Diversification : • Diversification involves increasing the range of products or markets served by an organisation. •
Related diversification involves diversifying into products or services with relationships to the existing business.
• Conglomerate (unrelated) diversification involves diversifying into products or services with no relationships to the
existing businesses., diversification takes the organisation beyond both its existing markets and its existing
products and radically increases the organisation’s scope.
The parenting matrix : 1. Heartland business units – the parent understands these well and can add value. The core of
future strategy. 2. Ballast business units – the parent understands these well but can do little for them. They could be
just as successful as independent companies. If not divested, they should be spared corporate bureaucracy. 3. Value-
trap business units are dangerous. There are attractive opportunities to add value but the parent’s lack of feel will result
in more harm than good The parent needs new capabilities to move value-trap businesses into the heartland. It is easier
to divest to another corporate parent which could add value. 4. Alien business units are misfits. They offer little
opportunity to add value and the parent does not understand them. Exit is the best strategy.
3MOTIVES M&A
Strategic motives for M&A Strategic motives can be categorised in three ways: Extension – of scope in terms of
geography, products or markets. Consolidation – increasing scale, efficiency and market power. Capabilities –
enhancing technological knowhow (or other competences)
Financial motives for M&A There are three main financial motives: Financial efficiency – a company with a strong
balance sheet (cash rich) may acquire/merge with a company with a weak balance sheet (high debt). Tax efficiency –
reducing the combined tax burden. Asset stripping or unbundling – selling off bits of the acquired company to
maximise asset values
Managerial motives for M&A M&A may serve managerial self-interest for two reasons: Personal ambition – financial
incentives tied to short-term growth or share-price targets; boosting personal reputations; giving friends and colleagues
greater responsibility or better jobs. Bandwagon effects – managers may be branded as conservative if they don’t
follow a M&A trend; shareholder pressure to merge or acquire; the company may itself become a takeover target.
acquiring firm learn and adopt the best qualities from each other. • Holding – a residual category – with little to gain by
integration. The acquisition will be ‘held’ temporarily before being sold on, so the acquired unit is left largely alone.