DIVERSIFICATION &

MERGERS
ASST PROF.
JONLEN DESA

INTRODUCTION
Diversification

Diversification refers to the addition of new lines

of business which may be related to the current
business or unrelated.
Product Diversification-Introduction
of a new
Diversificationproduct to the existing product line.
Merger
When two or more organizations combine to
become one through exchange of stock or cash
or both, it is termed as Merger.
Demergers, Acquisition.

ANSOFF MATRIX

 Market penetration This involves increasing market share

within existing market segments. This can be achieved by

selling more products/services to established customers or by
finding new customers within existing markets.
Product development This involves developing new
products for existing markets. Product development involves
thinking about how new products can meet customer needs
more closely and outperform the products of competitors.
Market development This strategy entails finding new
markets for existing products. Market research and further
segmentation of markets helps to identify new groups of
customers.
Diversification This involves moving new products into
new markets at the same time. It is the most risky strategy.
The more an organisation moves away from what it has done
in the past the more uncertainties are created. However, if
existing activities are threatened, diversification helps to
spread risk.

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.
Diversification strategies allow a firm to expand
its product lines and operate in several different
economic markets.
Diversification refers to a strategic direction
that takes companies into other products and/or
markets by means of either internal or external
development.

2 FORMS OF
DIVERSIFICATION

RELATED
It occurs when a company develops beyond its present
DIVERSIFICATION
product and market whilst remaining in the same area.
For example a newspaper company expanding by
acquiring a TV station remains with media sector.
This form of diversification can further be broken down
Backward diversification: when activities related to
the inputs in the business are developed. For example
a newspaper company acquiring a printing or
publishing company.

Forward diversification: when development into

activities which are concerned with a companys
output. For example a newspaper company acquiring a
distribution outlet.

UNRELATED
DIVERSIFICATION

It is used to describe a company moving its

present interests into unrelated markets or

products.
For example a company whose core business is
media services may diversify into provision of
financial services

REASONS FOR
DIVERSIFICATION
Saturation or Decline of the Current Business
Additional Opportunities
Better Opportunities
Risk Minimization
Benefits of integration
Better Utilization of resources & strengths
Need related diversification
Consolidation

ADVANTAGES
Control of inputs, leading to continuity and improved quality.
Control markets by guaranteeing sales and distribution.
Take advantage of existing expertise, knowledge and resources

in the company when expanding into new activities.

No longer being reliant on a single market
Provide movement away from declining activities
Opportunity to serve more customers in new markets with new
products.
Increase in sales, profits, growth rate & market share.
Synergy

DISADVANTAGES
No Guarantee that the firm will succeed in the new

business. Many diversifications of a number of companies

have failed.
If new lines of business result in huge losses, it may affect
the old business.
Neglecting of the old business or lack of sufficient
attention given to the old business.
Competition for the old as well as new businesses.
May result in slowing growth in its core business
Adding management costs
Adding bureaucratic complexity
Highest amount of risk involved.
Complicated rules & regulations incase of foreign markets.

Because of the high risks, many companies

attempting to diversify have led to failure.

However, there are a few good examples of
successful diversification:
Virgin Group moved from music production to
travel and mobile phones
Walt Disneymoved
from producing animated
Disney
movies to theme parks and vacation
properties
Canondiversified
from a camera-making
Canon
company into producing an entirely new range of
office equipment.

TYPES OF
DIVERSIFICATION

1. SIMPLE
DIVERSIFICATION
It refers to a normal and simple
diversification.
The company enters into a new business line

by introducing a new product or entering a

new market.
It is the easiest and most simple type of

diversification.

2. HORIZONATL
DIVERSIFICATION
The company adds new products or services that
are
often
technologically
or
commercially
unrelated to current products but that may appeal
to its current customers.
When is Horizontal diversification desirable?
Horizontal diversification is desirable if the
present customers are loyal to the current
products and if the new products have a good
quality and are well promoted and priced.

3. SYNERGISTIC

Synergistic diversification is diversification which

DIVERSIFICATION
results in the realization of synergistic effects.
Synergy is described as 1+1=3 or 2+2=5 effect

which implies that the result of the combined

performances will be greater than if they were gone
separately and independently.
Synergy offers a firm the advantage of higher
consolidated return on investment that can be
maximally obtained from a single separate firm.
Eg: Product A(Existing Product) Sold by Salesman X.
Product B( New Product) Can be sold by the
same salesman X instead of employing a new one.
This saves cost and acts as a synergy.

IMPORTANT SYNERGIES

4. CONGLOMERATE
DIVERSIFICATION
Conglomerate Diversification is

quite unrelated
diversification. The new business will have no
relationship to the companys current technology,
products or markets.
Some companies go in for diversification with the same
firm, while some will establish separate companies for
managing different types of products. (TATA)
The company markets new products or services that
have no technological or commercial synergies with
current products but that may appeal to new groups of
customers.
When
companies
engage
inconglomerate
diversificationstrategies, they are often looking to
enter a previously untapped market. Companies can do
this by purchasing or merging with another
company in the desired industry.

Conglomerate Diversification provides

enormous scope for business expansion &

growth.
Moving into a totally unrelated industry is
often highly dangerous, as the companys
current management is unfamiliar with the
new industry
Though this strategy is very risky, it could
also, if successful, provide increased
growth and profitability.

