week2B - Corporate Governance and Restructuring Corporate...

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Corporate Governance and Restructuring Thomas Noe Corporate Integration and Value
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Synopsis How does corporate scope affect value? Horizontal scope--Conglomerate diversification Ideas: The dark and sunny side of conglomeration Evidence: The conglomerate discount Vertical scope--Control of the supply chain Ideas: Hold-up problems Evidence: similar to horizontal case A classic example of why one ought not feed cows to stars: Sears’s diversification programme in the 1980’s
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Focus and value : the dark side of conglomerates Vices of conglomerates Social allocation of investment capital Capital allocations between divisions of the same firm may be influenced by factors other than the economic profitability of projects E.g., Political influence of division Lack of focus Managing a large number of unrelated business units makes it difficult for top management to develop specialized expertise in any one industry.
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Focus and value: the sunny side Virtues of conglomerates Capital allocations based on superior information Capital allocations between divisions of the based on insider (better) information while capital market allocations based on (worse) outsider information. Economies of reputational development Reputational capital can be spread over more product and labor markets.
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Conglomerate Bustups Do conglomerates destroy value?: In US, Berger and Ofek: say yes (as do many many other academics) They estimate the value of conglomerate firms vs. the total value of the conglomerates assets if the assets were held by stand alone firms. They find that Conglomerate value is at most 85% of stand-alone value.
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Conglomerates Maksimovic and Phillips (2002) say no Yes there is conglomerate discount. However causation runs the other way. Firm value is not destroyed by conglomeration. Rather firms with poor investment projects become conglomerates. Villalonga says no There is no conglomerate discount. The observed discount is a product of bad data.
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Conglomerate Bustups Recent Conglomerate Spinoffs (examples) Altria ’s planned spinoff of Kraft Foods Verizon’s  spinoff of print and yellow pages division
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What about conglomerates in developing countries. Good or bad? Krishna (2000) argues good. Conglomerates build institutions lacking in many emerging markets. These internal institutions Identify and develop human capital Enforce agreements Guarantee product quality Allocate capital Coinsurance in high volatility environments Sunny side of conglomerates
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In developed economies, functions of these internal institutions are performed by external institutions Legal system Business schools Capital markets When these external institutions are weak or nonexistent their functions must be performed internally.
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