PGP MAJVCG 2019-20 S1 Introduction

Mergers, Acquisitions, Joint Ventures &
Corporate Growth (MAJVCG)

Session 1
Introduction:
Growth & Diversification
P Rameshan
Professor (Strategic Management)
Indian Institute of Management Kozhikode
(Formerly: Founding Director, IIM Rohtak;
Board Member, IIM Kozhikode
Director In-charge, IIM Kozhikode;
Dean (Academic), IIM Kozhikode;
Faculty at IIM Lucknow;
Visiting Faculty at AIT Bangkok;
Visiting Faculty at Lulea University, Sweden)
Ph.D. IIT Kharagpur
With IIMs Since 1997
PGP MAJVCG 2019-20 S1: Introduction:

February 8, 2020 1
Sessions 1-5 & 6 (40% Weight):
Component-wise Credit Points*
Quiz1 CP-A2 CP-B2 Case Case Written

Class Lecture Case Discussion Presentations3 Submission3
Notes: Participation:
6 x 10 points 6 x 10 points
(Group/
Individual)
80 60 60 70 each 70
Note: 1 Component-1 (C-1) 2 Component-3 (C-3)
3 Component-4 (C-4)
* Total credit points 550: C-1 = 80, C-2 (Exam) = 140; C-3 = 120, C-4 = 210

February 8, 2020 2
Our Focus in This Course
Growth
Diversification
Buyouts
M&A
Collaborations

February 8, 2020
3
Is growth inevitable for any firm?
(Are ALL firms growing?)
Why?

February 8, 2020 4
Are mergers, acquisitions & joint
ventures critical for corporate
growth?
How?

February 8, 2020 5
Should firms diversify?
Why?

February 8, 2020 6
Without diversification, can mergers,
acquisitions & joint ventures alone
ensure desired growth?
How?
Profitable growth
Dominating (market power) growth
Opportunistic (emerging area/industry) growth

February 8, 2020 7
Levi Strauss - Growth Revival
Growth Peaking & Decline (1997

$7b - 2002 $4.1b)
Underperformance & Complacency
Competence Mismatch
In-home Visit & Brand Discovery
Four-Part Strategy (2012)

February 8, 2020
8
Levi Strauss - Growth Revival
Building Profitable Core
Expanding Potential Segments
Strengthening Omni Channel

Retailing
Achieving Operational Excellence
Shifting Innovation Lab to HQ
New Products - Women, Technology
Brand Building - Levi’s Stadium
Customer & Market Focus
Growth Revival (2018 $5.6 b)

February 8, 2020
9
Foundations of Strategic Management
Why, Where &

Economics How Much?
Motive
Strategic
Mathematics Psychology
Management
How? Who?
Calculations Drive
Finance
For What?
©2006-2020 P Rameshan Results
February 8, 2020 10
Ext. Int. Strat. Strat.
Vision, Mission
Anal. Anal. Direc. Ch/Opt.
Goals, Targets
Strategic Planning
Corporate,
Strat. Plan Formul. Business,
Strategic Plan Direction Operational
Strategy Structure,
Testing Systems,
Organization Processes
Resource Assess.
Financial,
Human,
Other
Org. Adj.
Implement.
Retention, Exit, New
Entry, Collaboration
Monitor.
Businesses, Products,
Markets, Customers
Feedback
Strategic Management Process

©2006-2020 P Rameshan PGP MAJVCG 2019-20 S1: Introduction:
February 8, 2020
11
Strategy Practice
Chairman Board Directors
Analysis CEO Analysis
Corporate Corp. Planning

Consultants Consultants
Office Team
Data Analysis Strategic Analysis Data

Direction
Tools Projects Policies Budget Tools
Execution
Divisions
SBUs
Branches
Functions
Field
External
©2019-2020 P Rameshan
February 8, 2020 12
Introduction
This course is about growth

- Growth of the corporate firm
To understand the growth of the firm, we need to

understand two things
Life cycle of the firm
Concept of the boundary of the firm
So, we take a look at these.
We also see a few cases of actual life cycle & boundary

February 8, 2020 13
Growth Process
Firms Want To Grow Size/Revenue
Grow Faster Market Share
Profits/Returns
Growth Struggle Sustain Growth
Economies of Scale
Stagnation
Economies of Scope
Decline
Restructuring Failure
How To Continue Growth?
Buyout Divestment
Growth Strategies
Revival Closure
Internal Growth External Growth
Focus
Diversification M&A Collaborations
Horizontal Integration
Related Unrelated JV Alliances

