Diversification, Portfolio Analysis and the Uneasy Case for Conglomerate Mergers

Levy, Haim; Sarnat, Marshall

doi:10.2307/2325416

Cited by 73 publications

(57 citation statements)

References 8 publications

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“…See also Mossin [19,20], Hamada [8] and Levy and Sarnat [11]. Lintner [12] disagrees; he maintains that diversification is an appropriate corporate objective.…”

mentioning

confidence: 99%

Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting

Myers¹

1974

The Journal of Finance

142

108

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INTkODUCTIONEveryone seems to agree that there are significant interactions between corporate financing and investment decisions. The most important argument to the contrary -embodied in Modigliani and Miller's (MM's) famous Proposition I -specifically assumes the absence of corporate income taxes; but their argument implies an interaction when such taxes are recognized.Interactions may also stem from transaction costs or other market imperfections. Also, assume that:Available investment opportunities can absorb $1 million at most. The investment generates a perpetual stream of after-tax cash flows.Let the expected average value of these flows be c • In this case C = .09y. 2.Assume the market will capitalize the retutms at a rate p_ = .10. Thus, if all-equity financing is used, these assets generate a net present value of -$.10 per dollar Invested.3.New debt is limited to 40 percent of new Investment. 4.The firm has $800,000 in cash available. 5.Any excess cash is paid out in dividends.6.The additions to debt and equity are expected to be permanent.In order to specify the objective function in the simplest possibly way, I will assume that MM's view of the world is correct.If so, it is sufficient to maximize the overall market value of the firm. V is given V = V + PVTS (1) where V = the market value of the firm given all-equity financing, and PVTS = the present value of tax savings due to corporate debt. The problem is to maximize \p, subject to:0^= Yt -Z^1 0, t = 0, 1, . . ., T.0^= """j^jtThe borrowing rate, r, is assumed constant for simplicity, as is the corporate tax rate t. In general, r will be a function of the other variables. III.

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“…See also Mossin [19,20], Hamada [8] and Levy and Sarnat [11]. Lintner [12] disagrees; he maintains that diversification is an appropriate corporate objective.…”

mentioning

confidence: 99%

Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting

Myers¹

1974

The Journal of Finance

142

108

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“…Levy and Sarnat (1970) states that while horizontal and vertical mergers can potentially produce value, the economic case for conglomerate merger is not clear as the production of economies of scale in production, research, distribution is not relevant, lacking discernible economic relationship between the parties to the merger. Amihud and Lev (1981) on the other hand claims that via diversification effect conglomerate merger leads to reduced risk for the combined entity.…”

Section: Types Of Mergers and Acquisitionsmentioning

confidence: 99%

Şi̇rket Bi̇rleşmeleri̇ Ve Satin Almalarda Kri̇ti̇k Başari Faktörleri̇: Türki̇ye Pazari Bağlaminda Bi̇r Değerlendi̇rme

Dalkılıç

Cagle

2015

Dokuz Eylül Üniversitesi İşletme Fakültesi Dergisi

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Merger and acquisitions is defined as a strategic decision to increase a firm's growth and enhance its operations (Saxena, 2012). Some proponents argue that mergers increase efficiency whereas opponents argue that they decrease consumer welfare by monopoly power (Coontz, 2004). There is a growing empirical literature documenting that mergers are efficient means for assets to be reallocated within the economy. In line with all these discussions Mergers and Acquisitions in the corporate world are achieving increasing importance and attention especially in the era of intense globalization. Grubb and Lamb (2000) states that only about 20 percent of all mergers really succeed. In 2014, there was a total of 130 deals with disclosed values totaling US$17.7 billion in Turkey. Of these, 4 of them were above one billion US dollars and accounted for 51% of total transaction volume. This paper analyzes the sources of value creation in mergers and acquisitions; focus on critical success factors in merger & acquisition strategies and examines the transactions that took place in Turkey in 2014.

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“…Therefore, financial theory in its current form predicts that div6rsifica-tion per se has a zero market value (see for example Levy and Sarnat [51]). …”

Section: Diversification Of Riskmentioning

confidence: 99%

“…Nonetheless, the works of Levy and Sarnat [51], Smith and Shreiner [85], Westerfield [97], and Mason and Goudzwaard [58], suggest that conglomerates are less efficient than direct diversification in the capital market.…”

Section: Summary On Financial Explanations For General Mergers and Comentioning

confidence: 99%

Study on Mergers. A Rationale for Conglomerate Mergers

Majluf¹

1978

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Diversification, Portfolio Analysis and the Uneasy Case for Conglomerate Mergers

Cited by 73 publications

References 8 publications

Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting

Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting

Şi̇rket Bi̇rleşmeleri̇ Ve Satin Almalarda Kri̇ti̇k Başari Faktörleri̇: Türki̇ye Pazari Bağlaminda Bi̇r Değerlendi̇rme

Study on Mergers. A Rationale for Conglomerate Mergers

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