diversificationbyWilliam[1].doc

Horizontal boundaries and diversification本来想把去年的笔记稍微修改下就放上来的，结果看了老师最后的revision PPT发现不行。一个PPT总共28页，讲了9个topic，结果7页是在讲diversification的，占了四分之一。东西又特别多，我只能尽可能地把我看的写出来。Definition of horizontal boundaries:Identifies the quantities and varieties of products and services a firm produces.Definition of diversification:Diversification is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. 这段话是Wikipedia复制的，书上貌似找不到definition，我很无奈。Why do firms diversify?1. Efficiency-based reasons for diversification Economies of scale and scope Spreading of fix costs. (including some resources that are not fully utilized) Inventory. Average cost decrease as the ratio of inventory holdings to sales decreases The cube-square rule. Purchasing, advertising and R&D Spread managerial talent Economizing on transaction costs Teece argues that the multiproduct firm is an efficient choice when transaction costs complicate coordination among independent firms Internal capital markets able to utilize a coordinated strategy. Imagine: A cash-rich company merged with a cash-constrained company. Diversifying shareholders portfolios Identifying undervalued firmsv Potential costs: 1) diversified firms may incur substantial influence costs (resource allocations decisions affected by internal lobbying); 2) diversified firms may need elaborate control systems to reward and punish managers; 3) internal capital markets may not function well.2. Managerial reasons for diversification这个原理基础所在是: Managers are the one involved in making decisions that affect the profit of the firms and shareholders, instead of owners. Managers may simply enjoy running larger firms (Michael Jensen, 1986) Managers may pursue unrelated acquisitions in order to increase their compensation (Robert Reich) their personal salaries and bonuses are tied to the volume of business their newly enlarged enterprise will generate. Managers may pursue unrelated acquisitions in order to shield防卫 themselves against risk shareholders are unlikely to replace top management unless the firm performs poorly, thus managers will reduce the risk of poor performance through unrelated acquisition.导致shareholder无法控制managerially driven acquisitions的原因有两点：1) Shareholders have neither the expertise nor the information to determine which acquisitions will lead to increased profits and which ones will not and 2) they cannot direct the management to undertake only those that will increase shareholder value.v Market control for corporate control suggested by Henry Manne can serve as an important constraint on the action of managers so that managers still need to focus on the goals of owners. If a manager overpays for a diversifying acquisition the value of the firm will fall If the stock market expects the firm to overpay for acquisitions in the future the market price of the firms share will fall. + A potential acquirer can purchase control of the firm simply by buying its shares on the market. With a sufficiently large block of shares, the acquirer can vote in its own slate of directors and appoint managers who will work to enhance shareholder value.Michael Jensen argues that Mannes reasoning underlies the wave of leveraged buyout (LBO) transactions observed in the 1980s. LBO: A corporate raider borrows against the firms future free cash flow and uses these borrowing to purchase the firms equity.杠杆收购（Leveraged Buy-out，LBO）是指公司或个体利用自己的资产作为债务抵押，收购另一家公司的策略。 交易过程中，收购方的现金开支降低到最小程度。 换句话说，杠杆收购是一种获取或控制其他公司的方法。 杠杆收购的突出特点是，收购方为了进行收购，大规模融资借贷去支付（大部分的）交易费用。 通常为总购价的70%或全部。同时，收购方以目标公司资产及未来收益作为借贷抵押。 借贷利息将通过被收购公司的未来现金流来支付。 杠杆收购的主体一般是专业的金融投资公司，投资公司收购目标企业的目的是以合适的价钱买下公司，通过经营使公司增值，并通过财务杠杆增加投资收益。通常投资公司只出小部分的钱，资金大部分来自银行抵押借款、机构借款和发行垃圾债券（高利率高风险债券），由被收购公司的资产和未来现金流量及收益作担保并用来还本付息。如果收购成功并取得预期效益，贷款者不能分享公司资产升值所带来的收益（除非有债转股协议）。在操作过程中可能要先安排过桥贷款（bridge loan）作为短期融资，然后通过举债完成收购。杠杆收购在国外往往是由被收购企业发行大量的垃圾债券，成立一个股权高度集中、财务结构高杠杆性的新公司。在中国由于垃圾债券尚未兴起，收购者大都是用被收购公司的股权作质押向银行借贷来完成收购的。 Since the number of shares outstanding is greatly reduced, it is possible to give the firms management a large fraction of its equity improves incentives for management to take actions that increase shareholder value. Since the debt must be repaid using the firms future free cash flow, management no longer has discretion over how to invest these funds limits managers ability to undertake future acquisitions and expand core business. 有些管理人员管理公司的方式（通过控制、回报等管理手段来提高个人权威），往往是以牺牲公司股东利益和公司长远优势为代价的。通过并购可以让这些管理人员或者立马出局，或者遵守“规矩”。 高额利息偿付的压力，迫使管理人员不得不想法设法提高运营绩效和生产效率。头脑里紧紧绷着“债务”这根弦，他们的注意力不得不时时集中在各种提高绩效的行动上，如剥离非核心业务、缩减规模、降低成本、投资技术改造，等等。注： 由此而言，借贷不仅仅是一种金融手段，而且也是一种促进管理变革的有效工具。o Critics of the LBO merger wave have raised questions about the effects of such transactions on parties other than shareholders, such as employees, suppliers and bondholders.对于杠杆收购的批评主要集中在，并购公司通过盗用第三方的财富来榨取目标公司的额外现金流， 如联邦政府。 被收购公司由于支付利息而享受的免税政策，在随后的生产运营过程中只有很少的赋税，但股东分配到的股息享受不到这样的优惠。 此外，与杠杆收购最大的风险存在于出现金融危机、经济衰退等不可预见事件，以及政策调整，等等。 这将会导致： 定期利息支付困难、技术性违约、全面清盘。 此外，如果被被收购经营管理不善、管理层与股东们动机不一致都会威胁杠杆收购的成功。