February 8, 2020 14
Abstract Image of
Firm’s/Product Life Cycle
Sales
Stagnant Declining
Maturing Market Market
Market
Point of Death
Growth
D
Market C E
B
Entrepreneurial
Market
A
Time
Start-up Growth Maturity Decline
PGP MAJVCG 2019-20 S1: Growth &

February 8, 2020 15
Diversification
o
Life of Enterprise: Flipkart vs. Alibaba
Alibaba o
o
End
1999 o
Founded Flipkart o
o
o 2011
2007
Founded

February 8, 2020 16
Net Profits %
Net Sales
Secondary
Axis
Years
(Secondary Axis)

February 8, 2020 17
Life Cycle in Reality
($ Billion) 1980 1990 2006 2017
GE 40 50 163 120
Walmart x 35 312 485
Cooper Ind. 2.5 4.5 5.1 Acq.2012*
IBM 26 69 91 79
E. Kodak x 15.6 10.6 1.5**
* 2011 Revenue $5.4 billion; acquired by Eaton Corp for $13 billion
** It went through bankruptcy procedures in 2012

February 8, 2020 18
Scope (or Boundary)* of a Firm
Size Branding
Growth Technology
Integration Product Portfolio
Diversification Outsourcing
Portfolio Features
Vertical Horizontal Restructuring
Buy vs. Make

Related Unrelated
Spin-off Disinvestment
* Value chain accretion/diminution
February 8, 2020 19
Value Chain Activities
Project Project Supply Distri- Customer

Staff Production Marketing Sales
Design Set up Chain bution Service
Cash
Consul- Mainten- Market Ware- Service
Finance HRM Logistics Inventory R&D Manage-
ting ance Research housing Network
ment
Accounting
IT Systems
Primary activities
Secondary activities
Secondary linking activities

February 8, 2020 20
Vertical & Horizontal Value Chain Integration
V
e Vertical Stage-1 Primary
r Vertical Stage -1 Secondary Plantation (USA)
t
i Vertical Stage-1 Linking-1
c
Vertical Stage-1 Linking-2
a
l Vertical Stage-2 Primary
Paper Production (USA)
I Vertical Stage-2 Secondary
n Vertical Stage-2 Linking-1
t
e Vertical Stage-2 Linking-2
g
Vertical Stage-3 Primary Stage-3 Horizontal Primary
r
a Vertical Stage-3 Secondary Stage-3 Horizontal Secondary
t
i Vertical Satge-3 Linking-1 Satge-3 Horizontal Linking-1
o Vertical Stage-3 Linking-2 Stage-3 Horizontal Linking-2
n
Book Printing - USA Book Printing - India
Horizontal Integration
February 8, 2020 21
Corporate Strategy
Growth Profits Stability
Focused Diversified
Independent Group-affiliated

February 8, 2020 22
Complexity of Growth Process
Bianchini, Stefano, Bottazzi, Giulio, & Tamagni, Federico (2017). What
does (not) characterize persistent corporate high-growth?. Small
Business Economics. 48(3, March): 633–656
Economic and financial characteristics (efficiency and leverage in particular)
are associated with high growth. However, none of the supposedly key
structural drivers of growth systematically stands out as significant
predictors of persistent high-growth performance. Persistent high-growth
firms are not differently productive nor differently profitable, and they do
not display differences in financial conditions as compared to high-growth
firms. In addition, and contrary to some previous analysis, firm
innovativeness (as proxied by intangible assets or patents) is not able to
discriminate persistent high-growth. Finally, we cannot fully corroborate
previous evidence that firm size and age are key features of persistent high-
growth firm, although these firms are younger and smaller in some country–
sector pairs. Our main conclusion is robust across countries (4 European
countries) and does not change across manufacturing and services.
The lacking association between efficiency and persistence in high-growth

performance, raises the further concern that policies supporting high-growth
firms will not necessarily favour firms that, in the long run, contribute more
than other firms to the overall competitiveness of sectors and countries.
February 8, 2020 23
Avenues of Inorganic Growth
Growth
Organic Inorganic
Greenfield Franchising Licensing SA JV M&A
Con
New New New New solid
New
atio
Customers Markets Products Stages Industries n
Backward Forward New

Reso
urces
Horizontal Vertical Core Competence
Integration Integration Extension
Related Diversification Greenfield Conglomeration

