ASST PROF. ASST PROF. JONLEN DESAJONLEN DESA

DIVERSIFICATION & DIVERSIFICATION & MERGERSMERGERS

INTRODUCTIONINTRODUCTION

DiversificationDiversificationDiversification refers to the addition of new lines

of business which may be related to the current business or unrelated.

Product Diversification-Product Diversification-Introduction of a new product to the existing product line.

MergerMergerWhen two or more organizations combine to

become one through exchange of stock or cash or both, it is termed as Merger.Merger.

Demergers, Acquisition.Demergers, Acquisition.

ANSOFF MATRIX

Market penetration – This involves increasing market share within existing market segments. This can be achieved by selling more products/services to established customers or by finding new customers within existing markets.

Product development – This involves developing new products for existing markets. Product development involves thinking about how new products can meet customer needs more closely and outperform the products of competitors.

Market development – This strategy entails finding new markets for existing products. Market research and further segmentation of markets helps to identify new groups of customers.

Diversification – This involves moving new products into new markets at the same time. It is the most risky strategy. The more an organisation moves away from what it has done in the past the more uncertainties are created. However, if existing activities are threatened, diversification helps to spread risk.

DIVERSIFICATIONDIVERSIFICATION

Diversification is a corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that new market.

Diversification strategies allow a firm to expand its product lines and operate in several different economic markets.

Diversification refers to a strategic direction that takes companies into other products and/or markets by means of either internal or external development.

2 FORMS OF DIVERSIFICATION2 FORMS OF DIVERSIFICATION

RELATED DIVERSIFICATIONRELATED DIVERSIFICATIONIt occurs when a company develops beyond its present

product and market whilst remaining in the same area. For example a newspaper company expanding by acquiring a TV station remains with media sector.

This form of diversification can further be broken downBackward diversification: when activities related to

the inputs in the business are developed. For example a newspaper company acquiring a printing or publishing company.

 Forward diversification: when development into

activities which are concerned with a company’s output. For example a newspaper company acquiring a distribution outlet.

UNRELATED DIVERSIFICATIONUNRELATED DIVERSIFICATIONIt is used to describe a company moving its

present interests into unrelated markets or products.

For example a company whose core business is media services may diversify into provision of financial services

REASONS FOR DIVERSIFICATIONREASONS FOR DIVERSIFICATION

Saturation or Decline of the Current BusinessAdditional OpportunitiesBetter OpportunitiesRisk MinimizationBenefits of integrationBetter Utilization of resources & strengthsNeed related diversificationConsolidation

ADVANTAGESADVANTAGESControl of inputs, leading to continuity and improved quality.Control markets by guaranteeing sales and distribution.Take advantage of existing expertise, knowledge and resources

in the company when expanding into new activities. No longer being reliant on a single marketProvide movement away from declining activitiesOpportunity to serve more customers in new markets with new

products.Increase in sales, profits, growth rate & market share.Synergy

DISADVANTAGESDISADVANTAGESNo Guarantee that the firm will succeed in the new

business. Many diversifications of a number of companies have failed.

If new lines of business result in huge losses, it may affect the old business.

Neglecting of the old business or lack of sufficient attention given to the old business.

Competition for the old as well as new businesses.May result in slowing growth in its core businessAdding management costsAdding bureaucratic complexityHighest amount of risk involved.Complicated rules & regulations incase of foreign

markets.

Because of the high risks, many companies attempting to diversify have led to failure. However, there are a few good examples of successful diversification:

Virgin Group  moved from music production to travel and mobile phones

Walt Disney moved from producing animated movies to theme parks and vacation properties

Canon diversified from a camera-making company into producing an entirely new range of office equipment.

 

TYPES OF DIVERSIFICATIONTYPES OF DIVERSIFICATION

1. SIMPLE DIVERSIFICATION1. SIMPLE DIVERSIFICATION It refers to a normal and simple

diversification.

The company enters into a new business line by introducing a new product or entering a new market.

It is the easiest and most simple type of diversification.

2. HORIZONATL DIVERSIFICATION2. HORIZONATL DIVERSIFICATIONThe company adds new products or services that

are often technologically or commercially unrelated to current products but that may appeal to its current customers.

When is Horizontal diversification desirable?Horizontal diversification is desirable if the

present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced.

3. SYNERGISTIC DIVERSIFICATION3. SYNERGISTIC DIVERSIFICATIONSynergistic diversification is diversification which

results in the realization of synergistic effects. Synergy is described as “1+1=3 or 2+2=5” effect

which implies that the result of the combined performances will be greater than if they were gone separately and independently.

Synergy offers a firm the advantage of higher consolidated return on investment that can be maximally obtained from a single separate firm.

Eg: Product A(Existing Product) Sold by Salesman X.

Product B( New Product) Can be sold by the same salesman X instead of employing a new one. This saves cost and acts as a synergy.

