If HBO is doing so well, why get rid of it? One answer is that HBO would be far more valuable in the eyes of investors as a separate company. Big, diversified companies suffer from the so-called “conglomerate discount.” The whole is worth less than the sum of its parts, because investors have trouble valuing corporate divisions and get worried about how the parts of a company interact. As Emilie Feldman, an assistant professor of management at Wharton and an expert on divestitures, puts it, “Spinning off a company allows the market to see it more clearly and value it more accurately.” This is especially true when, as at Time Warner, different parts of a company have radically different business models and growth trajectories. HBO looks set to thrive in a cord-cutting world; Time Warner’s cable networks are more likely to struggle.
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