DEFINITION of 'Diversification Acquisition'

Diversification acquisition is a corporate action whereby a company takes a controlling interest in another company to expand its product and service offerings. One way to determine if a takeover comes under diversification acquisition is to look at the two companies Standard Industrial Classification (SIC) codes. When the two codes differ, it means that they conduct dissimilar business activities. The acquirer may believe the unrelated company unlocks synergies that promote growth or reduce prevailing risks in other operations. Mergers and acquisitions (M&A) often take place to complement existing business operations in the same industry.

BREAKING DOWN 'Diversification Acquisition'

Diversification acquisition often occurs when a company needs to lift shareholder confidence and believe making an acquisition can facilitate a pop in the stock or buoy earnings growth. Takeovers between two companies that share the same SIC code are considered related or horizontal acquisitions, whereas two different codes fit in the framework of an unrelated takeover.

Big corporations typically find themselves involved in diversification acquisitions either to minimize the potential risks of one business component not performing well in the future, or to maximize the earnings potential of running a diverse operation. For example, Kellogg's (K) recently snapped up organic protein bar manufacturer RXBAR for $600 million to lift its struggling line of cereals and bars. It also presented an opportunity for the legacy food manufacturer to make headway in the rapidly growing natural food industry. We've seen similar moves from other large consumer staples companies struggling to stay relevant with cookie cutter products and minimal digital presence. Consumer products giants Unilever (UL) recently forked over $1 billion for Dollar Shave Club in its first foray into the razor business. 

Common Misconceptions about Diversification Acquisitions  

There's a common belief that acquisitions instantly bolster earnings growth or reduce operational risks, but in truth, creating new value takes time. Not every purchase will generate greater returns, higher earnings, and capital appreciation. In fact, many companies don't ever live up to their acquisition valuation. Some companies will never get enough traction to push a product while others may be limited in the resources they receive from the parent company. 

Some investors also assume unrelated acquisitions are a superior method of reducing risk. Two unrelated companies with separate revenue streams and earnings drivers should theoretically face different challenges. The trouble is the parent company plays an instrumental role in molding investor's sentiment around subsidiary brands. If the corporation is faced with backlash for misconduct, it would trickle down and infect the smaller business units. 

  1. Acquisition Cost

    The acquisition cost is the cost that a company recognizes on ...
  2. Mergers and Acquisitions - M&A

    Mergers and acquisitions (M&A) is a general term that refers ...
  3. Defensive Acquisition

    Defensive acquisition is a corporate finance strategy describing ...
  4. Acquisition Premium

    An acquisition premium is the difference between the estimated ...
  5. Diversification

    Diversification is the strategy of investing in a variety of ...
  6. Acquisition Accounting

    Acquisition accounting is a set of formal guidelines on reporting ...
Related Articles
  1. Investing

    3 Reasons Successful Investors Do Not Practice Diversification

    Discover why many of the most successful investors do not bother to create a diversified investment portfolio.
  2. Financial Advisor

    Concentrated Vs. Diversified Portfolios: Comparing the Pros and Cons

    Examine the relative advantages and disadvantages of utilizing either a concentrated or a diversified investment portfolio strategy.
  3. Investing

    The Importance Of Diversification

    Diversification is a technique that reduces risk by allocating investments among various financial instruments. Learn how to maximize your return without increasing substantial risk in your portfolio.
  4. Investing

    The Dangers Of Over-Diversifying Your Portfolio

    If you over-diversify your portfolio, you might not lose much, but you won't gain much either. Find out how to maintain a well-balanced set of investments.
  5. Investing

    Avoid These Portfolio Diversification Mistakes

    When diversifying a portfolio investors should avoid these common pitfalls.
  6. Insights

    How to Achieve Real Diversification in Your Portfolio

    Sometimes traditional asset allocation and diversification aren't enough to grow your investments.
  7. Investing

    Get Diversification The Easy Way With ETFs (VTI)

    Getting diversification with ETFs is easy, but investors can enhance that diversity with some extra effort.
  8. Investing

    Diversification: The Right Way to Manage Risk

    Diversifying your portfolio across multiple asset classes will help you minimize investment risk.
  9. Tech

    Top Tips for Buying a Financial Advisory Practice

    When acquiring a new financial advisory practice, make sure that your game plan avoids these acquisition missteps.
  1. Why do companies merge with or acquire other companies?

    The reasons for company mergers and acquisitions include synergy, diversification, growth, improving competition, and supply ... Read Answer >>
  2. Green Field vs. Acquisition to Enter New Country?

    A business considering new international operations must decide whether to create a new site via a green field investment, ... Read Answer >>
  3. What did Warren Buffett mean when he said, “Diversification is protection against ...

    Learn what Warren Buffett meant when he stated that diversification is for ignorant investors and does not help those who ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center