Mergers and Acquisitions: Three logics for M&A deals
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
📚 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.
💡 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
💡Diversification Strategy
💡Business Attractiveness Logic
💡Added Value Logic
💡Capital Markets Logic
💡Growth
💡Acquisition
💡Competitive Advantage
💡Strategy Consulting
💡Commercial Airlines
💡Subtracted Value
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.
Transcripts
hello
my name is andrew campbell from
ashbridge business school
and i want to talk to you briefly about
one
element of corporate level strategy
which is about what businesses a
particular
company should own or not earn it's also
called
diversification strategy this is drawn
from
my book strategy for the corporate level
which is published
in may 2014.
most companies want to grow
this is a particular challenge for
companies
once their initial business has started
to
to mature whether the growth has started
to slow down
so they begin to look for additional
activities
adjacent areas of opportunity
to get into and to get involved in
what we explain in the book
is that there are three logics three
ways of thinking
that will help leaders make decisions
about what businesses
to diversify into or to expand into
as they grow the three logics
are business attractiveness logic
and i'll talk about each of them uh one
at a time business attractiveness logic
is first
second is added value logic
and the third is capital markets logic
so let me uh describe business
attractiveness logic
business attractiveness logic is about
how
good the business opportunity is
and it has two dimensions to it one is
how easy is it
going to be to make money
in this new area so if the
if the business is you're thinking of
getting into is
commercial airlines it's a very hard
place to make money almost no large
commercial airlines make a decent profit
if the business you're thinking of
getting into is strategy consulting
then actually it's a pretty good
business most
people involved in strategy consulting
make quite good money
so first question is is this an easy or
a difficult place
um to make money and then the second
question is
are we going to be able to get an
advantage
over others in that area
and if we have something very special to
bring to the party clearly we can
get an advantage and even in a difficult
place to make money we may be able to
make good money so these two dimensions
it's the business
about business attractiveness and the
core thought is
you want to move into
attractive businesses
second logic is added value logic
so can we bring something
special to this
new area and
the simple thought here is if we can
bring something special that other
people can't bring to this new area
then we can um it makes sense for us to
to own that business and we can add
something to it and if we can't then
presumably somebody else is going to be
able to
do better in that area than us
this also has another dimension to it
this logic which is subtracted value
what we observe is companies
hierarchies in particular often do
things which
actually make it harder for the people
out in the field to succeed
and so and in addition to thinking about
can we add something to this business we
have to think about
um is there a risk that we will subtract
something
from this business and the combination
of those two thoughts
is the added value logic third
is capital markets logic
so is the marketplace
valuing the business that we're thinking
of getting into
at uh normal prices
or at above normal prices or at below
normal prices in other words is it
overvaluing the business
or undervaluing the business so if we're
going to
this is particularly relevant if you're
going to make an acquisition as part of
your
your effort to get into the new business
but
if the market is overvaluing and you
want to get in
you've got a problem uh it's a signal
that you probably shouldn't
if it's undervaluing uh or if
it's a signal that you shouldn't get in
or maybe if you already own
something it's a signal that you should
consider selling um
if it's under valuing then it's a signal
that you might want to get in
even if some of the other logics are
working against you
so you've got three kind of three
different kinds of logics three
different reasons
for wanting to get into a new business
one is it's really attractive
it's a good place to make money and we
can do well in that business
two is we can add something to it we can
bring something to it
all three is it's cheap and any of those
three
can be a motivation ideally you want all
three
and then you feel very confident if
you've got a mix of motivations
you need to analyze more deeply thank
you
you
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