Diversified Business Enterprise Value

We have already agreed that the value of the company is settled by the pricing function of the capital market.Fosun International as an ordinary private enterprise from mainland was honored "Hutchison Whampoa of Mainland" by the underwriters, and burst over-subscription boom,the net assets soared from 4 billion to 60 billion during a few days.All of these inspired us to question the pricing function.Could diversification brought value premium for the company? Would the company lost core competence when going through the transition from specialization to diversification? We have heard all kinds of cases about the successful and failed companies both in diversification and specialization,so define the success purely by diversification or not are unilateral.Scholars also hold different arguments on this topic.This article first introduces the diversification movements occurred in the world,which were all revolved with the development of the company history.Then a case about the Fosun International is meant to reveal the commons of all the private companies that listed in HK stock market.Fosun International is undoubtedly the representative of the private companies and could help us to learn more about the threats underneath the diversification.After that,this article looks back in the theories that drive companies to be diversification,and reviews some related papers to support further research.This article collects a special sample,all of the private companies that registered abroad and listed in HK.The government will not intervene too much in the operation decision of this sort of companies,which means their diversification decision was not the product of the society obligation.The final biggest stockholder of the company is enterpriser and the company had built mature operation model.From the investors' view they are also the most successful private companies in China.So the analysis on the relationship between diversification and company value is very significant for other growing private companies.Through a three-year data analysis from 2005 to 2007,we do not find any significant difference of company value between diversified companies and specialized companies.That means,companies with high value are not necessarily diversified.Due to the degree of diversification of the sample companies are not very high;the overall sample shows a phenomenon of diversification premium.However, after a further analysis on the diversification,we find an "inverted U-type" relationship between the company value and the diversification degree.When at a lower degree of diversification,increasing the diversification will bring a premium to the company value.But there exists a certain point,above of which the relationship between the diversification and company value will reverse.That is,at a higher degree,increasing the diversification will destroy the company value.We also find that there is a higher diversification premium with the higher leverage company.But there is only weak evidence shows that companies with higher growth ability will have higher diversification premium.