Mergers and Acquisitions: Three logics for M&A deals

Ashridge

15 Jul 201405:52

Summary

TLDRAndrew Campbell from Ashbridge Business School discusses corporate-level strategy, specifically diversification. He outlines three key decision-making logics for business expansion: business attractiveness, which assesses profitability and competitive advantage; added value, determining if the company can uniquely contribute to a new area; and capital markets logic, evaluating market valuation of potential businesses. These insights help leaders confidently navigate growth opportunities.

Takeaways

📚 Andrew Campbell from Ashbridge Business School introduces the concept of corporate level strategy, specifically focusing on diversification strategy.
🌱 Growth is a common challenge for companies once their initial business matures and they seek new areas of opportunity.
🔍 There are three main logics that guide leaders in making decisions about business diversification: Business Attractiveness Logic, Added Value Logic, and Capital Markets Logic.
💰 Business Attractiveness Logic assesses how profitable a new business opportunity is and whether the company can gain an advantage in that area.
🛫 The example of commercial airlines is given as a difficult industry to make money in, while strategy consulting is portrayed as more profitable.
💼 Added Value Logic considers whether the company can bring unique value to the new business and whether its involvement could potentially subtract value.
🏦 Capital Markets Logic evaluates whether the market is valuing the potential business at fair, high, or low prices, impacting acquisition decisions.
🚀 The ideal scenario for diversification is when a business is attractive, the company can add value, and the market pricing is favorable.
⚖️ Companies must weigh the motivations for entering a new business, ideally aligning all three logics for a confident decision.
📈 The transcript is based on Campbell's book 'Strategy for the Corporate Level' published in May 2014, providing a structured approach to strategic decision-making.
🤔 The importance of analyzing deeply when there is a mix of motivations for diversification is emphasized for informed strategic choices.

Q & A

What is the main focus of Andrew Campbell's book 'Strategy for the Corporate Level'?
-The book focuses on corporate-level strategy, specifically discussing what businesses a company should own or not own, also known as diversification strategy.
Why do companies often look for additional activities or areas of opportunity as they grow?
-Companies look for additional activities or areas of opportunity when their initial business starts to mature and growth begins to slow down, as a way to continue expanding and achieving growth.
What are the three logics that Andrew Campbell suggests leaders consider when deciding what businesses to diversify into or expand into?
-The three logics are business attractiveness logic, added value logic, and capital markets logic.
What does 'business attractiveness logic' refer to in the context of diversification strategy?
-Business attractiveness logic refers to evaluating how good the business opportunity is, focusing on how easy it is to make money in the new area and whether the company can gain an advantage over others in that area.
How does the 'added value logic' differ from 'subtracted value logic' in the context of diversification strategy?
-Added value logic considers whether the company can bring something special to the new area, enhancing its value. Subtracted value logic, on the other hand, considers the risk that the company might make it harder for the business to succeed by subtracting value.
What is the significance of 'capital markets logic' in the decision-making process for diversification?
-Capital markets logic assesses whether the marketplace is valuing the business at normal, above normal, or below normal prices. This is crucial in determining whether it's a good time to enter a new business through acquisition or consider selling existing assets.
Why is it important for a company to consider all three logics when deciding to diversify into a new business?
-Considering all three logics helps ensure a comprehensive evaluation of the potential diversification opportunity. It allows the company to assess not only the attractiveness of the business but also their ability to add value and the current market valuation, leading to a more informed decision.
What are some examples of industries where it might be difficult to make money, as mentioned in the script?
-Commercial airlines are mentioned as an example of an industry where it is hard to make money, while strategy consulting is cited as an industry where most people make quite good money.
How can a company identify if they have something special to bring to a new area of business, as per the 'added value logic'?
-A company can identify their unique value by assessing their core competencies, proprietary technology, brand recognition, or any other competitive advantage that can differentiate them in the new area.
What are the potential risks associated with diversifying into a new business area, as per the 'subtracted value logic'?
-Potential risks include the possibility that the company's internal processes or bureaucracy might hinder the success of the new business, or that the company might not be able to effectively integrate the new business into its existing operations.
How can a company determine if the market is overvaluing or undervaluing a business they are considering for diversification?
-A company can determine market valuation by analyzing financial metrics such as price-to-earnings ratios, comparing the business's valuation to industry averages, or consulting with financial analysts and advisors.

Outlines

00:00

📚 Introduction to Corporate Diversification Strategy

Andrew Campbell from Ashridge Business School introduces the concept of corporate level strategy, specifically focusing on diversification strategy. He mentions his book 'Strategy for the Corporate Level,' published in May 2014, as a reference. Campbell explains that companies often seek growth opportunities as their initial business matures and growth slows down. He outlines three logics that leaders can use to decide which businesses to diversify into: business attractiveness logic, added value logic, and capital markets logic. The first logic, business attractiveness, is about evaluating how profitable and advantageous a new business opportunity is, considering both the ease of making money in that industry and the company's potential competitive advantage.

