This document discusses strategic issues related to corporate diversification through mergers and acquisitions. It explains that diversification can help manage risk by spreading a company's resources across multiple industries. However, diversification only makes strategic sense when a company has exhausted growth opportunities in its core business. For diversification to create shareholder value, the new businesses must increase overall profitability through synergies. The document outlines various tests and considerations for evaluating potential diversification opportunities, including assessing attractiveness of the target industry and competitive advantages, and determining if the company will be better off with diversification. It also discusses different methods for diversifying, such as acquisitions, internal startups, or joint ventures.

1. MERGERS & ACQUISITION
Strategic issues in
Diversification
Pavan R Tiwari (17)

2. What is Diversification?
A risk management technique that mixes a
wide variety of investments within a
portfolio.
A collection of businesses under one
corporate umbrella.

3. Diversification and Corporate
Strategy
A company is diversified when it is in two or
more lines of business
Strategy-making in a diversified company is a
bigger picture exercise than crafting a strategy for
a single line-of-business
 A diversified company needs a multi-industry, multi-
business strategy
 A strategic action plan must be developed for several
different businesses competing in diverse industry
environments

4. When Does Diversification
Make Sense?
Single business strategies have a number of
advantages ……but also a number of risks
-- all eggs in one basket
- creates weak profitability
changes can wipe you out
The logic: to spread corporate risk across
multiple industries to enhance shareholder
value.

5. WHEN DOES DIVERSIFICATION
START TO MAKE SENSE?
Strong competitive Weak competitive
position, rapid market position, rapid market
growth -- Not a good time growth -- Not a good time
to diversify to diversify
Strong competitive Weak competitive
position, slow market position, slow market
growth -- Diversification growth -- Diversification
is top priority merits consideration
consideration

6. When do we diversify?
When a company runs out of growth
opportunities in the core business and not
before!
When diversification results in creation of
value

7. Motives for Diversification
GROWTH --The desire to escape stagnant or declining industries
a powerful motives for diversification (e.g. tobacco,
oil, newspapers).
--But, growth satisfies managers, not shareholders.
--Growth strategies (esp. by acquisition), tend to
destroy shareholder value
RISK --Diversification reduces variance of profit flows
SPREADING --But, doesn't create value for shareholders—they can
hold diversified portfolios of securities.
--Capital Asset Pricing Model shows that diversification
lowers unsystematic risk not systematic risk.
PROFIT --For diversification to create shareholder value, then
bringing together of different businesses under
common ownership & must somehow increase
their profitability.

8. The Major Issues
Diversification decisions involve two basic issues:
How attractive are our current businesses?
With these businesses, what is our performance
outlook for “X” years in the future?
Can the firm establish a competitive advantage
within the industry to be entered? (i.e. what
synergies exist between the core business and the
new business?)

9. Basic Issues
Poor understanding of how diversification activities will
“fit” or be coordinated with existing businesses.
Differences in organizational cultures
 Should new business be standalone operation or should it
be merged into one of the existing businesses?
Problems associated with internal development of new
businesses.
-Most problems due to considerable time and investment required to launch new
business.
-Difficult to assess the risks associated with new investment opportunity.

10. When to Stop Diversifying
When you achieve acceptable levels of
growth and profitability
Before complexity outstrips management's
ability to manage

11. Tests For Judging
Diversification
Attractiveness Test -The industry must be attractive.
Cost of Entry Test
-Is the cost of the diversification worth it?
-Will the diversified firm create enough additional value
to justify the cost?
-Cost has to be reasonable
Better off Test
-Diversification results in a competitive advantage and
creation of value.
-Will the company be better off after the
diversification than it was before?
-How and why?

12. Methods for Diversification
Acquisition of an existing business- Quick market entry,
Avoids entry barriers
Creation of a new business from within (A START-UP)-
Appropriate when You have time to launch, Market moves
slowly, Internal entry costs lower than acquisition costs, Target
industry is fragmented.
Joint venture with another firm or firms- Achieving
synergy from respective capabilities, Leveraging one another’s
experience.

13. Critical questions for diversification
success
What can our company do better than any
of its competitors in its current market?
What strategic assets do we need in order to
succeed in the new market?
Can we catch up to or leapfrog competitors
at their own games?
Player vs winner?

14. “In the business world, the rearview mirror is
always clearer than the windshield.”
THANK YOU