IMPORTANT SYNERGIESIMPORTANT SYNERGIES

4. CONGLOMERATE DIVERSIFICATION4. CONGLOMERATE DIVERSIFICATIONConglomerate Diversification is quite unrelated

diversification. The new business will have no relationship to the company’s current technology, products or markets.

Some companies go in for diversification with the same firm, while some will establish separate companies for managing different types of products. (TATA)(TATA)

The company markets new products or services that have no technological or commercial synergies with current products but that may appeal to new groups of customers.

When companies engage in conglomerate diversification strategies, they are often looking to enter a previously untapped market. Companies can do this by purchasing or merging purchasing or merging with another company in the desired industry.

Conglomerate Diversification provides enormous scope for business expansion & growth.

Moving into a totally unrelated industry is often highly dangerous, as the company’s current management is unfamiliar with the new industry

Though this strategy is very risky, it could also, if successful, provide increased growth and profitability.

5. CONCENTRIC DIVERSIFICA5. CONCENTRIC DIVERSIFICATIONTIONA concentric diversification strategy allows a company to

add similar products to an already successful line of business.

For example, a computer manufacturer that produces personal computers begins to produce laptop computers.

In Concentric Diversification, there is a technological similarity between the industries, which means that the firm is able to leverage its technical know-how to gain some advantage. The technology would be the same but the marketing effort would need to change.

The technical knowledge necessary to accomplish the new task comes from its current field of skilled employees. Concentric diversification strategies also exist in other industries, such as the food production industry.

Eg: Specialty Foods- Maggi, Sauces, Pasta & other related products.

MERGERSMERGERSWhen two or more organizations combine to

become one through exchange of stock or cash or both, it is termed as Merger.

A merger is a combination of two companies to form a new company, while an

acquisition is the purchase of one company by another in which no new company is

formed.

A merger is a legal consolidation of two companies into one entity

Sesa Goa & Sterlite Am Nissan & Datsun Indian Airline & Air India Vodafone purchased Hutch Ranbaxy & Daichii Sankyo Fortis Health Care India & Fortis Health Care International Nokia & Microsoft Max Life Insurance & Mitsui Sumitomo

LIST OF DEMERGERSLIST OF DEMERGERS Hero & Honda Tata & Fiat Max Life Insurance & New York life Insurance

EXAMPLESEXAMPLESSUCCESSFUL MERGERS UNSUCCESFUL MERGERS

ADVANTAGES/REASONS FOR M & AADVANTAGES/REASONS FOR M & AIt helps the firm acquire new technology.It enables company to start a new business.Provides the company with marketing

infrastructure.It avoids the gestation period of setting up a

new unit.Helps in eliminating or reducing competition.Cost of acquisition is less than the cost of

acquiring.Helps a firm boost sales, grow & gain a large

market share.Benefit from Synergiers

DISADVANTAGES OF M & ADISADVANTAGES OF M & A

Indiscriminate acquisitions have landed several companies in financial problems.

When a company is taken over, its problems are also taken over.

The company may not have the experience & expertise to manage the new unit.

Lack of evaluation before acquisition, could prove the acquisition decision wrong.

1. HORIZONTAL MERGERS1. HORIZONTAL MERGERSA merger occurring between companies in the same

industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms.

The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.

A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature.

2. VERTICAL MERGERS2. VERTICAL MERGERSA merger between two companies producing different

goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.

A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain.

An automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process.

3. CONGLOMERATE MERGERS3. CONGLOMERATE MERGERSA merger between firms that are involved in

totally unrelated business activities. There are two types of conglomerate mergers:

pure and mixed. Pure conglomerate mergers involve firms with

nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

The example of conglomerate M&A with relevance to above scenario would be if health care system buys a restaurant chain.

4. MARKET EXTENSION MERGERS4. MARKET EXTENSION MERGERSA market extension merger takes place between two

companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base.

Eg: RBC Bank Eagle Bancshaes Merger.

5. PRODUCT EXTENSION MERGERS5. PRODUCT EXTENSION MERGERSA product extension merger takes place between

two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.

Eg: Broadcom-Mobilink Merger.

ACQUSITIONACQUSITION

An Acquisition or Takeover is the purchase of one business or company by another company or other business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity. 

"Acquisition" usually refers to a purchase of a smaller firm by a larger one. 

 Types-Friendly & Hostile Takeovers

MERGERS VS ACQUISITIONMERGERS VS ACQUISITIONMERGERSMERGERS ACQUISITIONSACQUISITIONS

When 2 or more firms combine to form a single firm.

Types- Horizontal, Vertical, Conglomerate, Product Extension & Market Extension.

2 firms of same sizes merge together to conduct business.

Both companies benefit from the merger.

There is genuine pooling of assets & liabilities of the merging companies.

When one firm purchases or acquires another firm.

Types- Friendly & Hostile Takeovers.

A larger firm acquires a smaller firm.

Usually only the acquirer or the purchasing company benefits from an acquisition

There is no genuine pooling assets & liabilities in acquisition,