©2016-2020 P Rameshan Unrelated Industries
February 8, 2020 24
Popular Examples of Diversification
Unilever Mahindra
P&G Birlas
GE Reliance
Honda Tatas
ITC

February 8, 2020 25
Triggers for Diversification
Market Power of Excess Productive

Conglomeration: Positive Resources
Effect on Performance
Agency Actions: Huge Free

Negative Effects on Cash Flows
Performance
Profit Managerial Profit Resource

Maximization Goals Maximization Efficiency

February 8, 2020 26
Measures of Degree of Diversification
Entropy, E = ΣRi (log (1/Ri))

where Ri = Firm’s revenue share from ith industry, where i = 1,
2…n industries in which the firm is present. Lower the
diversification (or greater the focus), lower the entropy value
Feasible range of E value range: 0-3 (up to 1000 businesses, each with
0.1% revenue share)
Herfindahl Index, HD = 1 – ΣSi2

where Si = Firm’s revenue share from ith industry in its total revenue,
where i = 1, 2…n industries in which the firm is present (HD = 0 to 1,
where 0 indicates single business);
A variation of Tobin’s q (market cap/book value) is another measure that

can be adapted (pre-diversification vs. post-diversification or, perhaps,
weighting with revenue share from respective industries) to evaluate
diversification performance (lower value implies failures)

February 8, 2020 27
Performance Under Diversification
Benefits of Divestment indicated poor

diversification need to be results of M&A; similar
evaluated in the long run were results for JVs &
Strategic Alliances
Studies show that long-run Upto 50% of acquisitions

performance of diversification made in the sample in a 36-
(through M or A) is poor year period since 1950 were
divested (M Porter)
The larger the merger,

poorer the results were

February 8, 2020 28
Valuation studies consistently Acquiring firm’s value declines on

show that shares of diversified an average, target’s value rises
firms trade at a discount (upto relatively higher, & acquiring firm
15%) compared to undiversified pays too much to acquire, thus
firms implying transfer of wealth
Many diversified firms showing Stock market is good in internalizing

discounted share values already future benefits of diversification (or
had discounted share values before acquisition); thus, fall in share value on
getting into unrelated announcement of diversification implies
diversification un-useful diversification
Diversified firms showing

discounted share values are more
likely to be taken over. Thus,
diversification destroys value &
market for corporate control
counteracts it
February 8, 2020 29
Where a multimarket Market-power argument of

firm benefited from diversification is weak;
concentration in those resource-view & agency view
markets, profitability are more plausible. Of these,
was higher resource-view gives direction
of diversification while
Where multimarket agency view does not
presence was without
concentration benefits, Diversification in the US was
profitability was lower declining at establishment
level & increasing at
Firms with diversification built
enterprise level, implying that
around core organizational
narrow technical efficiencies
capability were more profitable
are not a major driver of
than single businesses or highly
diversification
diversified firms
Diversification into less
concentrated industries raise
concentration; diversification
into concentrated industries
dilute concentration
February 8, 2020 30
Source of Success of Diversification*
Emphasis on Good Quality of

Business Growth Corporate Governance
Divisional Focus on Stakeholder

Autonomy Interest
Stress on Return
on Investment
* GE’s earlier success was due to all these factors

February 8, 2020 31
Case 1
Asahi Glass Co.

February 8, 2020 32
Asahi’s Key Challenges
State of Glass Planning Future

Business Diversification
State of Electronics Sustaining

Business Profitable Growth
European & NA New Glass

Man. Challenges Opportunities

February 8, 2020 33
Asahi’s Related Concerns
Impact on Concerns of a
Sales & Profits Diversified Business
Search for Internally Economic

Consistent Strategy Slowdowns
Electronic
Strategy Report

February 8, 2020 34
Focus to Diversification*
Single Business: ≥ Unrelated or Conglomerate

95% Revenue from Business: <70% from
Primary Business Primary Business & Most
Other Businesses are not
Related
Dominant Business: 70- Related Business: ≤70%

95% from Primary or from Primary Business,
Vertically Integrated but Other Businesses are
Business Related by Skills &
Strengths
Asahi has 88% (56%+32%) revenues from vertically integrated glass-related

businesses; hence, it’s a dominant-business firm, & not a highly diversified firm
* Source: Based on Rumelt’s classification (HBS)

February 8, 2020 35
Provoking Question
Was Asahi’s diversified growth responsible for its

performance problems?
If yes, how?
If no, why?

