UNRELATED DIVERSIFICATION_ACS

8/7/2019 UNRELATED DIVERSIFICATION_ACS

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UNRELATED

DIVERSIFICATION

ABSIN.P.ABRAHAM

DEEKONDA SHAILENDER

DIYA JOSE MAMPILLY

NIRMAL KUMAR

RAMESH KUMAR



AGENDA

Introduction

Other views

Conglomerate Performance Arguments & Mis-Leading conclusions

Canonical Examples

Present Day Conglomerate

Conclusion



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.



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



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.



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



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.



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.



Conclusion

Value for conglomerate is derived from what

their competitors ( markets & market

intermediaries) dont do. Conglomerate threat : Internal Organization

challenges, functioning of markets



Thank You

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UNRELATED DIVERSIFICATION_ACS