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Wednesday 2 April 2014

Unit 3: De-merger & dis-economies of scale

Today, the world's largest mining company, BHP-Billiton, has signalled that it is considering demerger and slimming the business, as a way of improving productivity and performance. However, is there more to this than meets the eye?  

As in the majority of cases where a firm looks to shrink there's lots of talk about 'core businesses', 'shareholder value' and so on. But behind the bland rhetoric, this hints at all sorts of underlying themes. 

In the first place, it hints at significant diseconomies of scale. This is not to suggest that the firm only experiences diseconomies of scale at current output levels, but the diseconomies of scale significantly outweigh the economies of scale that can be gleaned from being so large. 

As a little revision exercise, you might like to remind yourselves which diseconomies/economies of scale BHP-Billiton is likely to experience.

Furthermore, there also a case for looking at the objectives of the BHP-Billiton board. Are they intent on pursuing profit-maximization, whereas previously they had sales/market share ambitions?


Alternatively, might they be maximising managerial utility in another way - I was curious as to whether current board members were rewarded for growing the company and might now be in line for similar bonuses for shrinking it, something that strikes me as nonsensical. 


The demerger is covered in this article from the Telegraph. 

The January 2007 paper question 12 could link to this. 

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