Dejouanys Strategy over CGE - Essay Example

 Dejouany’s Strategy over CGE A film is said to be diversified if it produces goods for numerous markets. When Dejouany took over CGE, it was primarily a water utility Company that was also involved in waste treatment. However Dejouany’s strategy was to diversify the activities of the Company from the core utility business by utilizing the cash resources it possessed in order to acquire franchises in other businesses such as real estate, health care and telecommunications. Diversification from the managerial entrenchment viewpoint, is undertaken by managers who diversify specifically through acquisition, mainly for reasons of increasing their financial compensation, their job security or to extend the span of their control.(Amihud et al, 1981). This may be seen to apply in the case of Dejouany, who capitalized on the huge cash flows that were generated by the near monopoly the Company enjoyed in the water business in order to create a vast portfolio of businesses, relying upon managerial synergies in order to derive financial advantages from new market enterprises. Dejouany’s management style was not so highly decentralized that it allowed decision making at lower levels. Rather it follows the multi divisional structure, where the division of labor is created between the top managers and division managers, such that it is the division managers who focus on the operational details of the functional departments, while the top managers are able to concentrate on strategic decisions and long range planning.(Videndi).Dejouany selected quality people who were well versed in the developing opportunities in a particular area of business, investing cash into those cash strapped businesses in order that the Company could benefit overall from the potentials inherent in those markets. In pursing his goals of diversification of CGE from a primarily water based business into a diversified entity which dealt with real estate and health care among other businesses, Dejouany followed the internal capital market model of diversification. The diversification of CGE was undertaken in order to make use of the internal capital market. Since CGE was a cash rich business, with vast cash resources accruing from its monopoly in the water business, it was able to enter into various type of agreements with cash strapped businesses for mutual benefit. One kind of agreement the Company entered into were affermage agreements where it did not have to invest cash but merely managed the assets of municipalities’ water supplies. However, when it diversified into other cash strapped countries, its cash rich resources helped it to own as well as manage the assets of water and waste water facilities, through concession agreements. In terms of other businesses that were non water related, the Company functioned on the basis of creation of subsidiaries, by combining its own cash rich resources with those of the cash strapped businesses, since the lack of venture capital and the weak capital market in France provided a unique advantage to the cash rich GCE to capitalize on the opportunity to acquire ownership in such Companies which had a profitable product to sell but did not have the necessary operational cash to make it succeed. Hence through a combination of resources, CGE was able to create a vast number of subsidiaries in various business areas and generate more profits through the sales brought about by those subsidiaries, in which CGE held an interest. The increase in the cross shareholdings of CGE reveals a similar diversification model, where the Company took advantage of the weak capital market in order to acquire shares in profitable, cash strapped companies through an increase in the number of its portfolio investments. However, in the 1990s, the Company diversification activity produced a detrimental effect on the Company. This was largely due to a slow reversal of CGE’s cash rich position of the 1970s and 80s. As a result of its large levels of cash investments in a vast umbrella of different enterprises, the extent of the Company’s debt worsened and its rate of return on the capital it had invested was below par. A large portion of its investments were in real estate but with high interest rates, the returns on investment were not sound. With increasing levels of recession, the real estate market in which CGE had invested heavily, also crashed in 1991, generating further losses for the Company, which was also coupled with a scandal in the water business which not only affected the reputation of the firm, but was so severe that it threatened the very economic stability of the firm. The two most severe problems that led to CGE’s problems were therefore a resulting cash crisis, as well as the reputation for corruption, which affected the Company’s reputation in the marketplace and had a detrimental effect on its profits. With the crunch in available cash, CGE was place din a position where it had spread itself too thin and was faced with a shortage of cash to carry on its operational expenses and to manage the losses from the real estate market crash. The Company was also incurring huge expenses in start up costs for its telecommunications business and had to function in a difficult economic environment while also maintaining its high employment levels. All of these reasons created CGE’s 1990 problems. When Jean-Marie Messier took charge of the Company, one of his first steps was to focus upon reversing the corruption stained image of the Company, he made it clear that the new policy of the Company would be to lose a contract rather than engage in receipt of illegal payments. His policy of diversification was that it would be effective only in those areas where the Company enjoyed economies of scope among businesses that were related to its core business in terms of technologies or markets (Vivendi). As a result, he entered into a policy of disinvestment. The factor that propelled Messier’s move towards disinvestment was the high debt equity ratio of 155%, as a result of which the Company urgently needed to reduce its leverage. He not only sold off those assets that he considered peripheral in so far as the core business of the Company was concerned, while also reducing CGE’s portfolio investments in shareholdings of other companies. His policy of diversification centered upon entering into strategic alliances with cash rich partners in order to supplement the cash resources of the firm and reduce its debts. Another aspect of his strategy was to restructure the Company from its previous broad base of subsidiaries into a series of mergers in order to consolidate the various subsidiaries that formed a part of CGE, so that all subsidiaries operating a similar kind of business became consolidated into a single entity in order to save on resources and assets and to streamline operations and make them more efficient. Hence, Messier’s decentralization policy was based upon consolidation and mergers rather than the creation of multiple subsidiaries. References: * Amihud, Yahov and Baruch, Lev, 1981. “Risk reduction as a managerial motive for conglomerate merger.” Bell Journal of Economics, 12. * Vivendi. “Diversification” Read More