Unformatted text preview: BUSI698
Horizontal Diversification Two views on Diversification
Two views on Diversification
Industry Attractiveness: the BCG GrowthShare Matrix suggests that firms should choose business areas that allow them to maximize long run growth potential Synergies: the ResourceBased View of the Firm (RBV) suggests that firms should diversify to the extent to which they can leverage their capabilities across multiple areas of business/product lines Vivendi in 2001
Vivendi in 2001
Chairman and CEO: JM Messier USA Networks Music TV & Film
Universal Studios Group
Group Publishing Telecoms Internet Vivendi Universal Publishing Cegetel Vivendi Universal Net VTI Vizzavi
ent Annual market growth %
Low Vivendi & BCG Matrix
Vivendi & BCG Matrix High Relative Market Share Low Plot Vivendi’s businesses according to the BCG framework Do Vivendi’s choices make sense according to the BCG framework? Why/Why not? Vivendi’s diversification logic
Vivendi’s diversification logic (1) Vivendi Business: (2) Your Names: Annual market
H ig h
Low growth % High Relative Market Share Low BCG GrowthShare Matrix:
Which quadrant does your business fit in the Vivendi BCG Matrix?
– What is the rate of market growth?
– What is Vivendi’s relative market share?
– Are they the market leader?
– What is Vivendi’s revenue growth?
What resources are required to compete successfully in this business?
Does Vivendi possess those resources? Are there any synergies with Vivendi’s other businesses? Vivendi Portfolio
WATER & WASTE
STUDIOS) MUSIC (UNIVERSAL
INTERNET (VIZZAVI) Market
Size 10% $28
billion 3% 13% $25
billion 4.50% -1% $31
billion 2.40% $7.6 billion 45% $32
billion 2% 129 million 169% Market
Revenue* Yes $26.5 b.
water) Yes (28%) $4.9 billion 30% Yes TV (CANAL PLUS)
Growth 19% 17% No
21% Yes 34% France
Telecom (66%) $4.2 billion
$6.6 billion Annual market growth %
Low Vivendi & BCG Matrix
Television? Internet Film Telecom Music Publishing Environment
High Relative Market Share Low Resourcebased view and Vivendi
Resourcebased view and Vivendi
RBV: Does Vivendi have a sustainable corporate advantage in this business? – Synergies? (Will the combination decrease costs or increase WTP in each business?)
– Is it necessary to have these businesses under the same corporate umbrella? What resources does Vivendi bring to each business?
Are Vivendi’s resources enough to add more value compared to more focused competitors? External vs. Internal Capital Markets
External vs. Internal Capital Markets How should funding decisions be made in Vivendi’s internal capital market? Is Messier’s discipline & oversight equivalent to that of the external market? Could it be better/worse? Vivendi Updates
Vivendi Updates 2002: – Vivendi posts largest one
year loss in French corporate history ($25 billion) , stocks fall 60% – Messier “resigns” 20022003: Sellout – Environment, Publishing, Vizzavi, NBC universal (80%), MP3.com 2004: Messier indicted for accounting fraud, settles with SEC for $51m Vivendi 2006
Vivendi 2006 Free Cash Flow & Cross
Free Cash Flow & Cross
subsidization Free cash flow = cash in excess of that required to fund all current projects with positive net present value. Michael Jensen on Agency & Free Cash Flow: argues that free cash flow is often utilized for projects that increase managers’ power and corporate scope without providing an adequate return for shareholders. Investors should receive this cash to invest it themselves. An increase in the size of the firm, which may be in the managers’ interest, will not necessarily lead to increased returns to the shareholders. Internal vs. external markets
Internal vs. external markets Efficient external markets are better than internal markets at allocating capital to best opportunities Unrelated diversification is not a good idea if the only logic is crosssubsidization and diversification of risk. Investors can do it themselves. Internal capital allocation may be better than external markets when: – external markets are not efficient e.g. in developing countries with thin capital markets, there may be undervalued opportunities. – Parenting advantage at the corporate level: When executives have superior knowledge compared to investors in the external market (typically happens in related diversification) – The combination of businesses creates new value (related diversification) ...
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