Can you describe a situation where a company made a decision to diversify? What type of diversification was it? Did it pass the three tests of building shareholder value?
Your task will be to find a company that has diversified and discuss whether the move was related or unrelated diversification. Also, did the diversification move pass the three tests of building shareholder value (page 155)? Also, how did the diversification turn out? Was it a net positive for the company, a negative, or is the jury still out on the outcome?
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Business diversi?eatien stands little ehanee ef building shareholder value witheut passing the fellewing three tests:3 1. The industgr attractiveness test. The industry te be entered threugh
diversifieatien must ei'ier an eppertunity fer prefits and return en
investment that is equal te er better than that ef the eempany‘s present
businessles}. 2. The eesf—ef—enhy test. The eest te enter the target industry must net be se
high as te erede the petential fer geed preiitability. A eateh-EE ean prevail
here. hewever. The mere attractive an industry's prespeets are fer grewth
and gee-d leng-term prefitehility, the mere expensive it ean be te enter. It's
easy fer aeeuisitiens el eempanies in highly attraetive industries te fail the
eest—ei—entry test. 3. The better-eff lest. Diversii'ying inte a new business must efler petential
fer the eem pany's existing businesses and the new business te perierm
better tegether under a single eerperate umbrella than they weuld perierm
eperating as independent, stand-alene businesses. Fer example, let's say
eempany A diversities by purehasing eem pany E in enether industry. If A
and B's eenselidated prefits in the years te eerne preve ne greater than
what eaeh eeuld have earned en its ewn. then A‘s diversifieatien wen‘t
previde its sharehelders with added value. Gempany A‘s sharehelders
eeuld have aehieved the same 1 + 1 = E resuit by merely purchasing
steel: in eempany E. Sharehelder value is net ereated by diversifieatien
unless it preduees a1 + 1 =3 ei'ieet.