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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