Corporate Strategy Flashcards
What is corporate strategy?
(company-wide)
- Answers the question: where to compete
- multiple industries/markets concurrently
- what businesses to be in/how corporate should manage
- vertical integration, diversification and geography
How does GE try to be more operationally efficient with mergers?
“best practices”
Why does Michal Porter say conglomeration of companies is a bad thing?
Premise #1: Competition occurs at the business level; diversified companies do not compete
Premise 2: Diversification inevitably adds costs and constraints to business units
Premise #3: Shareholders can readily diversify themselves anyway
What are the three tests for diversification
attractiveness, cost of entry, better off
What are common fails of the attractiveness test
Falsely believe the target industry is “similar”
Low cost of entry = “why not”
Falsely believe fast growth = profitability
What are common fails of the cost of entry test
cost for acquisition leads to buyer’s remorse
Underestimating the cost to ramp up start-up
What are common fails of the better-off tests
Does the corporation bring significant advantage to the new unit (or vice versa)?
Is the benefit “one-time” or long-term
What are the 4 ways to unlock value from M+A
1) portfolio management, 2) restructuring, 2) transfer skill, 4) share activities
Why is portfolio management a less compelling proposition?
Portfolio management is less compelling proposition because of cheap $, free markets
Why is restructuring effective?
Restructuring is a viable and historically profitable way to unlock hidden value- ya duh that’s why private equity is such a profitable thing to do
Why transferring skills?
can help to hone strategic competitive advantage
though debated bc most firms do a bad job of capturing value
What did JPM say about M+A outlook pre corona
business is still good, some geopolitical uncertainty, share repurchases popular, companies delevering bc of recession fears
What do we know about companies that conduct MA frequently?
better at capturing synergies
BCG argues that portfolio masters (defined as those who do 5+ transactions within 5 years) develop a core competency with M&A and yields superior returns to those who merge / divest less frequently.
