Diversification Acquisition: Meaning, Types, Advantages, Misconceptions

Diversification Acquisition refers to a company acquiring another firm that competes in a different line of business. The company gets to expand by introducing new products, services, or expanding into new markets. It also enables the reduction of the risk of relying too heavily on one line of business.

Such purchases provide firms with an opportunity to grow their revenues, remain competitive, and access new prospects. They can either be related, where the firms are identical, or unrelated, where they are different from each other. In considering a diversification purchase, firms must thoroughly examine the potential of the industry, the expenses involved, and the benefits in general so that the purchase will assist them in expansion and stability in the long term.

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What Is Diversification Acquisition?

A diversification acquisition happens when one company buys another company that works in a different business. This helps the first company add new products or services and grow. It is not about buying a similar company but one that works in a different field. This type of acquisition can help to reduce risks and open new chances for the company..

How Does Diversification Acquisition Work?

Diversification acquisition helps companies grow and improve financial health by buying businesses in different industries. This strategy can reduce risk by balancing the company's activities across varied markets. It also boosts shareholder confidence and earnings through exploring new business opportunities.

• Companies acquire unrelated or related businesses to expand their product lines or enter new markets.

• Such acquisitions reduce dependence on one business segment, helping manage risks.

• They increase earnings potential by diversifying operations across different industries.

• Diversification acquisitions can restore confidence when a company’s core business is weakening.

• These acquisitions may involve companies sharing the same industry code (related) or completely different codes (unrelated).

• Successful diversification assists companies in staying competitive and creating new growth paths.

Types of Diversification Acquisitions

There are two main types of diversification acquisitions:

1. Related Diversification: Buying a company that is somewhat related but not the same, like a car company buying a tire maker.

2. Unrelated Diversification: Buying a company in a completely different market, like a soft drink maker buying a movie studio.

Each type has different goals. Related diversification often tries to use existing company skills. Unrelated diversification tries to reduce risks by having very different businesses.

Role of Diversification Acquisition in Corporate Growth

The role of diversification acquisition is to help companies grow by entering new markets. 

• It helps businesses not depend on one product or one market. 

• This lowers their risk if one business area has problems. It also helps increase earnings by having many sources of income.

• Companies use diversification acquisition to become stronger and protect against losses. 

• For example, a company struggling in one area can succeed by owning another business that is growing fast. 

This strategy can also help companies stay competitive and relevant.

In short, diversification acquisition spreads risks and creates new opportunities. It is a key step in many companies’ plans to grow and stay safe.

Advantages of Diversification Acquisition

Diversification acquisition gives companies some clear benefits:

• It spreads risk because the company is not relying on one business.

• It allows the company to enter new markets and reach new customers.

• It can increase earnings by adding new income sources.

• It helps companies stay competitive in changing markets.

Common Misconceptions about Diversification Acquisition

Some people think diversification acquisition will make money quickly and solve all problems. But, that is not always true. 

• Sometimes new businesses take time to grow and may not bring expected profits. 

• It is also wrong to believe unrelated acquisitions always reduce risk. If the parent company has problems, it can affect all its businesses.

• The success of diversification acquisition depends on how well the new business fits and how it is managed. 

• Not all acquisitions create value right away, and some may fail if not handled carefully.

In short, these acquisitions are not magic solutions and need careful planning.

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Strategic Considerations in Diversification Acquisition

When a company thinks about diversification acquisition, it must check some important points:

• Is the new industry attractive with good profit chances?

• How much will it cost to buy and run the new business?

• Will both companies benefit from this acquisition?

These checks help make sure the acquisition creates real value and is not just costly. A company should avoid buying businesses that do not add competitive advantage or profits.

Planning and study are very important before making diversification acquisitions.

Examples of Diversification Acquisition in Industry

Many big companies use diversification acquisition to grow. For example, in 2017 Kellogg's bought RXBAR, which makes organic protein bars, to enter the healthy snacks market. This helped Kellogg's grow in a new area.

Another example is Unilever. In 2016, it bought Dollar Shave Club to enter the razor business for the first time. This helped Unilever reach new customers.

These examples show how companies use diversification acquisitions to stay strong and grow in new markets.