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In the article “Conglomerates: Cash Cows or Corporate Chaos?” Ben McClure describes a conglomerate as “a company that either partially or fully owns a number of other companies”. McClure uses the examples of General Electric and Berkshire Hathaway, both very wealthy companies that get to avoid what McClure describes as the “bumpy market”.
McClure goes on to tell that the number one pro of conglomerates is “diversification”. The best definition of a diversification is “a risk management technique that mixes a wide variety of investments within a portfolio. The reason behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.” The best part about this method is that a conglomerate would have many businesses that it owns and just because one does bad doesn’t mean that the other will too. The best benefit is that most of the time some of the other companies owned by the same conglomerate will pick up the slack for one another. McClure’s examples of General Electric and Berkshire Hathaway are perfect illustration of this method because they have both produced double digit earning for their companies.
McClure then goes on to state how conglomerates are the basis of a decision to make an investment in a company, but this investment won’t always be so great. Conglomerates can have their disadvantages too. Most conglomerates consider that the bigger the company they are the more indivisible they are; McClure proves this to be false with his same examples as before, General Electric and Berkshire Hathaway. Both companies did suffer in 2009 when the economy experienced deterioration. McClure quotes Peter Lynch who backs up McClure’s statement by stating how no matter how great of a management staff you might have, those people end up getting spread too thin between too many companies which is a cause of failure in conglomerates. The reason that is the cause of the failure is that when it comes time for the CEO of the conglomerate to make his claim as to why someone should invest in his/her company, if he has too many contrasting ideas between the companies. This is because the smaller companies in the conglomerate can be so vastly different, that the idea becomes unclear and confusing. This will then result in the investors not feels financially secure when investing their money in a company.
McClure finishes his article by describing the “conglomerate discount” and what you should be looking for in a company if you ever decided to invest in one. He started with the conglomerate discount and how it’s the company’s way of showing the investors that they can “trust” or have faith in the company. McClure tells how the more of the discount given the more of a chance you are going to have an investor invest. McClure then stated that if you were interested in investing that you should stay away from the conglomerate discount and lean towards finding a company that breaks down into small “spinoffs” of the smaller companies.
Work Citied
http://www.investopedia.com/articles/basics/06/conglomerates.asp
http://www.investopedia.com/terms/d/diversification.asp
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