Diversification, refocusing and corporate performance : a case study of Delta Corporation Limited
Thesis (MDevF (Business Management))--University of Stellenbosch, 2010.
ENGLISH ABSTRACT: Portfolio diversification in capital markets is an accepted investment strategy. On the other hand corporate diversification has drawn many opponents especially agency theorists who argue that executives must not diversify their firms. Instead, they must pay out the ‘free cash flows’ used to make acquisitions as dividends so that shareholders can diversify on their own. The ‘conglomerate discount’ of diversified firms in stock markets confirmed this argument and compelled many firms to refocus by selling-off non-core units from the 1980s. Through a case study of Zimbabwe Stock Exchange listed Delta Corporation Limited which spun-off its unrelated subsidiaries to focus on its core cold beverages business in 2001, this thesis investigates if by refocusing conglomerates improve shareholders’ returns. Using inflation adjusted share returns and factoring in risk by adopting the Sharpe index, the study results show that Delta underperformed the market and its peers as a diversified conglomerate but outperformed both benchmarks after refocusing. The study also argues that market failures in Zimbabwe, in particularly the foreign exchange and agriculture markets, compelled firms to divert from their core strategies in order to survive hyperinflation. It concludes by affirming the consensus in corporate diversification research that conglomerates are an inefficient structure for growing shareholders’ returns but may indeed be the default corporate strategy in developing economies frequently marred by market imperfections and failures.