Dear Sir, Firstly would like to thank CEO Online for the opportunity given to the public to ask question from panel of eminent CEO's like you. There many questions that puzzles laymen like us on daily basis that goes unanswered. Sir, I have read many articles written by you relating to capital markets and M&A opportunities in Sri Lanka. But I would appreciate if you could answer me the following questions? 1) Compared to the 1977s era of the economy when big companies slowly began diversifying but essentially connected to core operations, today it has changed completely. 2) Today new conglomerates are reaching all over irrespective whether there is expertise in the company or not, though expertise is a commodity today and can be bought overnight. 3) But the moot point is by delving into hitherto in-experienced business lines, are companies, particularly those listed putting their shareholders at risk because the risk is greater in such acquisitions and a longer return on investment 4) Is this the new style of business model that everyone will follow or what? Look forward for your expert answer!
Answered By :Nishan Sumanadeera
By Sanjana Fernando 2012-10-17 9:57 AM
Sri Lanka is a small market. Most companies who diversify, do it to utilise their FCF to better use than sitting in a interest baring account in the bank. Most of these companies would have come to a stage where they have reached what we call maturity, and cannot grow the rate of growth any further, mainly due to the ceiling in the market (small market). So the best way to increase value to the share holder (other than by buying back shares) is to invest the cash in other faster growing companies even though they may not always be in the same sector. There might not be any Revenue synergies in such acquisitions but there could be some cost synergies to be found, such as HR, some unskilled employees, marketing, cost reductions due to economies of scale etc. So in fact, it might not be such a bad idea for mature companies to invest in fast growing companies (of course this is given that the IRR of the investment is significantly higher than the company's WACC). Therefore it add value to the share and cannot be considered a risk. In fact, the risk for shareholders is to stay put in a mature company that is a cash cow, but at the same time struggles to grow its Revenues or invest in any acquisitions.
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