Just read two fantastic articles on diversification – companies diversifying into other businesses.
My few cents here…
What makes understanding a conglomerate difficult is that – there are not only multiple businesses – but multiple sectors involved
When multiple sectors get involved, then various moving parts come to play which makes it difficult to get hold on to the biz model
Each sector could be of different types – stable and predictable, cyclical, govt and policies dependent, forex fluctuation or crude dependent etc., etc.,
Then comes the management – each business’ management has to be analysed separately in light of the related sectors.
Then comes the valuation – SOTP valuation – each business has to be valued separately / DCFed, arrive at a number and compare with market cap.
But, I think unrelated diversification is the problem.
For ex, When a pharma company gets into real estate Or, an infrastructure company venturing into specialty chemicals business could possibly seen as a problem.
But, what about related diversification?
I don’t think that would be much of a problem
For ex, a paint company moving to varnishes, adhesives etc., a hospital business getting into medical devices or chain of medical stores business, a hotel business getting into online travel agency etc.,
Such companies can be comparatively easier to analyse and understand and value.
Amazon is one example who was into both unrelated and related business and successful in both
Related – Online selling of books and moved to selling anything online – core ecommerce biz model like, buy – store – sell (or) aggregator
Unrelated – AWS/Cloud, Devops tools, Primevideo, Tablets, Kindle, Alexa, Music etc.,
Even in investing, many great investors have suggested concentrated portfolio & within circle of competence. That is, diversify only within your circle of competence – the easier way to do this is to keep our circle of competence in related sectors and to diversify into those for investing.
Comments are welcome…