Corporate Relatedness
•Creates value in two ways:
Related Diversification: Market Power
Related Diversification:
Market Power (cont’d)
•Multipoint Competition
Related Diversification: Complexity
•Simultaneous Operational Relatedness and
Corporate Relatedness
Unrelated Diversification
•Financial Economies:
Unrelated Diversification (cont’d)
•Efficient Internal Capital Market Allocation
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Unrelated Diversification: Restructuring
External Incentives to Diversify
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•Antitrust laws in 1960s and 1970s
discouraged mergers that created
increased market power (vertical or
horizontal integration.
•Mergers in the 1960s and 1970s thus
tended to be unrelated.
•Relaxation of antitrust enforcement
results in more and larger horizontal
mergers.
•Early 2000: antitrust concerns seem to
be emerging and mergers are now
more closely scrutinized.
Anti-trust
Legislation
External Incentives to Diversify (cont’d)
•High tax rates on dividends cause
a corporate shift from dividends to
Anti-trust
Legislation
Internal Incentives to Diversify
•High performance eliminates the need
for greater diversification.
Low
Performance
Internal Incentives to Diversify
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•Diversification may be defensive
strategy if:
–product line matures.
–product line is threatened.
–firm is small and is in mature or
maturing industry.
Low
Performance
Uncertain
Future Cash
Flows
Relationship between Diversification
and Performance
Internal Incentives to Diversify
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Low
Performance
Uncertain
Future Cash
Flows
Synergy and
Firm Risk
•Synergy exists when the value created
by businesses working together
exceeds the value created by them
working independently.
•But synergy creates joint
interdependence between business
units.
Resources and Diversification
•A firm must have both:
–Incentives to diversify
Value-Reducing Diversification:
Managerial Motives to Diversify
Relationship between Diversification