Holdings

How Much Diversity Should the Stock Market Encourage?

Stock market investors often place faith in business plans made by established business houses, which they may not have supported from a new and independent entity. Segment-wise financial reporting requirements do not always tell full and true stories about contributions from new ventures supported by the vast resource infrastructures of large corporations. We do know that many brand extensions do less well than the original positioning, and some are even withdrawn quietly from the market place. The questions about how much minority stock market investors have to pay for the whims of powerful and well-spoken executives remain.

There are grave risks in unrelated diversification for stock market interests in terms of opportunity costs. The worst parts of these affairs are that minority interests are seldom kept fully in the picture. Managements are commonly tempted to gloss over unproductive forays in to business areas which lie outside their domains. Comparing present earnings with a corresponding quarter in the past may not always be relevant, yet such evaluation is ubiquitous when it comes to the stock market. The differences between statutory accounting and management information systems can be so vast, that it takes armies of accountants and sophisticated software to keep tabs on the different sets of accounts!

The stock market should be especially wary of horizontal integration because customers do not necessarily accept new product categories from their supply sources. There is also the worrying aspect of executive personnel and other resources being distracted from intensive competition in the core business.

There may be significant stock market value to be captured in vertical integration, provided that is executed in small and manageable steps. Raw materials and ingredients which act as cost drivers are most likely to be worth incorporating in internal processes. Integrating forward is tempting in terms of margins for industrial marketers, but is fraught with danger because drawing closer to ultimate consumers calls for entirely new sets of competencies.

Stock market investors who shy away from companies with diversification plans may sometimes lose huge values, but it is prudent to keep one’s portfolio stocked well with companies that focus on adding new values for existing customers, and which strive to expand existing markets shares and brand ranks.

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