5. CONCENTRIC

Aconcentric diversificationstrategy
DIVERSIFICA
TIONallows a company to
add similar products to an already successfulline of
business.
For example, a computer manufacturer that produces
personal computers begins to produce laptop computers.
In Concentric Diversification, there is a technological
similarity between the industries, which means that the
firm is able to leverage its technical know-how to gain
some advantage. The technology would be the same but
the marketing effort would need to change.
The technical knowledge necessary to accomplish the new
task comes from its current field of skilled employees.
Concentric diversification strategies also exist in other
industries, such as the food production industry.
Eg: Specialty Foods- Maggi, Sauces, Pasta & other related
products.

MERGERS

When two or more organizations combine to

become one through exchange of stock or cash or

both, it is termed as Merger.
A merger is a combination of two companies to form a new company, while an
acquisition is the purchase of one company by another in which no new company is
formed.

A merger is a legal consolidation of two

companies into one entity

Sesa Goa & Sterlite

Am Nissan & Datsun
Indian Airline & Air India
Vodafone purchased Hutch
Ranbaxy & Daichii Sankyo
Fortis Health Care India & Fortis Health Care International
Nokia & Microsoft
Max Life Insurance & Mitsui Sumitomo
LIST OF DEMERGERS
Hero & Honda
Tata & Fiat
Max Life Insurance & New York life Insurance

EXAMPLES
SUCCESSFUL MERGERS

UNSUCCESFUL MERGERS

ADVANTAGES/REASONS FOR
M
& Athe firm acquire new technology.

It helps
It enables company to start a new business.
Provides the company with marketing

infrastructure.
It avoids the gestation period of setting up a
new unit.
Helps in eliminating or reducing competition.
Cost of acquisition is less than the cost of
acquiring.
Helps a firm boost sales, grow & gain a large
market share.
Benefit from Synergiers

DISADVANTAGES OF M & A
Indiscriminate acquisitions have landed

several companies in financial problems.

When a company is taken over, its problems
are also taken over.
The company may not have the experience &
expertise to manage the new unit.
Lack of evaluation before acquisition, could
prove the acquisition decision wrong.

1. HORIZONTAL
A merger occurring between companies in the same
MERGERS
industry. Horizontal merger is a business consolidation
that occurs between firms who operate in the same
space, often as competitors offering the same good or
service. Horizontal mergers are common in industries
with fewer firms.
The goal of a horizontal merger is to create a new,
larger organization with more market share. Because
the merging companies' business operations may be
very similar, there may be opportunities to join certain
operations, such as manufacturing, and reduce costs.
A

merger between
beverage division,
horizontal in nature.

Coca-Cola and the Pepsi

for example, would be

2. VERTICAL MERGERS
A merger between two companies producing different

goods or services for one specific finished product. A

vertical merger occurs when two or more firms, operating
at different levels within an industry's supply chain, merge
operations. Most often the logic behind the merger is to
increase synergies created by merging firms that would be
more efficient operating as one.
A vertical merger joins two companies that may not
compete with each other, but exist in the same supply
chain.
An automobile company joining with a parts

supplier would be an example of a vertical merger.

Such a deal would allow the automobile division to obtain
better pricing on parts and have better control over the
manufacturing process.

3. CONGLOMERATE
A merger between firms that are involved in
MERGERS
totally unrelated business activities.
There are two types of conglomerate mergers:

pure and mixed.

Pure conglomerate mergers involve firms with
nothing in common, while mixed conglomerate
mergers involve firms that are looking for product
extensions or market extensions.
The example of conglomerate M&A with relevance
to above scenario would be if health care system
buys a restaurant chain.

4. MARKET EXTENSION
MERGERS
A market extension merger takes place between two
companies that deal in the same products but in
separate markets. The main purpose of the market
extension merger is to make sure that the merging
companies can get access to a bigger market and that
ensures a bigger client base.
Eg: RBC Bank Eagle Bancshaes Merger.

5. PRODUCT EXTENSION
MERGERS
A product extension merger takes place between
two business organizations that deal in products
that are related to each other and operate in the
same market. The product extension merger
allows the merging companies to group together
their products and get access to a bigger set of
consumers. This ensures that they earn higher
profits.
Eg: Broadcom-Mobilink Merger.

ACQUSITION
AnAcquisitionorTakeoveris the purchase

of one business or company by another

company or other business entity. Such
purchase may be of 100%, or nearly 100%, of
the assets or ownership equity of the acquired
entity.
"Acquisition" usually refers to a purchase of a
smaller firm by a larger one.
Types-Friendly & Hostile Takeovers

MERGERS VS
MERGERS
ACQUISITION

ACQUISITIONS

When 2 or more firms

combine to form a single

firm.
Types- Horizontal, Vertical,
Conglomerate, Product
Extension & Market
Extension.
2 firms of same sizes merge
together to conduct business.
Both companies benefit from
the merger.
There is genuine pooling of
assets & liabilities of the
merging companies.

When one firm purchases or

acquires another firm.

Types- Friendly & Hostile
Takeovers.

A larger firm acquires a

smaller firm.
Usually only the acquirer or
the purchasing company
benefits from an acquisition
There is no genuine pooling
assets & liabilities in
acquisition,