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Diversification and Changes in Shareholder Value

Please respond to the following:
Take a position as to whether or not your believe diversification increases shareholder value in a given company. Support your position.
Given a company that is already diversified, suggest how senior management may determine the most effective strategy and how it should be evaluated.

Solution Preview

The concept of diversification also introduces the need to view both the risk/reward concept, and the notion of maximizing shareholder wealth. Typically firms diversify in order to spread risk across a larger base (either of accounts or over a larger base of products and/or services). The idea is that this will reduce risk (of losing clients or of some existing product lines not meeting expectations).

If we accept the notion that diversification helps to reduce risk, then it follows that we should adjust our view of the rewards to be gained from this type of potential return. Having said that, the IDEAL position of a firm is to reduce risk as much as possible, while gaining the highest ...

Solution Summary

A discussion of the factors involved with diversifying and the associated risks attached to diversification.

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