THAT HORIZONTAL and vertical mergers potentially can produce real economic gains is nowhere denied, but the economic case for a conglomerate merger is somewhat less clear. Much of the traditional analysis relating to the possible creation of economies of scale in production, research, distribution and mangement is not relevant for the pure conglomerate in which there are no discernible economic relationships between the parties to the merger. Recognizing the need for an alternative approach to conglomerate growth, M. A. Adelman [1], and more recently W. W. Alberts [2], E. F. Renshaw [7] and K. V. Smith and J. C. Schreiner [10] have analyzed the diversification inherent in a conglomerate acquisition as a special case of the general theory of diversification and portfolio selection developed by Markowitz [4] [5] and by Tobin [11]. Such an approach identifies the reduction in standard error engendered by the combination of statistically independent or negatively correlated income streams as a "conglomerate effect" produced by the merger of firms whose economic activities are urelated, and the purely conglomerate type of merger, as one in which profits are not increased, "but only stabilized by bringing together centers with zero or negative correlations" [1, p. 242].It would seem to follow that even in the absence of economies of scale and complimentaries (synergism), the stabilization of the profit stream, induced by the merger, should still produce a clear-cut economic gain. But despite the plausability of this argument, it can be shown that in a perfect capital market an economic advantage cannot be achieved by a purely conglomerate merger.' I.Let us assume such a merger between two completely unrelated companies. In the absence of synergistic effects, the postmerger return to shareholders in the new firm will be the weighted average of the returns of each of the individual firms making up the merger:2 Z = X + (1-w)x2 (1) where: z = a random variable denoting the postmerger return to shareholders of the new firm,

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