The statement suggests that some managers prioritize their own interests over those of the company's shareholders. They engage in diversification efforts that do not benefit the company's value and instead pursue personal goals such as increased power, recognition, and prestige. In some cases, they may even use anti-takeover tactics that could potentially harm the value of the company's shares and reduce the returns to the shareholders.
One common example of such tactics is greenmail, where managers offer to buy back their own shares at a premium price from a potential acquirer, who could take over the company. This can be detrimental to the shareholders who will receive lower returns on their shares, as the company will have to pay a higher price to buy back its shares.
Similarly, golden parachutes refer to the practice of providing large payouts to executives if the company is acquired, even if their performance is not satisfactory. This can encourage executives to prioritize their own interests over those of the shareholders, as they will be financially secure even if the acquisition leads to a decline in the company's value.
Finally, poison pills involve the issuance of new shares to existing shareholders to dilute the ownership stake of the potential acquirer, making the acquisition more expensive. However, this tactic can also reduce the value of the existing shareholders' shares, as the value of their ownership stake in the company is diluted.
In summary, the statement suggests that some managers prioritize their own interests over those of the shareholders, and engage in diversification efforts that do not increase shareholder value. The actions they take can include growth for growth's sake, egotism, and anti-takeover tactics such as greenmail, golden parachutes, and poison pills. These tactics can erode shareholder value by diverting value from shareholders to other parties, potentially leading to lower returns on their investments.
Reference
https://quizlet.com/274025150/exam-2-summary-questions-flash-cards/
