Content M-2: Transforming corporate portfolios: Diversification and divestment Flashcards
(39 cards)
What are three types of corporate restructuring?
- Asset (financial) restructuring
> Management buy-outs
> Leveraged buy-outs
> Asset sell-offs - Portfolio restructuring
> Diversification
> Divestitures
> Dissolutions
> Mergers & Acquisitions - Organizational restructuring
> Change of organizational structure, systems, practices’
> Downsizing of workforce
What are some examples of portfolio matrices (six examples included here)?
- BCG Matrix
- GE/McKinsey Matrix
- BU/Competitiveness matrix
- Value innovation portfolio
- Innovation portfolio matrix
- Heartland matrix
Due to what 3 reasons do industries change?
- Macro environment changes
- Industries evolve
- Industries converge
> A major reason why inter-business synergy creation is gaining prominence (e.g. autonomous vehicles).
Recap: Two “general” types of synergy?
- Cost-reducing synergies
> Also called “Subadditive” - Revenue-enhancing synergies
> Also called “Superadditive”
What are two ways to transform a portfolio?
- Refocusing: Elimination of peripheral activities to strengthen the core
- Repositioning: Striking a new path by establishing a new core business
Traditional diversification studies make a distinction between four types diversification based on specialization ratio and a related ratio.
Extra info:
Specialization ratio = % of sales from firm’s major activity as a percentage of total sales.
Related ratio: % of total sales which are related to one another
Which four type of diversification are there?
- Single business: who/what/how are all the same.
- Dominant businesses: who/what/how are the same for two out of three
> Constrained
> Linked
> Unrelated - Related businesses: who/what/how are the same for one out of three
> Constrained
> Linked - Unrelated businesses: who/what/how are different for every business.
Type and competitiveness of synergy is driven by resource similarity and the need for modification. How do you assess relatedness?
Assessing relatedness is more informative in assessing whether:
- Resource (dis)similarity has value creation / rent generation potential
> Combination of similar resources does not necessarily create value
> Resources may be dissimilar but still related
- Resource modifications are possible, feasible, and valuable
> Integrating and modifying dissimilar resources may not be purposeful
> Value derived from resource modification depends on complementarity of resources.
When are activities or resources “complements”?
They are complements if doing more of any one of them increases the returns to doing more of the others.
Or, in a payoff function: if the marginal returns to one variable are increasing in the levels of the other variable.
What are the four types of rents?
- Ricardian rent : scarcity value)
- Monopoly rent: (scarcity value)
- Schumpeterian rent (entrepreneurial value)
- Pareto rent (association value)
A taxonomy of rents identify four types of rents.
What are Ricardian rents?
Excess returns provided by a resource compared to another, similar resource (of less value)
A taxonomy of rents identify four types of rents.
What are Monopoly rents?
Excess returns provided through a (legally enforced) monopoly.
A taxonomy of rents identify four types of rents.
What are Schumpeterian rents?
Excess returns provided by innovation until innovation diffuses
A taxonomy of rents identify four types of rents.
What are Pareto rents?
Excess returns by keeping a resource in its current use; or excess returns by putting resource to better use.
What are two criteria for choosing a candidate to divest?
- Financial
> Growth
> Margin
> Return on Capital - Strategic
> BU impact on the rest of the corporation
> Corporation’s impact on BU
> BU ability to beat market expectations
> Corporation’s overall portfolio
What are six types of divestment?
- Spin-out
- Sell-off
- Carve-out
- Leveraged buyout (LBO) / Management buyouts (MBO)
- Spin-off
- Split-off / Split-up
What does a spin-out entail?
Entrepreneurial ventures founded by an employee of an existing player’s firm, leaving the parent. Often competes int he same industry as the partent.
What does a sell-off entail?
A firm sells a division, business unit, product line, or subsidiary to another firm in exchange for cash. Parent has no connection with the divested unit.
What does a carve-out entail?
A new, independent company is created by detaching part of the parent’s business and selling the shares of the new company in a public offering. The parent generally maintains possession of a substantial fraction of the equity of the carved-out company.
What does LBO entail? And MBO?
LBO = Leveraged buyout.
> A group of private investors uses debt financing to purchase a corporation or division. The characteristics of an LBO are high leverage, management ownership, active corporate governance and investors’ loss of access to liquid public equity markets.
MBO = Management buyouts
> Managers replace public stockholding of the parent company. MBOs are normally financed with large debt issues, and the new stocks are normally held by an existing player’s managers and some external investors.
What does a spin-off entail?
The detached division, BU, product line, or subsidiary becomes an independent company whose shares are distributed tot he parent’s stockholders.
What does a split-off? And a split-up?
- In a split-off, the parent’s shareholders receive stocks of the new company in exchange for parent company stocks.
- A split-up occurs when the parent ceases to exist and the divested unit remains in the market.
When do you choose for what type of divestiture? Based on which two dimensions?
Two dimensions:
1. Synergy test (Pass vs Fail)
2. Is there a better parent? (Yes vs. No)
Results in 2-by-2 matrix:
- Passed synergy test & better parent present: Sell-off
- Passed synergy test & no better parent: (1) Keep, (2) Equity carve out, (3) Spin-off
> Depends on degree of ownership
- Failed synergy test & better parent: (1) Sell-off (if high premium, low taxes), (2) Spin-off (if low fees)
- Failed synergy test & no better parent: Spin-off
There are also challenges in divestiture. These can also be mapped in a 2-by-2 matrix. Based on which two dimensions? And which four options do they result in?
Dimensions:
1. Management of divestiture at unit level for development of understanding (Low vs. High)
“How well BU managers understand the reasons behind the divestiture”.
2. Perceived capabilities for unit independence (Low vs. High)
“Whether BU managers believe that they have means to manage the BU as an independent company.”
- Low perceived capabilities & high management of divesture for developing understanding.
> Abandonment - Low perceived capabilities & low management of divesture for developing understanding.
> Capabilities challenge - High perceived capabilities & high management of divesture for developing understanding.
> Opportunity - High perceived capabilities & low management of divesture for developing understanding
> Information challenge
What are reasons (antecedents) for divestiture?
- Performance
> poor firm/BU performance
> failed diversification
> performance of acquired units
> performance of larger units (spin-offs) - Strategy
> corporate fit
> lack of synergies
> required resource commitment - Governance
> shareholder pressure for control
> Executive turnover
> Owner retirement - Environment
> industry entry rates
> environmental uncertainty
> institutional investors and analysts
