Applied Mergers and Acquisitions. Robert F. Bruner

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СКАЧАТЬ diversification. The conglomerate arose in the 1960s and then gradually receded in the 1970s and 1980s as firms returned to a greater emphasis on strategies of focused business operations.

Rumelt also found that profitability varied by type of diversification strategy: As the firm moved from great focus (a “single business” strategy) to great diversity (an “unrelated business” strategy), the accounting returns of firms varied materially by type of strategy. Exhibit 6.23 summarizes these returns by category; see Rumelt (1974, pages 92, 94). Suggesting that a strategy of close relatedness in diversification yields the best returns, Rumelt’s findings were influential in prompting a critical reappraisal of conglomerate or unrelated diversification and became part of a general trend in the 1970s and 1980s toward increasing emphasis on strategic focus.

EXHIBIT 6.22 Changing Mix of Diversification Strategies for the Fortune 500 Firms

Strategic Category	Percentage of Firms in Each Strategic Category
1949	1959	1969
Single business	34.5%	16.2%	6.2%
Dominant business	35.4%	37.3%	29.2%
Related business	26.7%	40.0%	45.2%
Unrelated business	3.4%	6.5%	19.4%

      Note: “Single business” indicates firms focused entirely on one industry segment—not multibusiness firms.

      “Dominant business” indicates firms deriving between 70 and 95 percent of their revenues from one segment and 70 to 100 percent from the largest related group of businesses.

      “Related business” indicates firms deriving up to 70 percent of revenues from one segment and 70 to 100 percent from the largest related group of businesses.

      “Unrelated business” indicates firms with relatively low influence from one single segment or group of related segments.

      Source of data: Rumelt (1974), page 51.

EXHIBIT 6.23 Returns by Diversification Strategy

Category	Return on Capital	Return on Equity
Single business	10.81%	13.20%
Dominant business	9.64%	11.64%
Related business	11.49%	13.55%
Unrelated business	9.49%	11.92%

      Note: “Single business” indicates firms focused entirely on one industry segment—not multibusiness firms.

      “Dominant business” indicates firms deriving between 70 and 95 percent of their revenues from one segment and 70 to 100 percent from the largest related group of businesses.

      “Related business” indicates firms deriving up to 70 percent of revenues from one segment and 70 to 100 percent from the largest related group of businesses.

      “Unrelated business” indicates firms with relatively low influence from one single segment or group of related segments.

      Source of data: Rumelt (1974), page 91.

      Value Drivers in Diversification and Focus

      Numerous hypotheses about the profitability of diversification and focus boil down to two lines of argument:

EFFICIENCY (OR INEFFICIENCY) OF INTERNAL CAPITAL MARKETS The diversified firm internalizes the capital market by acting as an allocator of resources among businesses in the portfolio. Advocates of diversification claim that the closer proximity to the companies and access to better information about them permits the internal capital market to operate more efficiently than external markets. Advocates of focus argue that behavioral and agency considerations intervene to make the internal capital markets less efficient; people avoid unpleasant decisions about starving or selling unprofitable businesses and therefore tend to subsidize poorly performing units from the resources of high-performing units. Four papers⁷ make the basic argument for efficiency of internal capital markets. Also, Matsusaka and Nanda (1996) have argued that the internal capital market creates real option value for the firm by virtue of the strategic investment flexibility it affords.

      COSTS OF INFORMATION AND AGENCY Multidivisional firms are complicated to understand; investors require considerable information to value these firms. Yet most diversified firms provide no more information about their operations than do more focused firms. This opacity creates an asymmetry of information that might cause investors to discount the value of diversified firms more than focused firms. Also, the opacity shelters managers of diversified firms from the scrutiny and discipline of capital markets, creating the threat of agency costs and the manager’s expropriation of private benefits. This, too, leads to lower profitability. Scharfstein and Stein (2000) and Rajan, Servaes, and Zingales (2000) argued that unrelated diversification is inefficient and is a result of agency costs. Cross subsidization of business units within the firm is inefficient. Agency costs appear principally in efforts by managers to reduce risk of the firm out of self-interest only, and extract private benefits of control.

      Summary of Research Findings

      Studies of the economic impact of diversification or focus approach the question from among six methodologies. Each approach lends a different perspective and has its peculiar strengths and weaknesses. As with the general summary of the profitability of M&A (see Chapter 3), the findings lend no ironclad conclusions. Rather, one needs to look for tendencies. In general terms, here is a breakdown of the research approaches and their findings.

      EVENT STUDIES A number of papers consider the differences in return associated with the announcement of diversifying or focusing acquisitions, divestitures, spin-offs, and carve-outs. If diversification pays, it should be reflected in higher returns for acquisitions and disposals that result in a more diverse business portfolio for the firm. If focusing pays, announcements that herald acquisitions or disposals that will focus the firm should result in higher СКАЧАТЬ