Performance of diversified firmso Diversification and Operating Performance Unrelated diversification harms productivity Diversification into narrow markets does better than diversification into broad markets Improvements in newly acquired plants may come at the expense of performance at the existing plantsv Palich, Cardinal and Miller (2000): moderate levels of diversification yield higher levels of performance either limited or extensive diversification. Performance increases as firms shift from single-business strategies to related diversification, but performance decreases as firms change from related diversification to unrelated diversification.o Diversification and Shareholder Value: Porters Three Essential Tests If diversification is to create shareholder value, it must meet three tests:v The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive).v The Cost of Entry Test: the cost of entry must not capitalize all future profits (e.g., winners curse)v The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of “synergy” must be present)o Diversification and Long Term Performance Long term performance of diversified firms appear to be poor One third to one half of all acquisitions and over half of all new business acquisitions are eventually divested Corporate refocusing of the 1980s could be viewed as a correction to the conglomerate merger wave of the 1960sRelated or unrelated diversification:1. Related diversification occurs when the new business is related to the firms existing business. -Examples:-market related: a coffee maker extends to coffee creamer-input related: a milk, yogurt producer diversifies into cheese-technology related: a commercial airplanes company extends to military airplanesReasons for related diversificationThrough related diversification, the firm may realize economies of scope. Economies of scope arise when the joint production of two products is less costly than the production of each product separately. For example, consider the joint production of fruit and sheep. A fruit grower must have space between fruit trees in order to facilitate adequate growth of the trees and movement of farm machinery between the trees. This land can be used to graze sheep. Since land can be used as a common input, the joint production of fruit and sheep on one piece of land is less costly than the production of fruit and sheep separately on two different pieces of land. In addition, the fruit grower can also diversify into sheep and thus realize economies of scope. As an alternative, he can lease the land to a sheep farmer. In this case, a market transaction in the common input factor (land) occurs. The fruit grower can choose between two governance structures: the firm if he diversifies and the market if he rents his land to a sheep farmer. In both cases a market arrangement can be used to capture the economies of scope or the energy savings. The actual choice between these two arrangements will thus be driven by transaction costs involved. If market transactions in this common production factor are relatively costly, joint production of the two products in one firm may be the least cost solution.Common production factors leading to economies of scope are:1-specialized indivisible physical assetsThe service of specialized indivisible physical assets may be difficult to sell because the assets are specialized. E.g. consider a newspaper publisher in an isolated town, suppose this publisher prints his own newspaper and the press is used six days a week and idle one day a week. The newspaper publisher can start a Sunday paper if the idle capacity can be used, or he can make a contract with someone else who wants to start such a paper. Both solutions are feasible.2-technological knowhowTechnological knowhow may be difficult to trade across markets for two reasons:a. property rights may be ill definedFirms often choose not to patent technological findings, since they would reveal their knowledge after registering at the patent office. However, it is usually difficult to sell technological know-how if property rights are not protected by the patent law. The seller must try to convince a potential buyer of its value and in doing so must reveal some of his know-how, but the buyer may refuse to pay for it as he has already possessed the knowledge.b. Transfer of knowhow within a firm is easier than across marketsE.g. engineers working for the same firm have received a similar training; the transfer between engineers working for the same firm may be easier than between engineers working for different firms. In this case, related diversification is efficient.3-organizational knowhowTeece (1982) stated that organizational knowhow is often fungible, that is, it always has several kinds of application. E.g. breweries can use their organizational know-how to produce soft drink; automobile companies can use their organizational know-how also for making tanks.It is nearly impossible to trade organizational know-how across a market, since organizational routines are more difficult to transfer. Organizational know-how can be exploited across different applications through diversification. Thus organizational know-how is a fundamental reason to diversify.4-brand namesBrand names can also lead to economies of scope, since it is cheaper to introduce a new product under an established brand name than under a new one. 5summaryAn important reason for related diversification is the existence of economies of scope. Economies of scope always rest on use of four common production factors. Economies of scope can be exploited through market arrangement or through organizational arrangements. The actual choice between these two, thus the choice for related diversification depends on the transaction costs involved.This may occur when the firm can use one input factor in producing two different products, when it is difficult or impossible to sell the services of those input factors on the market for input factors (not fully utilize the input or the resources); related diversification is an efficient way to realize the economies of scope. Examples of input factors which may lead to economies of scope and are also difficult to trade are: specialized machinery, tec