Question 1

ConAgra uses the related diversification vertical integration initiative to enhance market power. They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

Accepted Answer

ConAgra uses pooled negotiating power to enhance market power. They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

Question 2

At times, the only other people who may have benefited from a merger-acquisition were the shareholders of the acquired firms or the investment bankers advising the acquiring firm.

Accepted Answer

At times, the only other people who may have benefited were the shareholders of the acquired firms or the investment bankers who advise the acquiring firm, because they collect huge fees upfront regardless of what happens afterward.

Question 3

Many acquisitions ultimately result in divestiture.

Accepted Answer

Many acquisitions ultimately result in divestiture, that is, an admission that things did not work out as planned. In fact, some years ago, a writer for Fortune magazine lamented that studies show that 33 percent to 50 percent of acquisitions are later divested, giving corporate marriages a divorce rate roughly comparable to that of men and women.

Question 4

When firms diversify into unrelated businesses, the primary potential benefits are horizontal relationships, i.e., businesses sharing tangible and intangible resources.

Accepted Answer

When a corporation diversifies into unrelated businesses, the primary potential benefits are derived largely from hierarchical relationships, which is value creation derived from the corporate office. Horizontal relationships are the primary benefit of diversification into related businesses.

Question 5

All diversification moves, including those involving mergers and acquisitions, erode performance.

Accepted Answer

Not all diversification moves, including those involving mergers and acquisitions, erode performance. For example, acquisitions in the oil industry, such as the British Petroleum purchases of Amoco and Arco, are performing well as is the Exxon-Mobil merger. MetLife was able to dramatically expand its global footprint by acquiring Alico, a global player in the insurance business from AIG in 2010 when AIG was in financial distress.

Question 6

Diversification initiatives must be justified by the creation of value for shareholders.

Accepted Answer

Diversification initiatives, whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development, must be justified by the creation of value for shareholders. They typically are successful when they introduce synergy.

Question 7

Economies of scope are cost savings from leveraging core competencies or sharing unrelated activities among businesses in a corporation.

Accepted Answer

Economies of scope are cost savings from leveraging core competencies or sharing related activities among businesses in a corporation.

Question 8

The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.

Accepted Answer

In 2012, Hewlett-Packard wrote off 9 billion USD of the 11 billion USD it paid for Autonomy, a software company that it purchased one year earlier. After the purchase was completed, HP realized that the Autonomy accounting statements were not accurate. This resulted in a nearly 80 percent drop in the value of Autonomy once the accounting irregularities were corrected.

Question 9

Reasons for acquisition failure include the effective integration of the acquisition.

Accepted Answer

Research shows that the vast majority of acquisitions result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the acquired firm, or were unable to understand how the assets of the acquired firm would fit with their own lines of business.

Question 10

Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems. This is an example of using unrelated diversification corporate restructuring and parenting initiatives to create value.

Accepted Answer

A corporation may diversify into unrelated businesses. Novartis has followed a successful strategy of unrelated diversification. Here, the primary potential benefits are derived largely from hierarchical relationships, that is, value creation derived from the corporate office. Examples of the latter would include leveraging some of the support activities in the value chain. Unrelated diversifiers often benefit from the best practices of sister businesses, even though their products, markets, and technologies may differ dramatically.

Question 11

One of the reasons that the Cisco acquisition of the Flip product failed is that the core businesses were very different.

Accepted Answer

Cisco was unable to avoid failure with Flip for two reasons. First, Cisco core business operations are in business networking equipment and software. Flip business was selling video cameras to individual customers. This is a very different business, where the Cisco knowledge and other competencies were of little value. While Cisco has some success extending into the consumer market, such as with its acquisition of Linksys, this success has come in the home networking business, a market to which Cisco can transfer some of its business networking competencies.

Question 12

Benefits derived from horizontal and hierarchical relationships are mutually exclusive.

Accepted Answer

Benefits derived from horizontal (related diversification) and hierarchical (unrelated diversification) relationships are not mutually exclusive. Many firms that diversify into related areas benefit from information technology expertise in the corporate office. Similarly, unrelated diversifiers often benefit from the best practices of sister businesses even though their products, markets, and technologies may differ dramatically.

Question 13

Sprint and Nextel merged in 2005. The successful merger resulted in a 31 billion USD merger-related charge that lead to a 76 percent decrease in its value by late 2012.

Accepted Answer

This is an example of an unsuccessful merger. The stock price continued to be an issue when SoftBank announced that it would purchase Sprint Nextel in 2012 and found that its own stock price dropped 20 percent the week after announcing its acquisition intentions.

Question 14

Cooper Industries has followed a successful strategy of related diversification. There are few similarities in the products it makes or the industries in which it competes.

Accepted Answer

Cooper Industries has followed a successful strategy of unrelated diversification. There are few similarities in the products it makes or the industries in which it competes; however, the corporate office adds value through such activities as superb human resource practices and budgeting systems.

Question 15

Corporate-level strategy focuses on gaining short-term revenue through managing operations in multiple businesses.

Accepted Answer

Corporate-level strategy focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses.

Question 16

Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process. This is an example of using the related diversification vertical integration initiative to enhance their market power.

Accepted Answer

First, a firm may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships, that is, businesses sharing intangible resources (e.g., core competencies such as marketing) and tangible resources (e.g., production facilities, distribution channels). Firms can also enhance their market power via pooled negotiating power and vertical integration.

Question 17

In a study of 270 international mergers between 2000 and 2003 it was found that sales growth increased, earnings growth increased, and market valuations increased overall for the merged companies.

Accepted Answer

A study investigated 270 mergers that took place between 2000 and 2003 in multiple countries and regions. It found that after a merger, sales growth decreased by 6 percent, earnings growth dropped 9.4 percent, and market valuations declined 2.5 percent (figures are adjusted for industry trends and refer to three years pre- or postmerger).

Question 18

When firms diversify into related businesses, the primary potential benefits come from horizontal relationships, which are businesses sharing intangible and tangible resources.

Accepted Answer

A firm may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships; that is, businesses sharing intangible resources (e.g., core competencies such as marketing) and tangible resources (e.g., production facilities, distribution channels).

Question 19

In large, widely diversified firms, decision making can become slow and remote to market conditions thus creating potential difficulties for successful mergers as evidenced by the Cisco-Flip failure.

Accepted Answer

Cisco was unable to avoid failure with Flip for two reasons. One of these is that its nearly 60 decision-making groups with many layers of responsibility made it difficult for Cisco to be responsive to market pressures on the Flip product. This just was not a priority since the Flip division had a mere 400 million USD in annual sales, representing only 1 percent of the overall sales of Cisco.

Question 20

Research shows that the vast majority of acquisitions of public corporations results in value creation rather than value destruction.

Accepted Answer

Research shows that the vast majority of acquisitions of public corporations result in value destruction rather than value creation.

Quiz 6: Corporate-Level Strategy: Creating Value Through Diversification