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What number comes after ? What is pokediger1s password on roblox? Hottest Questions How did chickenpox get its name? When did organ music become associated with baseball? How can you cut an onion without crying? Why don't libraries smell like bookstores? How long will the footprints on the moon last? Do animals name each other? Who is the longest reigning WWE Champion of all time? However, diversifying by acquiring a company in a related product market can enable a company to reduce its technological, production, or marketing risks. If these reduced business risks can be translated into a less variable income stream for the company, value is created.

The diversified company can route cash from units operating with a surplus to units operating with a deficit and can thereby reduce the need of individual businesses to purchase working capital funds from outside sources. Through centralizing cash balances, corporate headquarters can act as the banker for its operating subsidiaries and can thus balance the cyclical working capital requirements of its divisions as the economy progresses through a business cycle or as its divisions experience seasonal fluctuations.

This type of working capital management is, of course, an operating benefit completely separate from the recycling of cash on an investment basis. Managers of a diversified company can direct its currently high net cash flow businesses to transfer investment funds to the businesses in which net cash flow is zero or negative but in which management expects positive cash flow to develop.

The aim is to improve the long-run profitability of the corporation. This potential benefit is a by-product of the U. In November , Genstar, Ltd. There Genstar argued that the well-managed, widely diversified company can call on its low-growth businesses to maximize net cash flow and profits in order to enable it to reallocate funds to the high-growth businesses needing investment.

By so doing, the company will eventually reap benefits via a higher ROI and the public will benefit via lower costs and, presumably, via lower prices. Genstar recycled the excess cash flow into its housing and land development, construction, and marine activities. So Genstar was able not only to employ its assets more productively than before but also to reap economic benefits beyond those possible from a comparable securities portfolio. Diversified companies have access to information that is often unavailable to the investment community.

This information is the internally generated market data about each industry in which it operates, data that include information about the competitive position and potential of each company in the industry. With this inside information, diversified enterprises can enjoy a significantly better position in assessing the investment merits of particular projects and entire industries than individual investors can.

Through risk pooling, the diversified company can lower its cost of debt and leverage itself more than its nondiversified equivalent. As the number of businesses in the portfolio of an unrelated diversifier grows and the overall variability of its operating income or cash flow declines, its standing as a credit risk should rise.

Since interest, in contrast to dividends, is tax deductible, the government shoulders part of the cost of debt capitalization in a business venture.

Diversification via Acquisition: Creating Value

These benefits become significant, however, only when the enterprise aggressively manages its financial risks by employing a high debt-equity ratio or by operating several very risky, unrelated projects in its portfolio of businesses. While this type of company can enjoy a lower cost of capital than a less diversified company of comparable size, it can also have a higher cost of equity capital than the other type.

This possibility stems from the fact that part of the financial risk of debt capitalization is borne by the equity owners. Indeed, the professional investor may be unwilling to lower the rate of return on equity capital just because a company has acquired a well-balanced or purportedly countercyclical collection of businesses. The risks and opportunities the investor perceives for a company greatly depend on the amount and clarity of information that he or she can effectively process. An unrelated-business diversifier is a company pursuing growth in product markets where the main success factors are unrelated to each other.

Such a company, whether a conglomerate or simply a holding company, expects little or no transfer of functional skills among its various businesses.

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In contrast, a related-business diversifier uses its skills in a specific functional activity or product market as a basis for branching out. The most significant benefits to the stockholder occur in related diversification when the special skills and industry knowledge of one merger partner apply to the competitive problems and opportunities facing the other. Exhibit III summarizes the benefits that are attainable from the two types of diversification.

Unfortunately, the benefits that offer the greatest potential are usually the ones least likely to be implemented. Of the synergies usually identified to justify an acquisition, financial synergies are often unnoted while operating synergies are widely trumpeted. Yet our experience has been that the benefits most commonly achieved are those in the financial area. It is not hard to understand why. Most managers would agree that the greatest impediment to change is the inflexibility of the organization.

These changes are usually slow to come; and so are the accompanying benefits.

Nevertheless, diversification does offer potentially significant benefits to the corporation and its shareholders. When a company has the ability to export or import surplus skills or resources useful in its competitive environment, related diversification is an attractive strategic option. When a company possesses the skills and resources to analyze and manage the strategies of widely different businesses, unrelated diversification can be the best strategic option. Finally, when a diversifying company has both of these abilities, choosing a workable strategy will depend on the personal skills and inclinations of its top managers.

Bureau of Economics, Federal Trade Commission. Richard P. William F. For summaries of empirical evidence supporting the efficient market theory, see Eugene F. See Keith V. Smith and John C. Hal Mason and Maurice B. House of Representatives, November 20, You have 1 free article s left this month. You are reading your last free article for this month. If these demands exceed the potential revenue and profit gains, diversification can put your business at risk.

For example:. In general, diversifying with similar products or services and selling them to a familiar customer base is less risky than creating a product for a completely new market. It can be a great way to maintain business stability. It allows you to hedge your bets and, if one of your markets or products fails, you have another to back you up until you recover.

Remember, diversification is only one of four growth strategies in the Ansoff matrix. You should consider it alongside the other business growth strategies. Breadcrumb Home Guides Grow your business Planning business growth Business growth through diversification. Assess your options for business growth Business growth through diversification.

Business growth through diversification |

Different types of diversification strategies There are several different types of diversification: Horizontal diversification is when you acquire or develop new products or services that are complementary to your core business and appeal to your current customers. For example, an ice-cream business adds a new type of confectionary into its product line. You may require new technology, skills or marketing approach to diversify in this way. Concentric diversification involves adding new products that have technological or marketing synergies with existing product lines or industries, but appeal to new customers.