Puzzles Laymen

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!

Posted By: Deepal Weerasooriya

Bookmark and Share

Answered By :Nishan Sumanadeera

In business, growth can be achieved in many different ways. Organic and inorganic growth are considered two of the key methods. Organic growth is painful and time consuming process which requires considerable amount of time and  effort. This is what most companies in early 70's were engaged in, starting new business that compliment with their core business and tirelessly building bridges between businesses. But today's business managers have more dynamic and fast way to growth or conglomeration. This is via mergers and acquisition of well run businesses through capital market activities.

Although this method can be considered as a easy way to the top, today's business managers have the more challenging task of identifying businesses opportunities that may synergism with its existing business in a more complex macro economic environment. Mistakes could be fatal. In a M&A situation, valuation cannot be fixed but variable. Current day acquisitions targets are not valued on the basis of assets or earnings but more on perceived values based on potential synergism it may have with the existing businesses of the acquirer. Hence one must give credit to present day conglomerate builders for the challenge they face.

Current day we see, Hospital owning companies acquiring Insurance companies, Financial conglomerates diversifying into hotels and media but common justification for most acquisitions are often been stated as the growth potential of the specific sector as against the corporate synergism. Sectorial diversification is good it should come at the correct time, diversification should happen only after integration and consolidation of the exiting core businesses. It is difficult for a business to grow in the long run unless acquisition are planned in a way that would compliment overall business position of the acquirer across all its businesses regardless of the sector.


We are yet to witnesses any de-conglomeration.


Reader's Comment(s)

  • 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.

Name
E-mail
Comment
 

Recently Answered by Nishan