Diworsification

After the Reliance Power IPO, Acquisitions made by Tata group is my memory. That time The Tata-Corus Deal was something out of the world for me. It feels great that one Indian is buying global companies. But does it make any sense to acquire another business and not to choose Organic Growth and 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. (Wiki Pedia)

If the parent Brand is strong enough, then the entry is easy. Example is Tata Cement. Tata Group is well known in India. So it’s not difficult. But the competition is big threat for any company. Still there are many companies which succeeded in this task. Like Coca Cola. More one thing, it’s no problem if the company acquires the business which is related with its business, known as Vertical or horizontal acquisition. But acquiring unrelated business, known as Conglomerate merger, is full of risk. Many times it is one of the reasons for financial crisis.

I agreed that Warren Buffet himself mention, don’t put all your Eggs in one Basket. But I also agreed with Milton Friedman that the business of the business is to make business and make wealth for its shareholders. So what is the X- factor for success in Merger? What are Conglomerate Mergers? And Why Oracle of Omaha Warren Buffett and Peter Lynch, both of my heroes call them DIWORSIFICATION? “Conglomerate mergers occur when two companies that offer different services, or are engaged in different types of business, merge. A conglomerate also can occur when two like companies want to merge to increase their market share. Usually a conglomerate merger is meant to make both entities stronger than they would be individually, and it occurs between two large-scale companies.” (Investopedia) Advantage to a conglomerate merger is an exponential increase in audience reach. If company A merges with company B, then company A now has access to all of company B’s market base. Before, company A only had access to its own, and it’s likely that company B was a competitor. By merging, the two companies have effectively reached twice the audience size as before, while eliminating competition and reducing cost. Example is Holcim Laffarge merger.
By diversifying a company’s holdings, this spreads risk out among more factors, thereby decreasing the chances of overall company failure if one leg fails. This is an advantage most of the time, but it can also be a disadvantage as it is making chaos. Penn Central Transportation Co. v. New York city is Best example about it. In some cases if a company spreading its budget across eight divisions with a merger when it only has the funding to do five of those divisions well. best Example is Japee Associate, GVK Power. suzlon. Jain Irrigation. If you are thinking for growth then its not the merger, but the Quality of management is showing the growth. why? which company to acquire for growth is a decision of Management, Directors, and shareholders. For some Companies Diversification is important. There is no choice. LIKE ITC. This company is mostly in Tobacco business, which is potential Target for Govt. so if they want to run throughout, Diversification is only one way. the key one is that the specialist skills built up in the original company or group of companies may not be relevant in the newly-acquired entities. This means that with overall control being exercised by a management that does not fully comprehend the forces that drive success in some of its component parts, a conglomerate can become a confusing and dysfunctional entity that is not maximizing all of its potential. One very big thing about the Mergers and acquisition is the use of Medium, DEBT or EQUITY. Both are ways with some advantages and disadvantages. Best Examples for debt are nothing but INDIAN. Tata steel-Corus. Growth story of Jaypee asso. Why it’s risky. It’s all about Leverage. Financial Leverage. Most of the time operating leverage is exist in all company as it is a product of fixed cost. When you are taking loan then you are adding one more fixed cost, which potentially make or break your business. Possibly it is a reason why the mergers financed with Equity are potentially safer. As it’s very easy to reacquire the share from open market or block Deal.Its risk(y) For more read I want to close this writing with Information of someAcquisitions made by FACEBOOK which are most helpful to increase its Services. Its very interesting How mark Zuk, head of facebook, is heading the company. july 20, 2007, Parakey that makes Images, video, writing transfer to internet. it used it for Facebook Mobile App. Aug 10, 2009. friendFeed. for Like Button. $50 Bn, feb 19, 2010. octazen. For inviting your friends who are not on facebook with the help of contact list. now you know them as Facebooks friend Finder. April 2, 2010. Divvyshot for tagging the Event with pics. May 18, 2010. Our Own Zynga for Farmville, CityVille etc May 26, 2010. ShareGrove for Facebook group Chat. Aug 23, 2010. Hot Potato for helping you to show ” I was her” check in facility. Jan 25, 2011, Rel8tion, A threat for google. ad company which show the adds as per your geography. March 1 2011. snaptu for better mobile service on smartphones March 20, 2011. Beluga. for expanding Group Chat activity June 18 2012. Face.com for face Recognition. July 20, 2012 acrilic Software for “Read It Letter’ option There are many more acquisition. I mention some of them.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter