Subtracting Value by Adding Businesses

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Subtracting Value by Adding Businesses

• Strategic Trap 4 - Subtracting Value by Adding
  Businesses
• Diversifying, for all the wrong reasons, into
  areas of activity that fail to add value for
  investors.

"Studies show that 33 to 50 of acquisitions are
later divested, giving corporate marriages a
divorce rate roughly comparable with that of men
and women." T. P. Pare, Fortune
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Subtracting Value by Adding Businesses

• Mergers and acquisitions must, in the end, be
  justified by the creation of value for
  shareholders.
• Individual investors can often diversify their
  portfolios a lot more cheaply than corporations,
  which usually end up paying expensive takeover
  premiums.
• By attempting to diversify into areas that don't
  create more value through acquisition than
  individual investors could do on their own, many
  organizations fall into this common strategic
  trap.

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Subtracting Value by Adding Businesses

• A recent study conducted by Business Week and
  Mercer Management Consulting analyzed 150
  acquisitions between 1990 and 1995. They found
  that
• 30 substantially eroded shareholder value
• 20 eroded some returns
• 33 created only marginal returns
• 17 created substantial returns
• Clearly there were some winners and some losers,
  but given the track record, one is tempted to
  ask why diversify at all?

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Subtracting Value by Adding Businesses

• Why diversify All the wrong reasons.....
• Growth for growth's sake (increased size and CEO
  compensation, without commensurate increases in
  shareholder returns)
• Ego-centric machoism (personal competitive
  rivalries between CEO's, acted out vicariously
  through their organizations)
• Portfolio diversification (balancing of risks,
  without operational synergies)

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Creating Value through Strategic Diversification

• Why diversify All the right reasons.......Creati
  ng operational and financial synergies by
• Capitalizing on core competencies (RD expertise,
  marketing skills)
• Sharing infrastructures (production facilities,
  distribution channels, procurement processes,
  etc.)
• Increasing market power (creating a stronger
  bargaining position vs. customers and/or
  suppliers)
• Combining the benefits of all three rationales