UNRELATED DIVERSIFICATION_ACS

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UNRELATED

DIVERSIFICATION

ABSIN.P.ABRAHAM

DEEKONDA SHAILENDER

DIYA JOSE MAMPILLY

NIRMAL KUMAR

RAMESH KUMAR

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AGENDA

Introduction

Other views

Conglomerate Performance Arguments & Mis-Leading conclusions

Canonical Examples

Present Day Conglomerate

Conclusion

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INTRODUCTION

DIVERSIFICATION DISCOUNT Companiesdiversifying into unrelated business have shownto trade at a discount

Reasons for skepticism : Few mechanisms put inplace for co-ordination between businesses,operating autonomy.

Role of markets in allocating land and labor to

individual business, investors get various optionsto diversify in case of individual business.

Failure to perform and govern.

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OTHER VIEWS

Questioning existence of diversification discount:Measurement Problems, Relatively Unproductive in corebusiness Discount even before they diversify

Other critiques acknowledge the existence but question

generalizability Generalizability across time periods. Ex: Diversification

premium for some periods.

Generalizability across countries. Ex: Emerging Markets business groups outperform individual firms

Generalizability across firms in the same market and pointin time. Ex: 43% diversified companies performing well,Strategy Question rather than Scope question

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CONGLOMERATE PERFORMANCE

Based on Markets & Institutional Context

How well markets (capital & labor) function.

Based on Firms Corporate Strategy Marketsdont matter but corporate strategy does.

Related diversification Choosing firms

corporate strategy. Unrelated diversification

Organizational Processes.

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ARGUMENTS & MISLEADING

CONCLUSIONS

Ignoring the role of context How can firms possibly add 

value to business that are unrelated? Ex: Fill institutional

voids Internal capital markets.

Ignoring the role of strategy Markets dont function well,therefore conglomerates should not be broken up Ex: Chilean

Business groups.

Focusing on business mix rather than organizational

processes.

Ignoring alignment between strategic choices.

Ex- Anything goes

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Canonical Examples Institutional Context & Firms strategy: Beatrice

Corporation Key Additional Feature Non- availability of growth capital for small businesses, due diligence at time of choosing business mix.

Private Equity Firms : A difference in organizational process

& ownership structure.- High debt-equity ratio in LBO forces capital withdrawals-managers spend less.

- Responsibility of corporate managers

- Forced divestitures due to limited legal life.

Business Groups : Brand de novo

- The power to self-finance a new project. Ex: RelianceCommunications.

- Business government nexus.

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Present Day Conglomerate

The conglomerates operate successfully due toorganizational process and coordinate mechanisms.

GE Example : Not simply being a bank

1) Alignment of organizational process with the choiceof business. Portfolio selection coupled withintrinsic quality of business.

- Kitter Peabody failure limits to exposingorganizational process on just any business

2) Alignment of initiatives with each other. Bestpractice sharing, empowering organization, phase byphase movement

3) Alignment with ownership structure.

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Conclusion

Value for conglomerate is derived from what

their competitors ( markets & market

intermediaries) dont do. Conglomerate threat : Internal Organization

challenges, functioning of markets

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Thank You