What is Related Diversification?
Related diversification involves growing a business by entering new areas that have a connection to the existing business, often by leveraging current skills and capabilities like technology, product type, customers, or production skills.
How Related Diversification is Distinction from other M&A Strategies
- Horizontal acquisitions involve buying competitors in the same market, offering immediate revenue growth but limited profit increase.
- Vertical integration involves acquiring suppliers or sometimes customers to integrate the value chain. Buying customers is less common due to the risk of alienating other customers.
- Unrelated diversification (conglomerate strategy) involves acquiring businesses with no direct connection to the core business and is now more common for financial investors.
Advantages of Related Diversification
- Relatively low risk as it complements the existing business.
- Offers more synergies and profit improvement opportunities compared to unrelated acquisitions.
- Provides a wider range of potential acquisition targets than horizontal acquisitions.
- Has the potential for significant growth through cross-fertilization of customers, technologies, products, or geographies.
Key considerations for successful related diversification
- Conduct a thorough market overview to identify suitable targets.
- Assess internal skills and capabilities to ensure effective integration.
- Focus on excellent M&A execution and post-merger management.
Identifying the Right Targets
Use market intelligence, industry events, and consultants to find companies that can leverage your existing strengths
Importance of Market Perspective
Start with a market scan to understand available opportunities before extensive internal analysis
Volume of Options
Evaluate at least 50 potential options for every acquisition pursued.