In This Issue:
During the Crisis, Diversification Can Beat Spinoffs' Narrowing
Not all that long ago, so many companies were spinning off some their businesses. The aim was to be more focused and, thus, more profitable. Yet, in many cases, the hoped for post-spinoff profit improvements never materialized. And, by spinning off businesses to become more narrowly focused, companies may have lost valuable protection from downturns.
I cautioned about the spinoff trend back in 2016 when I was quoted in the US News and World Report article “Corporate Spinoffs: Tops or Topsy-Turvy?” by Lou Carlozo. I pointed out that the spinoffs so popular back then wouldn’t necessarily reignite better corporate performance. And now, during the current corona virus crisis, many sectors of the economy have been in severe downturn. Since downturns do not affect all lines of business equally, some companies find that their broader focus has helped spare them from the worst of it.
An example is PepsiCo, which is discussed in the April 29, 2020 Wall Street Journal article “Food and Snacks Help PepsiCo Offset Drop in Beverages” by Jennifer Maloney and Dave Sebastian. According to the article, PepsiCo’s beverage sales fell during the “coronavirus lockdown, as fewer people grab sodas on the go at convenience stores and gas stations” and as demand from “larger venues such as movie theatres and sports stadiums” dried up. “The decline in the company’s beverages has only been partially offset by an increase in sales of potato chips, oatmeal, and pancake mixes, as consumers eat breakfast at home and snack more during the day.”
Consistent with my cautioning about spinoffs four years ago, PepsiCo’s situation today benefits from the company’s decision not to emphasize spinoffs, as so many large corporations were doing back then. Granted, the company’s less narrow focus did not completely shield it from the current crisis, but having some lines of business that fared reasonably well during the downturn is certainly beneficial. PepsiCo wouldn’t have this advantage today if it had embraced the spinoff trend four years ago, like many other large corporations did.
Of course, this does not mean that companies should pursue a widely scattered strategy merely for possible protection from downturns. Being too scattered can bring terrible problems. But, it does mean that when there are good reasons for some degree of diversification, choosing to go for the narrowest focus often is not the best option.
A good use of diversification can be in situations where companies have branched off into related areas. Or, it could be when a company truly does have different businesses that actually fare well with cross selling, unlike the many situations where cross selling is wished for, but never materializes. Or, it could be a rather unrelated business that a company went into and ended up doing reasonably well in. Spinning these off merely for focus won’t necessarily improve things. And, when business is hurt by nasty downturns, like what happened with the corona virus, having some lines of business that are less vulnerable to decline can be a desirable plus.So, in conclusion, companies should pay attention to the pros and cons when deciding what businesses they choose to be in. New ventures where there is little chance of success should not be pursued merely for possible downturn protection. But, diversification that can work well for a company should not be abandoned merely for focus. That kind of diversification might offer valuable protection during downturns.
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