Today’s News Pepsi’s challengesPepsi’s challenges

Spun-off restaurantsSpun-off restaurants Acquired TropicanaAcquired Tropicana Pepsi Bottling IPOPepsi Bottling IPO

Disney -- Retail storesDisney -- Retail stores Baby merchandizeBaby merchandize White goodsWhite goods PaintPaint

AT&TAT&T Spin-off or sell Consumer Long Spin-off or sell Consumer Long

Distance unitDistance unit Maxtor acquires Quantum HDD unitMaxtor acquires Quantum HDD unit

Corporate Strategy

Q: What businesses are we in?Q: What businesses are we in?

How did we get there?How did we get there?

Single Business

Product Line Expansion

Geographic Expansion/Vertical Integration

DiversificationRelated / Unrelated

Diversification and Poker

J

3K

7Q10 2

4

3 4 7

3J

Why Diversify??

1994Q1 Q2 Q3 Q4

DivisionSales($)

IndustryGrowth

(%)

1993 1994 1995 1996 1997 1998

Benefits of Diversification

Reduce earnings volatilityReduce earnings volatility Minimize riskMinimize risk Move firm into attractive Move firm into attractive

industriesindustries Prolong “life” of firmProlong “life” of firm Improve long-term performanceImprove long-term performance Capture synergies and strategic Capture synergies and strategic

“fit” between businesses“fit” between businesses Steer corporate resourcesSteer corporate resources

Types of Diversification

VerticalVertical HorizontalHorizontal

RelatedRelated UnrelatedUnrelated

GlobalGlobal

Evaluation of Diversified Firms

Identify present corporate Identify present corporate strategystrategy extent and type of extent and type of

diversificationdiversification geographic scopegeographic scope new acquisitionsnew acquisitions recent divestituresrecent divestitures mode of new business mode of new business

entryentry

Evaluation of Diversified Firms

Reveal contextual position of Reveal contextual position of corporate portfolio corporate portfolio

BCG Growth-share Matrix

Indu

stry

Gro

wth

Rat

e

Hi

Lo

Relative Market Share

1.0< 1.0 > 1.0

Evaluation of Diversified Firms

• Reveal competitive position of corporate portfolio - G.E. Industry attractiveness/business strength matrix

Indu

stry

Lon

g T

erm

A

ttra

ctiv

enes

s H

M

L

Firm’s Competitive Position

Str. Avg. Weak

Diversified Inc.

HQ

Bus. 1 Bus. 2 Bus. 3

$ $$

GrowthSize

Remote Env.

GrowthSize

Remote Env.

GrowthSize

Remote Env.

Entering New Businesses

WHY?WHY? Does business fit?Does business fit?

FinanciallyStrategicallyCulturally

If not in this business today, would we want to get into it now?

HOW?HOW? AcquisitionAcquisition Internal start-upInternal start-up Joint venturesJoint ventures

Why M&A Activity?

Intensifying competitionIntensifying competition Global marketsGlobal markets Growth in new industriesGrowth in new industries NOTE:NOTE:

20% of 20% of all-timeall-time corporate corporate mergers have occurred mergers have occurred within last 18 monthswithin last 18 months

Justifications Attractiveness testAttractiveness test

Industry factorsIndustry factors Core competenciesCore competencies Strategic positionStrategic position

Cost of entry testCost of entry test Buy outstanding sharesBuy outstanding shares CashCash Contributions to merger or JVContributions to merger or JV

Better off testBetter off test Synergies, econ. of scale/scopeSynergies, econ. of scale/scope Consolidation of resources, activities Consolidation of resources, activities Competitive advantage?Competitive advantage?

Why MBC’s “Should” Outperform SBC’s Economies of ScopeEconomies of Scope

Intangible assets - brandIntangible assets - brand Consolidate operationsConsolidate operations

Efficient Resource AllocationEfficient Resource Allocation MBC as “internal” capital MBC as “internal” capital

marketmarket Increased SizeIncreased Size

Lower cost of capitalLower cost of capital Increased market powerIncreased market power

Why MBC’s Actually Underperform SBCs

Why does stock price of acquirer Why does stock price of acquirer always go down?always go down?

Diseconomies of ScopeDiseconomies of Scope Leadership - bureaucracyLeadership - bureaucracy

Capital AllocationCapital Allocation Democratic processDemocratic process Cross-subsidization (e.g., AT&T)Cross-subsidization (e.g., AT&T)

Misaligned IncentivesMisaligned Incentives Too short-termToo short-term

Underdeveloped Corporate Underdeveloped Corporate StrategyStrategy

International Diversification WHY?WHY?

slow domestic growth (earnings risk?)slow domestic growth (earnings risk?) intense domestic rivalryintense domestic rivalry no overseas competitionno overseas competition intense overseas competitionintense overseas competition

HOW?HOW? ExportingExporting FranchisingFranchising Joint venturesJoint ventures Wholly-owned subsidiariesWholly-owned subsidiaries

Greenfield (internal development)Greenfield (internal development) Mergers & AcquisitionsMergers & Acquisitions

Alternative Corporate Strategies

Portfolio “juggling” ...Portfolio “juggling” ...

Evolutionary ApproachEvolutionary Approach Corporate TransformationCorporate Transformation Sudden RedefinitionSudden Redefinition

Portfolio Managers TurnaroundTurnaround

restore competitiveness to poor performers

New advantages created within portfolio

RetrenchmentRetrenchment narrow scope of portfolio “stick to your knitting”

RestructuringRestructuring add new businesses / divest poor

performers

Evolutionary Approach:Leveraging Competence

Performance culture (3M, ABB)Performance culture (3M, ABB) Business system replicator Business system replicator

(Gillette)(Gillette) Capability leverager (Nike)Capability leverager (Nike) Valuator (Berkshire Hathaway)Valuator (Berkshire Hathaway) Inventor (H-P, J&J)Inventor (H-P, J&J) Synergy capturer (Kraft-Genl. Synergy capturer (Kraft-Genl.

Foods)Foods) Cost squeezer (Sunbeam)Cost squeezer (Sunbeam)

Disney: Capability Bundling

FilmsFilms VideosVideos Network TVNetwork TV Cable TVCable TV HotelsHotels Cruise linesCruise lines MerchandiseMerchandise Brand licensingBrand licensing NEW …NEW …

Retail StoresRetail Stores

Toy Story

TV Show

Merchan

dise

Food Items

Theme P

ark

Corp. Transformation Choosing new businessesChoosing new businesses PlannedPlanned Surprises Surprises

Change business portfolio (Monsanto)Change business portfolio (Monsanto) Change global portfolio (CitiBank)Change global portfolio (CitiBank) Capability bundling (Disney)Capability bundling (Disney) Industry consolidation (Chrysler)Industry consolidation (Chrysler)

TotalReturn

1994

S&P

MTC

Chemicals (18%)

Biotech (38%)

Transformation

TotalReturn

1993

S&P

Nokia

Motorola

Eriksson

NokiaNokia 1989: Diversified electrical 1989: Diversified electrical

conglomerateconglomerate 1993: 87% telecom focus1993: 87% telecom focus

Sudden Redefinition

Competitive/performance Competitive/performance crisiscrisis

Massive immediate Massive immediate corporate portfolio changecorporate portfolio change DeregulationDeregulation PatentsPatents Foreign competitionForeign competition M&A in same/related M&A in same/related

industriesindustries