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In a world where change is the only constant, businesses are continually seeking innovative ways to stay ahead of the curve. One such method that has gained prominence is the corporate diversification strategy, a multifaceted approach that can lead to new growth avenues and enhanced resilience. In this article, Tyler Rodewald, VP, M&A at EIS Holdings, discusses Corporate diversification through M&A.
“If you can take a dollar and turn it into two, that's great. But if there's an opportunity to turn it into three or four, that's where you should be investing.” - Tyler Rodewald
Corporate diversification strategy
Corporate diversification involves companies expanding their operations by moving away from their core business. They venture into new products or market areas, fostering growth within the industry, and attracting a broader customer base.
Diversification is a sensitive topic because it implies reallocating resources to a new service line. It's important to communicate the benefits of corporate diversification and that this doesn't mean the value of the core business has become less.
For the diversification strategy, discipline and swimming in the same direction, having everybody go there and understand why you're doing it are the two most important factors.
Drivers of corporate diversification
According to Tyler, their main driver is value creation where the company can put capital to work and have the best return metrics. The core business might trade at one multiple, but horizontal acquisition opportunities have much higher multiple when going back to market.
Their strategy is purely focused on cross-selling and revenue synergies. This is why there must always be customer overlaps in all their deals.
People involved in corporate diversification
It starts with the board and the executive leadership team identifying the need for diversification. The next question is where to diversify.
During this time, the leadership team will identify markets that are potentially more attractive than their current ones. The focus should be on capturing additional wallet shares of customers. Explored adjacent services that the company could offer to cross-sell between the core business and the new business.
Once it’s done, bring it back to the board, do the market research, and present the strategy. After gaining their approval, roll out the plan, including messaging to the employees.
Closing deals with competition
It’s not easy closing deals in a corporate diversification strategy, says Tyler. They’ve lost deals because it is more comfortable for the target company to work with a company that is like-minded, even though the money was the same. Change is tough, and culture definitely plays a part.
The key to success is to communicate the benefits of corporate diversification strategy, and look for companies that are open to new ideas.