Whenfirmsacquirestakesinotherfirms,thevalueofthese
holdings willbe added to thevalue ofoperating assetsto
arriveatthevalueoftheequityofthefirm.Inconventional
valuation,again,theseholdingshaveaneutraleffectonvalue.
Aswith cash,therearepotentialproblemswiththesecross
holdings that cancausethem to be discounted (relativeto
theirtruevalue)bymarkets.Cross holdingsaredifficultto
value, especially when they are in subsidiary firms with
differentriskandgrowthprofilesthantheparentcompany.It
isnotsurprisingthatfirmswithsubstantialcrossholdingsin
diverse businesses often find these holdings being
undervaluedbythemarket.Insomecases,thisundervaluation
canbeblamedoninformationgapscausedbythefailureto
conveyimportantdetailsongrowth,risk,andcashflowson
cross holdings to the markets. In other cases, the
undervaluation may reflect market skepticism about the
parent company’s capacity to manage its cross holding
portfolio; consider this a conglomerate discount.
5 If sucha discountapplies, theprescription forincreased
valueissimple.Spinningoffordivestingthecrossholdings
andthusexposingtheirtruevalueshouldmakestockholders
in the parent company better off.
Pension Fund Obligations (and Liabilities)
Most firms have large pension obligations and matching
pension assets.To theextent thatboth theobligations and
assets grow over time, they offer both threats and
opportunities.Afirmthatmismanagesitspensionfundassets
mayfinditselfwithanunfundedpension obligation,which
reduces the value of its equity. In contrast, a firm that
generatesreturnsthatarehigherthanexpectedonitspension