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1 1. Oxford English Dictionary, 2nd ed., Oxford: Oxford University Press, 1998, Vol. 16, page 852.

2 2. For a more detailed discussion of the growth-share matrix in strategic planning, see Hax and Majluf (1984), Chapter 7.

3 3. SIC stands for “Standard Industrial Classification.” The U.S. Commerce Department’s classification of firms in an industry should be checked for reasonableness.

4 4. This financial rationale for conglomerate mergers presupposes that shareholders are unable to replicate this through their own investing and homemade leverage. Taxes, transaction costs, margin requirements, and high consumer loan rates can frustrate the individual investor’s attempt to synthesis this benefit.

5 5. Financial recapitalizations may also affect the operations and asset mix of the firm. These deals are often predicated on asset sales, plant closings, spin-offs, and so on.

6 6. To “divisionalize” is to adopt an organizational structure for the firm that shapes major segments or divisions around product groups.

7 7. See Weston (1970), Chandler (1977), Alchian (1969), and Williamson (1975).

8 8. See Morck, Schleifer, and Vishny (1990), Sicherman and Pettway (1987), Morck (1990), Maqueira et al. (1998), Nail, Megginson, and Maqueira (1998), Delong (2001), and Megginson, Morgan, and Nail (2002).

9 9. See Carow (2001), Hubbard and Palia (1999), Schipper and Thompson (1983), Elgers and Clark (1980), Matsusaka (1993), and Ferris et al. (2002).

10 10. See Berger and Ofek (1995, 1999), Lang and Stulz (1994), Servaes (1996), Comment and Jarrell (1995), Lins and Servaes (1999), Mansi and Reeb (2002), Denis, Denis, and Yost (2002), and Lamont and Polk (2002).

11 11. Berger and Ofek (1995) compute the diversification discount as excess value divided by the imputed value of the firm. The actual value is the market value of equity plus the book value of liabilities. The imputed value is the sum of segment values estimated by the product of a valuation multiple for single-business peers (total capital divided by assets, sales, or operating earnings) times the accounting value for the segment.

12 12. See Chevalier (2000), Hyland and Diltz (2002), Klein (2001), Graham, Lemmon, and Wolf (1998), Campa and Kedia (1999), Villalonga (1999, 2003a), Mansi and Reeb (2002), and Whited (2001).

13 13. See Rumelt (1974, 1982), Ravenscraft and Scherer (1987), and Kaplan and Weisbach (1992).

14 14. See Kruse (2002), Healey, Palepu, and Ruback (1992), Parrino and Harris (1999), and Cornett and Tehranian (1992).

15 15. Amihud and Lev (1991) concluded, “Risk reduction through conglomerate merger may be convincingly rejected on a priori grounds as a merger motive from the stockholders’ point of view.” (Page 615)

16 16. It is easy to grow sales or assets by investing willy-nilly, without attention to value creation. For instance, it is possible for many firms to expand sales by relaxing credit standards and investing in more accounts receivable. But doing so without giving attention to the pricing of that credit or the probability of being repaid can, in the long run, destroy firm value.

17 17. Return on total capital is computed by dividing earnings before interest and after taxes (EBIAT) by the total capital of the firm (i.e., debt plus equity). This is also sometimes called “return on net assets” and is computed as EBIAT divided by net assets (i.e., total assets less current liabilities).

18 18. The dividend payout ratio is computed as dividends divided by earnings.

19 19. The hypothetical bond rating is inferred from Value Line’s rating of financial stability. The after-tax cost of debt is associated with that bond rating as of early 1991.