February 8, 2020 36
Was Asahi a substantially diversified firm in 1992?
Was there a performance problem (weak growth/profits)?
Would the problem have occurred if there was no diversification?
Was sustaining performance possible without diversification?
Will performance improve by reducing diversification?

February 8, 2020 37
5
Single business: E=0

2 business (70%. 30%) E=0.26
3 busin. (50%, 30%, 20%) E=0.45
For Asahi, entropy value for 1992 is E=0.48; it implies low diversification

February 8, 2020 38
Diversification Performance
Developed Countries
Performance/Market Value
Diversification
Discount
Point of Optimum
Diversification
Dominant Related Unrelated

Diversification
X-axis can be defined by using a selected measure of relatedness of diversification.

The scale could be: (1-(revenues from primary & its vertically integrated businesses/
total revenue from all businesses)). Or, it could be Entropy, E = ΣRi (log (1/Ri)).

February 8, 2020 39
February 8, 2020 40
Cost of Sales Rising Faster after 1987

February 8, 2020 41
Rising Cost of Sales with Falling NP
after 1989

February 8, 2020 42
Asahi 2015
Glass Organizational
2015: 52.2% Structure
Electronics Strategy
2015: 21.6% (Reorganization)
Chemicals
2015: 23.8%
Revenue: 2006: 1620 billion yen 2015: 1280 billion yen

Profit 2006: 45 billion yen 2015: 71 billion yen
Organizational Changes: Creation of (1) Corporate Planning Division
(2) HR Division (3) (by merging R&D) Technology General Division

February 8, 2020 43

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Mergers, Acquisitions, Joint Ventures &

Corporate Growth (MAJVCG)

PGP MAJVCG 2019-20 S1: Introduction:

Quiz1 CP-A2 CP-B2 Case Case Written

PGP MAJVCG 2019-20 S1: Introduction:

PGP MAJVCG 2019-20 S1: Introduction:

PGP MAJVCG 2019-20 S1: Introduction:

PGP MAJVCG 2019-20 S1: Introduction:

PGP MAJVCG 2019-20 S1: Introduction:

Dominating (market power) growth

Opportunistic (emerging area/industry) growth

PGP MAJVCG 2019-20 S1: Introduction:

Growth Peaking & Decline (1997

Underperformance & Complacency

In-home Visit & Brand Discovery

Four-Part Strategy (2012)

PGP MAJVCG 2019-20 S1: Introduction:

Expanding Potential Segments

Strengthening Omni Channel

Achieving Operational Excellence

Shifting Innovation Lab to HQ

New Products - Women, Technology

Brand Building - Levi’s Stadium

Customer & Market Focus

Growth Revival (2018 $5.6 b)

PGP MAJVCG 2019-20 S1: Introduction:

Why, Where &

Strategic Management Process

Analysis CEO Analysis

Corporate Corp. Planning

Data Analysis Strategic Analysis Data

Tools Projects Policies Budget Tools

This course is about growth

To understand the growth of the firm, we need to

Concept of the boundary of the firm

So, we take a look at these.

We also see a few cases of actual life cycle & boundary

PGP MAJVCG 2019-20 S1: Introduction:

Internal Growth External Growth

Related Unrelated JV Alliances

PGP MAJVCG 2019-20 S1: Growth &

PGP MAJVCG 2019-20 S1: Introduction:

PGP MAJVCG 2019-20 S1: Introduction:

($ Billion) 1980 1990 2006 2017

Walmart x 35 312 485

Cooper Ind. 2.5 4.5 5.1 Acq.2012*

E. Kodak x 15.6 10.6 1.5**

PGP MAJVCG 2019-20 S1: Introduction:

Integration Product Portfolio

Buy vs. Make

Project Project Supply Distri- Customer

Secondary linking activities

©2006-2020 P Rameshan PGP MAJVCG 2019-20 S1: Introduction:

Growth Profits Stability

PGP MAJVCG 2019-20 S1: Introduction:

The lacking association between efficiency and persistence in high-growth

Greenfield Franchising Licensing SA JV M&A

Backward Forward New

Related Diversification Greenfield Conglomeration

PGP MAJVCG 2019-20 S1: Introduction:

Market Power of Excess Productive

Agency Actions: Huge Free

Profit Managerial Profit Resource

PGP MAJVCG 2019-20 S1: Introduction: