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I’m getting confused with the role of a Portfolio Manager. My understanding is that a PM attempts to find undervalued businesses, turn them around, and then sell on for a profit. The Gorden Gecko approach?
Is it fair to say that a PM role would be linked to an unrelated diversification strategy? And a PD role would be a related diversification strategy?
I understand a PM can asset strip but not how it can turn around a struggling business if it’s unrelated? With a PD role you apply Ashridge to assess the strategic fit, but because it’s unrelated you can’t do this with a PM role…
Are there any real world examples of PM that can illustrate the strategy?
Thank you so much for any help!
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As I understand it, both PM and PD could be used as related or unrelated diversification strategies.
It’s just that unrelated diversification suits a PM role more, because they’re intending to be quite “hands off”. To expand an answer a bit, I’d argue that the more related the target is, the lower the risk.
PMs turn companies around by restructuring and/or providing management and cash. I guess the ideal scenario is to take a question mark and turn it into a star.
It can be handy if the parent has experience in business turnaround, or if it’s a core competency for them.
Just my take anyway, I’d be keen to read other’s opinions.
Can’t give a real world example, but there is a question from Dec ’08 exam (MMI – Q20 in BPP revision kit) which explores the different types of acquisition strategies.
Many thanks Leigh, I had forgotten about MMI even though I had done it a couple of days ago! I’ve looked at Kaplan’s answer and the significant line (for me anyway!) was that MMI could recruit managers with established track records in IT. What you said but I was reading it as internal management.
So I take it a corporate parent would have the skill at spotting undervalued businesses, e.g. low share price, but buy in the expertise to turn them around. They then adopt a hands off approach and set financial targets.
That’s also pretty much the definition of the financial controller role, MMI looks at that with the leisure park company. I guess a PM role can mature into a FC role.
My confusion came with the Dec 10 exam as the roles are specifically discussed. I would have thought that Shoal’s takeover of the restaurant chain was an ideal case of a PM role. It turns the restaurant around with some cash, installs some new management and sells it when it’s back to profit. I know Shoal looks to exploit synergies, but the BPP answer says the PM role is not suitable. Still confused about that one to be honest!
In the question Shoal, the restaurant was a fish restaurant and the company’s other businesses were catching, farming and processing fish. Because they are related businesses, seeking synergy is their most likely motive. For example, the fish farm business could be asked to supply fish of a certain size and on certain delivery dates to the restaurant business. The could market the link “Our fish is ethically sourced from our own farms” etc.
HTH
Thank you Gromit. I can see the horizontal integration provided some synergy and that was the most likely motive for an answer.
Also, one last question, sorry. Being that there’s more emphasis on pricing now, should we be concerned about transfer pricing issues when evaluating the financial results of SBUs that are integrated, such as Shoal? None of the text books seem to cover it.
Thanks again.
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