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A strategic partnership?

One obvious approach for a company plagued by excessive near-term earnings and a dearth of reinvestment options is to harness itself, by merger with, acquisition of, or substantial investment in a company with a complementary ``shape'': an enterprise with substantial near-term capital investment requirements and out-year payoff substantially greater than compounded money market returns on the earnings of the New Technological Corporation. Unfortunately, this approach does not seem workable.

First, in an era where short-term interest rates exceed the earnings of mature industry-leading companies, the only investments with the potential to materially better those yields bear high risks to the capital invested. If the New Technological Corporation invests its earnings in such ventures, it risks the wrath of its shareholders for ``starting a venture capital fund with their earnings'' rather than paying them out as dividends. To the extent that its investments succeed, it dilutes the ``pure play'' aspect of its stock and becomes instead a composite investment which experience indicates will be valued by the market at less than the sum of the assets that compose it. Finally, there is no reason to believe that the managers of a New Technological Corporation will succeed in identifying promising ventures in which to invest--after all, they readily acknowledge they cannot even reliably predict which products of their own company will succeed.

Therefore, however attractive hypothetical composite balance sheets may appear, partnership with a capital-intense business appears a strategy which will cause vilification of management and shareholder unrest if attempted, collapse of the New Technological Corporation's unique advantages and stock price if it fails, and undervaluation and consequent vulnerability to takeover and break-up if it succeeds.

Editor: John Walker