Mergers, Acquisitions, Joint Ventures &

Corporate Growth (MAJVCG)

Session 3

Unrelated Diversification

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Diversification
 Wipro

1945 Wipro incorporated

1967 No diversification
1994 Unrelated diversification
2002 Related diversification

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Diversification
 Wipro’s Corporate Evolution: A Comparison

• Wipro in 1967
– Cooking fat – Soap – Wax – Tin container for packing – Trading in oil –
Trading in oilseed

• Wipro in 1994
– Vanaspati – Toilet soaps – Toiletries – Hydraulic cylinders – Computer
hardware – Computer software – Lighting – Financial services –
Medical systems – Diagnostic systems – Leather exports

• Wipro in 2002
– Vanaspati – Toilet soaps – Toiletries – Hydraulic cylinders – Computer
hardware – Computer software – Lighting – Financial services –
Medical systems – Diagnostic systems – Leather exports – Software
Consulting – Business Process outsourcing – Internet service provider –
Health services – Enterprise Solution – Six Sigma Consulting

Wipro 2013: IT & Non-IT businesses separated

Wipro 2017-18: Revenue $8.4b; Net profit $1.2b

Wipro Enterprises: Revenue <$2b

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Diversification
 Wipro’s Industry/Service Presence 2018

Aerospace & Defence Pharmaceutical & Life Sciences

Automotive Platforms & Software Products
Banking Industrial & Process Manufacturing
Communications Professional Services
Consumer Electronics Public Sector
Consumer Packaged Goods Retail
Engineering & Construction Securities & Capital Markets
Healthcare Semiconductors
Insurance Travel & Transportation
Medical Devices Utilities
Natural Resources
New Age Markets
New Age, Media & Education
Network Equipment Providers
Oil & Gas

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Diversification
Wipro Enterprises (P) Limited (non-IT) comprises of two main divisions
1. Wipro Consumer Care and Lighting (WCCLG)
Wipro Consumer Care and Lighting (WCCLG) is among the top fastest growing FMCG companies in India. It has a
strong brand presence in personal care and skin care products in South-East Asia and Middle-East apart from
significant market share in identified segments. Today WCCLG has global workforce of 8300 serving over 40
countries. WCCLG business includes multiple product ranges from Personal care (Soaps, Toiletries), Baby care,
Wellness Electrical wire devices, Lighting and Modular Office Furniture.

2. Wipro Infrastructure Engineering (WIN)

Wipro Infrastructure Engineering (WIN) is the largest independent hydraulic cylinder manufacturer in the world,
delivering around 2 million cylinders to OEMs in different geographies. WIN has global workforce of over 1,700
committed and skilled people, and 14 state-of-the-art manufacturing facilities across India, Northern Europe, Eastern
Europe, US, Brazil and China. WIN specializes in designing and manufacturing custom Hydraulic Cylinders (double
acting, single acting and telescopic cylinders), Actuators and Precision engineered components for infrastructure and
related industries such as Construction & Earthmoving, Material/Cargo Handling & Forestry, Truck Hydraulic, Farm &
Agriculture, Mining, and Aerospace & Defense.

Wipro Enterprises (P) Limited also has two associates

•Wipro GE Healthcare Private Limited
•Wipro Kawasaki Precision Machinery Private Limited

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Diversification
 Unrelated Diversification
Group/Company New Business Remark
Future Group (Biyani) Financial Services, Insurance Exited both
Mindtree Mobile handset (2009) Exited
ITC Biscuit, Apparels, Hospitality
Aditya Birla/Reliance/Bharti Retailing
Channel [V] Food & Beverage (2012)
Sun Pharma Energy (”)
DRL Hospitality (”)
Piramal Financial Services (”)
RPG Healthcare (”)
Arvind Organic Farming (”)
HUL Retailing (Coffee) (”);
Pharma OTC (GSK) (2018)
L&T Defence (”)
Bharat Forge Defence (”)

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Diversification
 Unrelated Diversification - Impulses
Business Business Group Top Managers

Countering Cyclicality Y Y Y

Rapid-growth Aspiration Y Y Y

Large Free Cash Flow Y Y Y

Low Current Profitability Y Y Y

Risk Diversification Y Y Y

New Opportunities N Y Y

Promoters’ Ambition N Y N

Managerial Ambition N N Y

Investors’ Pressure Y Y Y

Agency Problem N N Y

Judgmental Errors N Y Y

©2019-2020 P Rameshan
PGP MAJVCG 2019-20 S1: Introduction:
February 8, 2020 7
Growth & Diversification
 Diversification Discount

Diversification
Outperformers

Performance
Diversification
Discount
Optimum
Diversification

Dominant Related Unrelated

Diversification

eKochi EoS 2017-18 S14: Boundaries of

February 8, 2020 8
the Firm: Inorganic Growth
 Measure of Vertical Integration:
Relatedness vs. Un-relatedness

Total Value Added

________________
V* =
Total Sales Revenue

Revenue – Cost of Materials & Energy

_________________________________
= Total Sales Revenue

* Total for each industry & for all businesses.

