Conglomerates - an alternative?

Essay from the year 2003 in the subject Business economics - Investment and Finance, grade: 1.3 (A), University of Kassel (Finance;International Management School), course: Investment Finance, language: English, abstract: Many managers believe that the interests of shareholders are best served byindustry diversification. Such may be found in the so-called conglomerates(chaebol in South Korea; Keiretzu in Japan). a. Explain why this attitude among managers may exist, and whether there issome rationale behind it, i.e. from the point of view of the managers of thesecompanies. Shareholders interest in buying shares is primarily to earn money. There aretwo major extremes to invest in shares. The first way is to invest in risky companieswith high earnings and the other way is to invest in conservative shareswith low earnings. There are a lot of alternatives between these extremes whichbalance the risk and the earnings. A mix of different shares will be the best solutionand balance. The discussion about cooperate diversification starts alreadyin the late 70 s, but until now there are no global accepted ideal results. With current market understanding and knowledge about the influence of trendson individual industries an investment in different industries like conglomeratesis rational. Conglomerates with industry diversification can have a balance betweenrisk and earnings with the potential of better results compared to otherinvestments. The diversification of risk in each industry makes a balance betweenrisk and different scenarios possible. Trends in stocks and industries cannot be calculated, but a conglomerate can balance this risk trough the differentindustries. [...]