Diversification is driven by a simple economic logic: that the company entering the new business can earn a better return on its investment than the market rate of return (on the cash and stock it has used to diversify) in the long term.
From that perspective, Vedanta Resources Plc’s offer to pay up to $9.6 billion (Rs.44,928 crore) for a majority stake in the Indian assets of Cairn Energy doesn’t really look like a good diversification.
Vedanta’s deal-in- the-making—it will remain that till the Indian government blesses it—will also likely rank among the largest acquisitions by a non-financial investor in a company in an entirely unrelated business.
And so this will remain one of those deals where the seller’s decision—the choice of Greenland over India to prospect for oil— is understandable, but the buyer’s, inexplicable. And so it will remain until Vedanta proves most analysts wrong.