Value of V should be 0-1; higher the value of
V, greater is the vertical integration (or
relatedness). Obviously, 1-V should indicate
the level of buy (instead of make) strategy

In addition, a value of Entropy, E, moving

away from 0 (in the 0-3 range) or Herfindahl
Index, H, moving towards 1 (in the 0-1 range)
should also indicate the rising unrelated-ness

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Diversification
 Sources of Unrelated Diversification

Risks of Existing Investor or Managerial

Industry (E.g., Tobacco) Preference

Emergence of New Regulatory Constraints

Industry (E.g., IT) to Integration (Antitrust)

Another Lucrative Need for Counter Cyclical/

Industry (E.g., Food) Seasonal Portfolio (E.g.,
Hot & Cold Products)

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Diversification
 Drivers of Unrelated Diversification

Idle Funds Opportunistic

Factors

Agency Empire-
Aspirations Building

Overconfidence

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Diversification
 Anti-competitive Power of Conglomerates
Source of Power

Cross-subsidization Reciprocal Buying

Across Businesses by Conglomerates

Mutual Accommodation
by Conglomerates

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Diversification
 TRS: Total Returns to Shareholders
Source: www.mckinsey.com

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Diversification
 Case 3

Tyco International

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Diversification
 Provoking Question

Was the CII ranking of Tyco in 1995 justified?

If yes, how?

If no, why?

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Diversification
 CII’s 1995 Ranking

Was It Justified? Did It Reflect Tyco’s

Fundamentals?

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Diversification
 Was CII’s 1995 Ranking of Tyco Justified?
Yes

CII Ranking was Formula-based

CII Ranking was Neutral for All Firms

Worst-20 Ranking was a Neutral Outcome

It was Independent of Tyco’s Justifications

Tyco was Aware of its 1991-92 Data

Even Its 1992-97 Results were Below Its Goal

Tyco’s Reaction is Normal of an Affected Firm

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Diversification
 7000 450
Chart Title

400
6000

350

5000
300

4000
250

200
3000

5-year Fit-line 150

2000

100

1000
50

0 0
1990 1991 1992 1993 1994 1995 1996 1997

Sales Net Income

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Diversification
 Tyco EPS Trend
EPS ($)
3.5
Against targeted 5-on-5 since 1992
3.0

2.5

2.0

1.5
1.0 5-year Fit-line

0.5

1991 1992 1993 1994 1995 1996 1997 Year

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Diversification
 Tyco EPS Trend
EPS ($)
3.5 Against targeted 5-on-5 since 1992

3.0

2.5
Unadjusted
2.0

1.5 Merger-adjusted

1.0
5-year Fit-line
0.5

1991 1992 1993 1994 1995 1996 1997 Year

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Diversification
 Did CII’s 1995 Ranking of Tyco Reflect Its Fundamentals?

NO

Its Superior Past Stock Performance

Its Lean & Efficient Corporate Structure

Its Very High 4-year Earnings Growth

Lehman’s Report of Its Strong Fundamentals

Lehman’s Report of Its Best Business Mix

Its Sound Strategic Practices

Its Focused Approach to Acquisition & Operations

Its Post-1992 Profit Performance

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Diversification
 Tyco Later

Split Into Multiple Frequent

Operations in 2011 Controversies &
Restructuring

In 1997, Tyco Had Merged

2011 Revenue
with a Smaller ADT Limited
$17.4 billion To Become Its Subsidiary, but
ADT adopted the name Tyco
International; In 2005 VSNL
Acquired Tyco Global
Network; Its HQ is partly in
Ireland & partly US

2011 Net Profits

$2.1 billion
Dennis Kozlowski left Tyco in 2002; he was subsequently (2005) jailed for
various financial actions as CEO although financial performance of Tyco
during his later half was appreciated by Wall Street as Tyco became a
mega-conglomerate through ‘1000’ acquisitions
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Diversification