Value diversification is a poor substitute for the Management of Technology
April 30, 2007
Value diversification is the improvement of stockholders’ investments in a company through quick-fix solutions on paper, such as mergers, acquisitions, and other stock-enhancing strategies.
I have to disagree that this is a quick fix solution, as it is true that it can improve the share value of the company in short term, the decision to acquire or merge another company goes through a process of ultimately achieving a win solution to the surviving entity in a long term basis. This includes the management of technology in which case harmonizing or implementing the best practice to sustain growth. It is rather the startegy or implementation of it that makes the difference. Acquiring a company does not only mean to acquire the market share. It is also a strategy to develop new technology that can be integrated to the company’s flagship product/s.
In the case of Oracle, it has acquired it’s 1-2 leading competitor in one of their product category. Oracle does not only gain marketshare but also able to integrate say Siebel products or even replace oracle product portfolio in this field. Oracle shopping spree includes Siebel, Peoplesoft and JD Edwards. All of which were once giving Oracle a though competition in their space.
The figure below shows after integrating products of the acquired companies to Oracle’s portfolio, the stock price was improving consistently.
Google acquired YouTube and replaced it’s video search product for the same purpose. In contrast Microsoft acquired GreatPlains Dynamics, an ERP application developer, but is striving to compete with the leaders in this field.
The same in the local banking industry, in which case big banks are acquiring smaller banks that has a niche market. They are diversifying their product portfolio and gaining market shares. The surviving companies, are applying the management of technology to the business units they have acquired.
Value diversification is a substitute but is definitely not a poor one.