Many managers believe that the interests of shareholders are best served by
industry diversification. Such may be found in the so-called conglomerates
(chaebol in South Korea; Keiretzu in Japan).
a. Explain why this attitude among managers may exist, and whether there is
some rationale behind it, i.e. from the point of view of the managers of these
companies.
Shareholders interest in buying shares is primarily to earn money. There are
two major extremes to invest in shares. The first way is to invest in risky companies
with high earnings and the other way is to invest in conservative shares
with low earnings. There are a lot of alternatives between these extremes which
balance the risk and the earnings. A mix of different shares will be the best solution
and balance. The discussion about cooperate diversification starts already
in the late 70’s, but until now there are no global accepted ideal results.
With current market understanding and knowledge about the influence of trends
on individual industries an investment in different industries like conglomerates
is rational. Conglomerates with industry diversification can have a balance between
risk and earnings with the potential of better results compared to other
investments. The diversification of risk in each industry makes a balance between
risk and different scenarios possible. Trends in stocks and industries can
not be calculated, but a conglomerate can balance this risk trough the different
industries. [...]
Inhaltsverzeichnis (Table of Contents)
- Task I
- a. Explain why this attitude among managers may exist, and whether there is some rationale behind it, i.e. from the point of view of the managers of these companies.
- b. How do you think does the market react to these conglomerates? Provide some explanation as to the observed lower value of the conglomerate in the market compared to the calculated sum of the individual values of the "parts" of the conglomerate based on their financial performance.
- Task II
- Task III
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This assignment explores the concept of conglomerates, specifically their relevance as an investment strategy. The author investigates the rationale behind managers' preference for diversification and examines the market response to conglomerates. The analysis also delves into the relationship between depreciation and NPV assessments, and examines the validity of common assumptions regarding portfolio management.
- Conglomerates as an investment alternative
- Rationale behind managers' preference for diversification
- Market response to conglomerates
- Depreciation and NPV assessments
- Portfolio management and expected returns
Zusammenfassung der Kapitel (Chapter Summaries)
- Task I: The assignment explores the reasons for managers' preference for industry diversification through conglomerates. It examines the potential advantages of such diversification, including risk management and potential for higher returns. However, it also addresses criticisms of conglomerates, highlighting arguments that diversification may not necessarily benefit investors and that inefficient structures can lead to a lower market valuation compared to the sum of individual parts. The author argues that the success of conglomerates depends on factors such as financial discipline, rigorous analysis, and effective management.
- Task II: This section delves into the relationship between depreciation and NPV assessments, questioning the perceived inconsistency between the two tools. The author argues that both NPV and profit and loss accounts are valid decision-making tools, but their application and focus differ. NPV is considered a strategic tool for internal use, while the profit and loss account provides an external view on past performance. The author highlights that depreciation is treated differently in both contexts due to its internal and external relevance.
- Task III: The assignment examines the validity of statements regarding expected returns and standard deviations in portfolio management. The author agrees with the statement that expected portfolio return is the weighted average of individual security returns. However, they disagree with the statement that expected standard deviation is also a weighted average, explaining that the relationship is non-linear. The author concludes that the linearity of expected returns allows for the calculation of portfolio return as a weighted average.
Schlüsselwörter (Keywords)
This assignment focuses on conglomerates, diversification, risk management, NPV assessments, depreciation, portfolio management, expected returns, standard deviations, financial discipline, and market valuation. The author explores the merits and drawbacks of conglomerates as an investment strategy, examining both theoretical and practical considerations.
- Quote paper
- Florian Christ (Author), 2003, Conglomerates - an alternative?, Munich, GRIN Verlag, https://www.grin.com/document/23417
