Pros and Cons

Assignment 1. Match the terms with their definitions and explanations.

1.conglomerate

2. synergy

3. counter-cyclical stock

4. haircut

5. divestiture

6. spin-off

7. multinational

8. portfolio investment

a) The idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts. This term is used mostly in the context of mergers and acquisitions. For example, if Company A has an excellent product but lousy distribution whereas Company B has a great distribution system but poor products, the companies could create synergy with a merger.

b)A stock whose price will tend to move in the opposite direction of the general economic trend. In times of recession, a counter-cyclical stock will tend to appreciate in value, while in times of expansion, the stock's price will tend to depreciate.

c) A large corporation consisting of a group of companies dealing in widely diversified goods, services, etc.

d) Disposition or sale of an asset by a company. A company will often divest an asset which is not performing well, which is not vital to the company's core business, or which is worth more to a potential buyer or as a separate entity than as part of the company.

e) The difference between prices at which a market maker can buy and sell a security.

f) Company or enterprise operating in several countries, usually defined as one that has 25% or more of its output capacity located outside its country of origin.

g) An independent company created from an existing part of another company through a divestiture, such as a sale or distribution of new shares.

h) This occurs when an overseas corporation purchases shares, debentures, or other securities in existing domestic companies. This type of investment is often speculative, as investors are usually waiting for positive movements in exchange rates or interest rates to make a profit.

Assignment 2. Many of the top multi-national corporations (MNCs) have sales totaling more than the GDP of the smaller economies. The table below contains some examples. Working in pairs, list five examples of other MNCs. What is the total global workforce of the company? Name five countries in which this company operates. List any diversified business interests of the company.

(Source: World Bank Development Report 2000 and Forbes Magazine, 2001)

Assignment 3. Read the following case study on investment in conglomerates and answer the following questions.

§ Why can conglomerates be an inefficient, jumbled affair?

§ What can lead to investors' inability to understand a conglomerate's philosophy?

§ Why are underperforming companies quickly divested?

§ How does the market value the conglomerate as compared to the sum value of its various parts?

Conglomerates: Cash Cows or Corporate Chaos?
By B. McClure

Conglomerates are companies that either partially or fully own a number of other companies which may be in the same or in different industries. Not long ago, sprawling conglomerates were a prominent feature of the corporate landscape. Vast empires, such as General Electric and Berkshire Hathaway, were built up over many years with interests ranging from jet engine technology to jewelry. Corporate hodgepodges like these pride themselves on their ability to avoid bumpy markets. In some cases, they have produced impressive long-term shareholder returns, but this doesn't mean that corporate conglomerates are always a good thing for investors. If you're interested in investing in these behemoths, there are a few things you should know. Here we explain what conglomerates are and give you an overview of the pros and cons of investing in them.