Heyaz… I have just recieved my Curriculum and just started reading by equity section. I came across a term named as Coglomerate Discount which means that the company who is in more unrelated business, market tends to apply discount on that stock of the company in comparison to the stock of the company with narrow focus.
Some explanations were given like:
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Inefficiencies in Internal Capital Market
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Endegenous Factors
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Research Measurement Errors
The thing which is bothering me is If a company is in multiple unrelated business then their risk reduces to a particular sector, Chances of capture oppurtunities increases, High customer base, although also there would be some increased threats but is it necessary that these threats or difficulties in addition with the explanations given above will always be greater than the merits of being in a multiple unrelated business and will lead to discount of the share of that company.?
Hope i was able to make myself clear.
I think the whole idea behind coglomerate discount is that diversification as a reason is not fully justified - investors can just invest in different companies on their own, with less cost. I guess that ties in other concepts such as takeover premium or competitive advantage of successful companies in their own fields…
just random 2 cents pls don’t over critic if not right !
You can view a conglomerate as a collection (or portfolio) of business opreations in different sectors. You would expect diversification from being invested in these different sectors but I think it has been observed that conglomerates underperform relative to directly investing in the different business sectors yourself - hence the need for a discount on conglomerates.
Diversification at indivudal level is considered more effective as diversification at corporate level. Moreover I think investors usually when invest in particular organizations expect the companies to remain in same business that’s why they have invested in them. If they diversify then its somehow hurting their cuase.
thnx guys i think i got d idea…