Planning to change or renew your business structure, there are a lot of factors to consider: Do Diversified or Focused Firms Do Better Acquisitions? Additionally, there are also plenty of questions to ask so you can lead your business on the right path to success.
One of those questions is whether or not diversified firms do better acquisitions than focused firms? If this is one of the questions you had in your mind, then you are in the right direction. To better answer this question, let us first discuss the difference between diversified and focused firms.
Diversified firms
A diversified firm or company runs multiple unrelated businesses and/or products. This means that while you’re running your company, you are also running multiple other businesses or selling other products.
Usually, these unrelated businesses require unique expertise in management. These also have different end customers than your primary business’ customers. An unrelated business under a diversified firm can also produce different products or provide different services.
To make it short, a diversified business is not focused and needs a lot of management. Because you have different products and services, you also have different consumer markets.
The idea is to spread or smooth financial operations or geographic risk concentrations. It is time-consuming and requires a lot of effort. But at the end of the day, what type of business doesn’t, right?
There are good sides and silver linings to running a diversified business, too. One of the main advantages of operating a diversified business is that it helps protect a company from drastic volatility in any market. This means that one business under a diversified firm can do bad at the stock market without affecting the others, or vice versa.
Another silver lining is that you can run multiple businesses, therefore, multiple sources of income without affecting the others. With multiple businesses, you also have the ability to create more jobs for people and help improve your local economy.
A company may diversify by entering into a new type of unrelated business on its own, combining with another company, or buying another company operating in a very different field or service sector.
There are plenty of diversified firms that are very successful at what they do. Some great examples of these types of diversified companies are General Electric, Motorola, 3M, Toshiba, Hitachi, and Siemens and Bayer. But do they have better acquisitions than focused firms?
Focused Firms
On the other hand, you have a focused firm that focuses on one specific brand or type of business. These focused firms immediately eliminate the complexity of running a diversified business.
It creates opportunities for simplification. Virtually every area of the business is simple enough. You no longer have the need for several management teams, and you don’t have to diverse your focus on other businesses.
You have your clear objectives, and you have a precise understanding of who your customer base is. This comes in handy especially when you are trying to focus on giving your customers the best products or services you can possibly provide.
This allows a businessman to focus more on other areas of the business such as determining which products or services will most appeal to the customers. It also helps you understand what your customers like or don’t like.
A focused firm helps you create a focused strategy. It helps with effective decision making and execution because you have the time and energy to focus on one specific niche. Therefore, it is easier to achieve your business’ objectives.
Throughout the companies’ lifespan, a focused firm is not interested in expanding, merging or entering into a new type of business. It focuses on one specific business model. But is it a better business model than a diversified firm?
Which One Did It Better?
An examination of the benefits and costs between a diversified and a more focused business structure has revealed a lot of information on which structure does better. Another separate question is which of the two business models are better at merger and acquisition.
For a period of two decades from 1981 to 2010, Cihan and Tice analyzed and studied a large sample of 1,810 deals. They found in the study that diversified firms had announcement returns that were 1.5 percent higher than single-segment bidders.
But that is not all that they found out. Cihan and Tice also went on to try to find the source of the higher value for diversified acquirers. They have conducted a regression analysis in which post-merger performance measures reflecting the profitability and costs were regressed against bidders’ diversification status and premerger performance.
What they found was that for firms with diversified acquirers, the Selling, General and Administrative is 1.8% to 2.6% lower than those firms with focused acquirers. Furthermore, the study that was conducted concluded that the combined companies where the bidder was diversified had higher profit margins and lower costs.
In the end, the results implied that the diversified acquirers are at a better position to implement post-deal efficiency improvements as opposed to those who are more focused bidders.
The results of this study play a major learning lesson for those who are running a business today. It has been a general guide for businessmen who are trying to do better at running and expanding their businesses.
We hope that this blog post has helped you understand the difference between a diversified business and a focused firm better. The data in this post aims to help you decide on which route to take to create a better business model.
Now that you have the data in mind, you can think about what type of business model you want to do, and whether or not you should enter a diversified business or stick to a focused business. At the end of the day, it all boils down to what risks you are willing to take, and how hard you are willing to work to help lead your company to a better path.