Ingeniero

The authors make an implicit argument that firms can obtain better long-term outcomes by pursuing a "retain & reinvest" strategy over the downsize and distribute model that has emerged as a wayof building shareholder value. Do you agree? Is this argument naïve?

To “retain & invest” may not bring the optimal long-term outcomes that are expected from shareholder. We have seen this inmany conglomerates such as Vivendi (formerly CGE, one of the biggest companies in France in the mid 90’s). A strong diversification strategy was implemented in the late 70’s thru the 80’s, enteringmany businesses including real estate, healthcare, utilities, telecommunications and many more. 1 In the 90’s cracks started to appear because of large capital expenditure. Debt levels increaseddrastically and return on invested capital dropped. After the evident problems, new young CEO was appointed with a mission to take the company in a different direction. After analyzing situation herestructured the conglomerate eliminating many subsidiaries, companies and other real estate assets leaving only four completely different core businesses. He “retained and invested” in these sectors(Utility, real estate, media/publishing and construction and property) bringing a stock appreciation of 71.8 in the following year of his appointment. This new strategy also brought debt to equity ratioway down. At the beginning this new strategy seemed as a great solution and the CEO was praised. This was an excellent short-term strategy but after a while shareholder value started to decrease.One of the main problems of this diversification strategy of retaining and investing in different industries was that there were no resources shared amongst these sectors. Basically the CEO was usinghis Cow Company (Utility sector) to feed he’s greed on diversifying on whatever he thought was a good business idea. It has been said by strategy expert that this diversification plan has been one...