Which of the following rationales for pursuing unrelated diversification is likely to increase shareholder value?
A) Enabling a company to achieve rapid or continuous growth
B) Reducing risk by way of spreading the company's investments over a set of truly diverse industries
C) Stabilizing earnings, that is, market downtrends in some of the company's businesses will be partially offset by cyclical upswings in its other businesses
D) Providing benefits to managers such as high compensation and reduction in employment risk
E) Restructuring an underperforming business
E) Restructuring an underperforming business
As opposed to restructuring an underperforming business or subsidiary, risk reduction, rapid growth, stabilization of earnings, and managerial motives tend to be misguided reasons for pursuing unrelated diversification to increase shareholder value. Management sometimes undertakes a strategy of unrelated diversification for the wrong reasons: (1) risk reduction by spreading the company's investments over a set of diverse industries; (2) expectations for rapid or continuous growth; (3) earnings stabilization, that is, market downtrends in some of the company's businesses will be partially offset by cyclical upswings in its other businesses; and (4) managerial motives, including the prospects for higher compensation—diversification for this reason alone is far more likely to reduce shareholder value than to increase it.
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