Business Mix
Some firms aremore complex thanothers simply because
they operate in multiple businesses, often with little in
common.GeneralElectric(GE),forinstance,hasoperations
in more than 10 distinct businesses with very different
marginsand riskprofiles. AnalyzingGE istherefore more
difficultthan analyzinga firmlike Adobe Systems,which
produces and sells only software. Why do firms get into
different and oftenunrelatedbusinesses? In the1960sand
1970s,theimpetuscamefromthedesiretodiversify,which,
itwasargued,wouldreducerisk.Inthe1980s,theargument
wasthatawell-runfirmcouldtakeoverpoorlyrunfirmsin
otherbusinessesanduseitssuperiormanagementtoincrease
value.Whetherthesebenefitsactuallymaterializeisopento
question,butthecomplexityaddedtofinancialstatementsis
one potential cost.
Itisnotjustthenumberofdifferentbusinessesthatafirmis
inthatgenerates complexitybutalso thedifferences across
thebusinesses.Manufacturingfirmswithfinancialarms(GE
Capital, GMAC, Ford Capital) are particularly difficult to
work with because there are huge differences in financial
leverageandoperating characteristicsbetweenthefinancial
and nonfinancial parts of the firms.
Structuring of Business
Whenfirmsenternewmarketsorbusinesses,thewaythey
structure these businesses can have an effect on their
complexity. For instance, a firm that keeps each business
separateandindependent(withitsownfinancialstatements)
shouldbe easierto valuethana firmthatenvelops allthe