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Maximizing Corporate Value through Mergers and Acquisitions: A Strategic Growth Guide by Patrick A. Gaughan

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Chapter 4

Diversification

Diversification means growing outside a company's current industry category. Many companies pursue diversification to varying degrees. In this chapter, we examine pros and cons of a merger and acquisition (M&A) diversification strategy. In doing so, we look at the performance of companies that have pursued diversifying acquisitions.

In Chapter 3, we discussed synergy and companies' efforts to derive synergistic benefits from M&A. Can companies derive similar synergistic benefits from diversifying acquisitions? This is a question we will explore. We will also explore the troubling instances where diversification destroys value. This may be surprising to readers, as we will see that companies across the developed and less developed world have a long history of creating very diversified companies. If, and it is a big if that we want to explore in detail, diversification does not add to corporate value, and if it sometimes destroys value, then why does it occur? We will see that the question is a complex one that requires lengthy exploration.

While we regularly see examples of companies doing diversifying acquisitions, one time period in the United States, the late 1960s, provides many examples of large companies built through diversifying acquisitions. Thus, it makes sense to begin our discussion of such deals with a look back at the conglomerate era.

Diversifying M&A in the Conglomerate Era

The 1960s in the United States provide us with numerous examples ...

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