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SHAREHOLDER VALUE IN A
CONGLOMERATE
SECTION A
GROUP MEMBERS:
NIKITA PENDSE(16PGP096)
COMPANY BACKGROUND:
CPL BUSINESSES
CPL operated five businesses:
CONGLOMERATE DISCOUNT :
By the 1980s and 1990s, conglomerates had fallen out of fashion and investors
preferred pure play companies, as they were easier to value and understand.
Conglomerates were trading at a discount of 15% to the sum of their parts on
average. The discount was higher in case of CPL due to poor coverage by
equity analysts. CPLs stock was covered either by railroad analysts or oil and
gas analysts, who had limited knowledge of CPLs other businesses.
DRAWBACKS OF A CONGLOMERATE:
CONCLUSION/RECOMMENDATIONS:
Divestiture may not be a preferred method when it comes to maximising
shareholders value because of the tax penalty. And shareholders do not have a
vote in this process. In case of a spin-off, if it is structured appropriately, it
could be tax free. But, even a spin off could not receive a favourable ruling.
And if it did, actions in the future might trigger a retroactive double-tax. And
the starburst strategy of creating five separately listed companies would be
something too new for the markets; it could be too bold a move. Also, it would
involve a lot of negotiations with Revenue Canada and debt restructuring.
Canadian Pacific should go with Spin Off of one or more business strategy. In
this strategy, the shareholders have a vote. It would be easily understood by the
analysts and investors. If properly implemented and with a check on the future
actions, the strategy can be a butterfly reorganisation. It would make sense to
keep some of the related businesses together to preserve economies of scale and
maintain synergies.