Tag Archives: diversification

VCFS-4DC: VALUATION AND CORPORATE FINANCIAL STRATEGY FOR DIVERSIFIED COMPANIES

George A. Haloulakos, CFA, is a university instructor, author and entrepreneur [DBA Spartan Research and Consulting]. His published works utilize aviation as a teaching tool for Finance, Game Theory, History and Strategy.

Abstract

Value is the key performance measure in a market economy because it encompasses the long-term interests of all stakeholders in a company. In highly competitive global businesses – especially with diversified companies — it is essential for a firm to be effective in all three phases of managing cash flow — operations, investing and financing – to generate cash at a return exceeding its cost of capital. The concept of stakeholder management has broadened the responsibility of management to include financial stakeholders (i.e., equity owners and creditors) and non-financial stakeholders such as customers, employees and suppliers. This task is magnified for diversified companies whose corporate structure is based on a mix of different types of product or business groups having a variety of financial requirements. Corporate financial strategy for diversified companies based on a portfolio management style may benefit from a stakeholder approach in order to cope with a myriad of challenges including, but not limited to, achieving economy of scale, diversification and growth in difficult or less predictable environments. Two different eras – the “stagflation” period from the mid-1970s to the very early 1980s and the “globalization” decade of the 2000s – provided extremely competitive market conditions where diversified companies achieved mixed results with divergent stock price performance. The case studies reviewed here offer a study in contrast in how the stock market values diversified firms with different corporate financial strategies.

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AN OPERATING CORPORATE GROWTH STRATEGY: Building a Fortune 500 Manufacturing Business (7th article in the series on M&A)

I  write about two of the factors I consider central to successful growth and I used to build JPIndustries (JPI) in to A Fortune 500 Corporation at a time of economic recession, high interest rates and an exodus of manufacturing operations from the mid west: synergy and homogeneity.

You are probably saying to yourselves that synergy was a concept of the 1960’s which was not notably and successfully employed by the conglomerates which coined it, and that homogeneity reminds you more of processing milk than of conducting business.

But these words, synergy and homogeneity are Creek.  And I of Greek origin. I believe   that understood and applied correctly, the concepts expressed by these words    have clear practical meanings and direct application to business growth.

First: synergy.

Synergy comes from the Greek synergia, meaning “working together”. From the same root we have synergism, which means cooperative action of separate agencies such that the total effect is greater than the sum of the effects taken independently. This is the basis for the famous 2+2=5 definition of synergy promoted as the strategy of the conglomerates of the 1960’s.

I would propose to you that in the 1960’s the term synergy was poorly understood and in many cases poorly applied. That is the fault not of the concept, but of its utilization. And I would further propose that, correctly understood and applied the concept of synergy works.

Continue reading AN OPERATING CORPORATE GROWTH STRATEGY: Building a Fortune 500 Manufacturing Business (7th article in the series on M&A)