 5.40: GE Transportation rel. to comps. & peers Figure 5.11: World energy consumption by type Figure 5.41: GE Lighting revenue split 2017 Figure 5.12: World energy consumption by fuel type Figure 5.42: Global lighting market size & segment split Figure 5.13: Global heavy-duty gas turbine orders Figure 5.43: GE Lighting relative to competitors & peers Figure 5.14: Global gas turbine market size in USDbn Figure 5.44: GE Capital revenue split 2017 Figure 5.15: Global gas turbine market split on OEMs Figure 5.45: GE Power quarterly perf. YoY comparison Figure 5.16: Top 5 countries by total energy supply Figure 5.46: GE contract assets 2010-2018 Figure 5.17: GE Power relative to competitors & peers Figure 5.47: GE Actual EPS versus consensus forecast Figure 5.18: GE Oil & Gas revenue split 2017 Figure 5.48: Accounts receivable Figure 5.19: GE Renewable Energy revenue split 2017 Figure 5.49: Accounts receivable to total assets Figure 5.20: Global new investments in renewables Figure 5.50: Working capital metrics Figure 5.21: Global renewable energy consumption Figure 5.51: Cash conversion cycle Figure 5.22: Historical & projected global wind power Figure 5.52: Changes in cash flows 2013-2017 Figure 5.23: Projections of renewable energy's share Figure 5.53: Net change in cash available 2013-2017 Figure 5.24: Global wind turbine OEMs market split Figure 5.54: GE share target price from analysts Figure 5.25: Capacity added in 2016 Figure 6.1: GE's implied share price and discount III List of Tables Table 1.1: Thesis sub-questions to be addressed Table 5.6: Intersegment revenues & eliminations (adapted) Table 2.1: Academic findings on conglomerate discount Table 5.7: Statement of Cash Flows (selected accounts) Table 2.2: Abnormal returns related to spin-off in the U.S. Table 5.8: GE and peers restructuring charges to revenue Table 2.3: Overview of theoretical hypotheses Table 5.9: GE and peers net change in cash to revenue Table 3.1: Stock performance periods Table 5.10: GE divisional sales growth & profitability 2013-‘17 Table 3.2: Pros and cons of the two multiple analyses Table 5.11: Public comps peer groups for each industrial division Table 3.3: Data composition for stock performance test Table 5.12: Public company comparables valuation multiples Table 4.1: Regression model output Table 5.13: Transaction comps peer groups for industrial divisions Table 4.2: Return and volatility results Table 5.14: Precedent transactions valuation multiples Table 4.3: Return and volatility for selected peers Table 5.15: Aggr. multiples valuation for the industrial divisions Table 5.1: Key findings of strategic and market analysis Table 5.16: BHGE net interest bearing debt and value contribution Table 5.2: GE adjusted non-GAAP metrics versus GAAP Table 5.17: Consolidated valuation of GE Table 5.3: Consolidated Income Statement (adapted) Table 5.18: Selected equity report findings Table 5.4: Un-consolidated Income Statement (adapted) Table 6.1: Overview of hypotheses' key findings and conclusions Table 5.5: Supplemental information GE annual report IV Table of Contents 1. Introduction ...................................................................................................................................... 5 1.1. Research question .......................................................................................................................... 6 1.2. Structure of the thesis ................................................................................................................... 7 2. Theory ............................................................................................................................................. 10 2.1. Literature review .......................................................................................................................... 10 2.2. Theoretical framework ................................................................................................................ 19 3. Method ........................................................................................................................................... 21 3.1. Research approach ...................................................................................................................... 21 3.2. Analysis method ........................................................................................................................... 22 3.3. Data collection ............................................................................................................................