Diversification Decision and Spin-Off Decision. Expansion Cycles and Focus Cycles: Retrospective Analysis of Evidence in the Bavaria Case

DOI:  https://doi.org/10.12804/revistas.urosario.edu.co/empresa/a.6649

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Published: Oct 24, 2018
Issue: Vol. 21 No. 36 (2019)
Section Articles


Keywords: Business groups unrelated diversification scission internal capital markets

Main Article Content

Authors

  Hernan Herrera-Eceheverri
Universidad Eafit

Abstract

This proposal uses the case of Grupo Empresarial Bavaria to analyze three aspects of the unrelated diversification and the spin off process. First, it is established that firms with business units characterized by cash excess, start unrelated diversification processes, because internal capital market allows them to bring down their funding constraints and increase corporate profitability. Second, we demonstrate that the diversification decision of a corporate manager is inversely proportional to the magnitude of the expected cost by the effort dilution of the manager of the new business unit. And finally, it is shown that unrelated diversification has a limit on their contribution to increased corporate profitability, in which case it may induce the decision to spin off for delimit, specialize and improve the quality of allocation decisions resources. This explains why some corporative groups present focus cycles and diversification cycles. When the economic group wants to increase the profitability starts a diversification process, once the threshold is overtaken, the probability of success in their investment decisions is reduced, then the focus process begins again by separating unrelated units. This cycle can be repeated in the historical development of a business group.

Author Biography

Hernan Herrera-Eceheverri, Universidad Eafit

Hernan Herrera-Echeverri:  Is a Professor at Universidad EAFIT in the area of Corporate Finance.Director of the Master in Financial Administration (MAF) at Universidad EAFIT in Medellin. He is Ph.D in Management, Finance concentration at Universidad de los Andes, Bogota, Colombia and visiting researcher at FIU (Florida International University) United States. He received his Master in Management at Universidad de los Andes. He is Specialist in Finance at Universidad EAFIT in Medellin-Colombia and Specialist in project management at Universidad Javeriana, Cali, Colombia. He graduated in System Engineering from the Universidad San Buenaventura de Colombia. He has been board member of several firms in Colombia. His research interests are related to topics in corporate finance, private equity, venture capital and corporate governance.

How to Cite
Herrera-Eceheverri, H. (2018). Diversification Decision and Spin-Off Decision. Expansion Cycles and Focus Cycles: Retrospective Analysis of Evidence in the Bavaria Case. Revista Universidad Y Empresa, 21(36), 228–260. https://doi.org/10.12804/revistas.urosario.edu.co/empresa/a.6649
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