Creating Synergy in Diversification- Overcoming Common Pitfalls in Mergers and Acquisitions

Creating Synergy in Diversification- Overcoming Common Pitfalls in Mergers and Acquisitions

Discuss how managers can create value for their firm through diversification efforts.

Managers can create value for the firm by performing related and unrelated diversification (Dess, p. 193). The former entails venturing into associated businesses, for example, launching new products within the sector in which the company operates. Similarly, the managers could establish horizontal relationships that facilitate the sharing of both tangible and intangible resources. Unrelated diversification refers to venturing into unrelated business activities. In this case, the value generation is developed through the hierarchal structure.

What are some of the reasons that many diversification Efforts fail to achieve desired outcomes?

Some of the reasons diversification efforts fail are due to the ineffective integration of acquisitions into businesses, paying considerably high premiums for the target company’s common stock, and failure to act in the shareholders’ best interest. The failure to integrate acquisitions robs the company of synergies obtained from the companies purchased (Dess, p. 195). As a result, the firm fails to obtain the value targeted in acquiring the company. Secondly, paying a high premium results in the company not maximizing the value of the company purchased. Lastly, some acquisitions are performed in the manager’s interest, e.g., enhancing their prestige.

What are some of the important ways in which a Firm can restructure a business?

Restructuring a business can be performed through asset, capital, and management restructuring. Asset restructuring entails the selling of unproductive assets to liquidate the company’s working capital. The revenue obtained from selling these assets could be invested in capital projects required to enhance its efficiency (Dess, p. 194). Capital restructuring entails developing new approaches to fund the acquisition. Ideally, equity and debt are the principal approaches employed by companies in borrowing funds and makeup what is known as the capital structure. In this case, changes could be used by varying the proportion of debt and equity obtained in financing the business. Management restructuring entails changing the organizational structure and the firm’s leadership.

Works Cited

Dess, Gregory. Strategic management: Text and cases. McGraw-Hill Education, 2013.

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Summary Exercise: answer/address three of the six questions in a post with three substantive paragraphs

A key challenge for managers today is creating “synergy” when engaging in diversification activities. As we discussed in this chapter, corporate managers do not generally have a very good track record in creating value in such endeavours when it comes to mergers and acquisitions. Among the factors that erode shareholder values are paying an excessive premium for the target firm, failing to integrate the activities of the newly acquired businesses into the corporate family, and undertaking diversification initiatives that are too easily imitated by the competition.

Creating Synergy in Diversification- Overcoming Common Pitfalls in Mergers and Acquisitions

We addressed two major types of corporate-level strategy: related and unrelated diversification. With related diversification the corporation strives to enter into areas in which key resources and capabilities of the corporation can be shared or leveraged. Synergies come from horizontal relationships between business units. Cost savings and enhanced revenues can be derived from two major sources. First, economies of scope can be achieved by leveraging core competencies and sharing activities. Second, market power can be attained from greater or pooled negotiating power and from vertical integration.

When firms undergo unrelated diversification, they enter product markets that are dissimilar to their present businesses. Thus, there is generally little opportunity to either leverage core competencies or share activities across business units. Here, synergies are created from vertical relationships between the corporate office and the individual business units. With unrelated diversification, the primary ways to create value are corporate restructuring and parenting, as well as the use of portfolio analysis techniques.

Corporations have three primary means of diversifying their product markets—mergers and acquisitions, joint ventures/strategic alliances, and internal development. There are key trade-offs associated with each of these. For example, mergers and acquisitions are typically the quickest means to enter new markets and provide the corporation with a high level of control over the acquired business. However, with the expensive premiums that often need to be paid to the shareholders of the target firm and the challenges associated with integrating acquisitions, they can also be quite expensive. Not surprisingly, many poorly performing acquisitions are subsequently divested. At times, however, divestitures can help firms refocus their efforts and generate resources. Strategic alliances and joint ventures between two or more firms, on the other hand, maybe a means of reducing risk since they involve the sharing and combining of resources. However, such joint initiatives also provide a firm with less control (than it would have with an acquisition) since governance is shared between two independent entities. Also, there is a limit to the potential upside for each partner because returns must be shared as well. Finally, with internal development, a firm is able to capture all of the value from its initiatives (as opposed to sharing it with a merger or alliance partner). However, diversification by means of internal development can be very time-consuming—a disadvantage that becomes even more important in fast-paced competitive environments.

Finally, some managerial behaviours may erode shareholder returns. Among these are “growth for growth’s sake,” egotism, and antitakeover tactics. As we discussed, some of these issues—particularly antitakeover tactics—raise ethical considerations because the firm’s managers are not acting in the best interests of the shareholders.