ASST PROF. JONLEN DESA

DIVERSIFICATION & MERGERS

INTRODUCTIONDiversificationDiversification refers to the addition of new lines of business which may be related to the current business or unrelated. Product Diversification-Introduction of a new product to the existing product line.MergerWhen two or more organizations combine to become one through exchange of stock or cash or both, it is termed as Merger.

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.

DIVERSIFICATION

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 DIVERSIFICATION

RELATED 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 companys output. For example a newspaper company acquiring a distribution outlet.

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

ADVANTAGESControl of inputs, leading to continuity and improved quality.Control markets byguaranteeing sales anddistribution.Take advantage of existing expertise, knowledge and resources in the company when expanding into new activities. No longer beingreliant 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

DISADVANTAGESNo 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 Groupmoved from music production to travel and mobile phonesWalt Disneymoved from producing animated movies to theme parks and vacation propertiesCanondiversified from a camera-making company into producing an entirely new range of office equipment.

TYPES OF DIVERSIFICATION

1. 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 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 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 SYNERGIES

4. CONGLOMERATE DIVERSIFICATIONConglomerate Diversification is quite unrelated diversification. The new business will have no relationship to the companys 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)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 inconglomerate diversificationstrategies, they are often looking to enter a previously untapped market. Companies can do this by 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 companys current management is unfamiliar with the new industryThough this strategy is very risky, it could also, if successful, provide increased growth and profitability.

5. CONCENTRIC DIVERSIFICATIONAconcentric diversificationstrategy allows a company to add similar products to an already successfulline 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.

MERGERSWhen 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.Amergeris a legal consolidation of two companies into one entity

Sesa Goa & SterliteAm Nissan & DatsunIndian Airline & Air IndiaVodafone purchased HutchRanbaxy & Daichii SankyoFortis Health Care India & Fortis Health Care InternationalNokia & Microsoft Max Life Insurance & Mitsui Sumitomo

LIST OF DEMERGERSHero & HondaTata & FiatMax Life Insurance & New York life Insurance

EXAMPLESSUCCESSFUL MERGERSUNSUCCESFUL MERGERS

ADVANTAGES/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 & AIndiscriminate 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 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 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 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 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 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.

ACQUSITIONAnAcquisitionorTakeoveris 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 ACQUISITIONMERGERSACQUISITIONSWhen 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 acquisitionThere is no genuine pooling assets & liabilities in acquisition,