Diversification strategies, business cycles and economic performance

Abstract

Two major diversification strategies of firms are examined: diversification into related businesses and diversification into unrelated businesses. The first strategy attempts to exploit operating synergies. In the second, the firm attempts to gain financial benefits from its ability to increase leverage due to a greater stability of cash flows. The study utilizes a large sample affirms to assess empirically the benefits and costs of these two diversification strategies by developing a new measure of diversification across business cycles and economic sectors. This new measure is compared with Berry—Herfindahl type measures of total diversification and recent measures of diversification into related businesses. The results indicate that pure financial diversification is associated with (a) more stable cash flows, i.e. lower operating risk; (b) increased levels of leverage; and (c) lower profitability. These observations are in accord with the theory. We also reaffirm that firms which diversify into related businesses have, on the average, higher profitability than non‐diversified firms, although these results are not always statistically significant.

Corporate mergers, stockholder diversification, and changes in systematic risk

“…For example, the study assumed central limits and therefore did not explicitly control for other influences on the coefficients such as operating risk (Amit and Livnat, 1988a;Lev, 1974), labor-capital ratio (Subrahamanyam and Thomadakis, 1980), organizational structure (Bettis and Chen, 1986), the structural characteristics of the merging firms' selected industries (Brealey and Myers, 1981;Moyer and Chatfield, 1983), environmental influences such as regulatory changes (Armour and Teece, 1978), and market conditions (Amit and Livnat, 1988b;Lubatkin and O'Neill, 1987).…”

Redirecting Research Efforts on the Diversification–Performance Linkage: The Search for Synergy

“…Several studies found no significant performance difference between firms with differing levels of diversification (e.g. Dubofsky & Varadarajan, 1987;Johnson & Thomas 1987;Keats & Hitt, 1988), others found that diversified firms outperformed focused firms but there was no difference between the performance of related and unrelated diversifiers ) and yet, others found that diversified firms had lower profits than undiversified firms (Amit & Livnat, 1988).…”

“…Studying related and unrelated mergers, Amit and Livnat (1988) use a measure that takes the underlying economic attributes as well as the impact on the business cycle explicitly into account and find that pure financial diversification is associated with a reduction in risk and with an increase in leverage. find that, while all kind of mergers tend to increase the level of unsystematic risk, related mergers significantly reduce the level of systematic and total risk.…”

Helsefeltets strateger

“…with respect to business cycles). To mention another commonly used categorization, horizontal, vertical and concentric mergers belong to related mergers, while conglomerate mergers belong to unrelated mergers (Amit & Livnat, 1988;Chatterjee, 1986;Napier, 1989). Because we examine a merger between two Swedish university hospitals that offer similar services within the same "industry", the definitions of merger used in this thesis are the horizontal and related mergers.…”