Diversification, refocusing and corporate performance : a case study of Delta Corporation Limited

ENGLISH ABSTRACT: Portfolio diversification in capital markets is an accepted investment strategy. On the other handcorporate diversification has drawn many opponents especially agency theorists who argue thatexecutives must not diversify their firms. Instead, they must pay out the ‘free cash flows’ used tomake acquisitions as dividends so that shareholders can diversify on their own. The‘conglomerate discount’ of diversified firms in stock markets confirmed this argument andcompelled many firms to refocus by selling-off non-core units from the 1980s. Through a casestudy of Zimbabwe Stock Exchange listed Delta Corporation Limited which spun-off itsunrelated subsidiaries to focus on its core cold beverages business in 2001, this thesisinvestigates if by refocusing conglomerates improve shareholders’ returns. Using inflationadjusted share returns and factoring in risk by adopting the Sharpe index, the study resultsshow that Delta underperformed the market and its peers as a diversified conglomerate butoutperformed both benchmarks after refocusing. The study also argues that market failures inZimbabwe, in particularly the foreign exchange and agriculture markets, compelled firms todivert from their core strategies in order to survive hyperinflation. It concludes by affirming theconsensus in corporate diversification research that conglomerates are an inefficient structurefor growing shareholders’ returns but may indeed be the default corporate strategy indeveloping economies frequently marred by market imperfections and failures.