05:02

💡 The Three Logics of Diversification Strategy

In this paragraph, Campbell elaborates on the three logics for diversification. The second logic, added value, suggests that a company should consider whether it can bring unique value to a new business, which would justify ownership. Conversely, the concept of subtracted value warns against the potential negative impact that a company's involvement might have on the business. The third logic, capital markets, involves assessing whether the market is valuing the prospective business appropriately. Overvaluation might be a signal to avoid entering the business, while undervaluation could indicate an opportunity. Campbell emphasizes the importance of aligning all three logics for a confident decision in diversification, but acknowledges that a mix of motivations may require deeper analysis.

Mindmap

Keywords

💡Corporate Level Strategy

Corporate Level Strategy refers to the decisions a company makes about what businesses it should own or not own. It is a key aspect of strategic management that involves deciding on the scope and direction of the company's portfolio of businesses. In the context of the video, Andrew Campbell discusses this concept as it relates to diversification strategy, which is about expanding a company's activities into new areas.

💡Diversification Strategy

Diversification Strategy is a strategic approach where a company seeks to expand its business into different areas or industries to reduce risk and increase growth potential. It is mentioned in the video as a way for companies to look for additional activities and opportunities as their initial business matures and growth slows down.

💡Business Attractiveness Logic

Business Attractiveness Logic is one of the three logics discussed in the video for making decisions about which businesses to diversify into. It focuses on the profitability and competitive advantage of a business opportunity. The video explains that this logic involves assessing how easy it is to make money in a new area and whether the company can gain an advantage over competitors.

💡Added Value Logic

Added Value Logic is another logic mentioned in the video, which considers whether a company can bring something special to a new business area. This logic is about assessing whether the company can add unique value to a business, making it a good candidate for diversification. It also involves considering the potential for subtracted value, where a company's involvement might actually hinder the success of the business.

💡Capital Markets Logic

Capital Markets Logic is the third logic discussed in the video. It involves assessing how the market values a potential business opportunity. The video mentions that this logic is particularly relevant when considering acquisitions, as it helps determine whether the market is overvaluing or undervaluing a business, which can influence the decision to enter or exit a market.

💡Growth

Growth is a central theme in the video, as it is a primary motivation for companies to consider diversification strategies. The video notes that once a company's initial business matures and growth begins to slow, it starts looking for new areas to expand into. Growth is seen as a key driver for exploring new business opportunities.

💡Acquisition

Acquisition is mentioned in the context of entering a new business through the purchase of an existing company. The video discusses how the capital markets logic can influence the decision to make an acquisition, especially in terms of whether the market is valuing the target business appropriately.

💡Competitive Advantage

Competitive Advantage is a concept that relates to the Business Attractiveness Logic discussed in the video. It refers to the unique strengths or capabilities that a company can leverage to outperform its competitors. The video suggests that having a competitive advantage is crucial for success in a new business area.

💡Strategy Consulting

Strategy Consulting is used as an example in the video to illustrate a business area where it is relatively easy to make money. It is mentioned to contrast with commercial airlines, which are described as a difficult area for profitability. Strategy consulting is presented as an attractive business opportunity.

💡Commercial Airlines

Commercial Airlines is used in the video as an example of a business that is challenging to profit from. It serves as a counterpoint to strategy consulting, highlighting the importance of assessing the profitability and attractiveness of different business opportunities when considering diversification.

💡Subtracted Value

Subtracted Value is a concept introduced in the video under the Added Value Logic. It refers to the potential negative impact a company might have on a business by making it harder for the business to succeed. The video emphasizes the need to consider not only what a company can add to a business but also what it might take away.

Highlights

Introduction to corporate level strategy and diversification strategy.

The challenge of company growth once the initial business matures.

Exploration of additional activities and adjacent areas of opportunity for growth.

Introduction of three logics for decision-making in business diversification.

Description of the first logic: Business Attractiveness Logic.

Two dimensions of Business Attractiveness Logic: ease of making money and potential for competitive advantage.

Example of commercial airlines as a difficult business to make money in.

Strategy consulting as an example of an attractive business opportunity.

The concept of moving into attractive businesses as a core thought.

Introduction of the second logic: Added Value Logic.

The idea of bringing something special to a new area to justify ownership.

The concept of subtracted value and its potential impact on business success.

Introduction of the third logic: Capital Markets Logic.

Market valuation of the business as a factor in decision-making.

The relevance of market valuation in the context of acquisitions.

The implications of market overvaluation or undervaluation on business strategy.

The ideal scenario of having all three logics aligned for confident business decisions.