Successful strategies are innovative. They combine resources or businesses in unique or complex ways that other firms may fail to recognize. Yet research from the Olin School of Business at Washington University finds that the market actually tends to undervalue companies with complex or unique strategies. The reason: they receive less analyst coverage.
These results provide an alternative explanation for the long term trend away from conglomeration and toward more focused firms. In truth, diversified corporations have not disappeared, they have merely transformed into private equity firms, which, of course, have no need for market analysts, Zenger says.
“If the market is structured to not fully reward the value inherent in unique or complex strategies, then it’s problematic in the sense that analysts end up discouraging strategic innovation, and ultimately value creation.”