Most Bids to Diversify Fail, Study Shows

More than half the efforts by big companies to diversify their business lines since 1950 have ended in failure, a “dismal” track record, according to a Harvard Business School study released Wednesday.

Companies that fail in diversification typically choose the wrong businesses, spend too much for them or ignore whether the linkages truly add anything to either side, the study says.

“The irony, of course, is the management loves (diversification),” Michael Porter, a management expert and Harvard Business School professor, said at a news conference.

The study of 33 big U.S. companies found they made 3,788 entries into new businesses through acquisitions, joint ventures or start-ups between 1950 and 1986. Of those entries made by 1980, 53.4% had been disposed of by January, 1987.

Although companies sometimes got out of the businesses at a profit, Porter said, “That’s very rare.”

Foolish diversification has created a gold mine for corporate raiders who buy a company and sell off its ill-fitting parts, Porter said. In many cases, he said, “It’s absolutely costless to break it up.”

The study is the lead article in the May-June issue of Harvard Business Review, which began reaching subscribers and newsstands this week.

Companies that dumped the biggest percentage of their new businesses generally also gave their shareholders the poorest returns, but there were exceptions, such as CBS Inc. and General Mills, Porter said.

“General Mills has made a fortune in the food industry and they’ve made a mess of everything else,” Porter said.

CBS was at the bottom of Porter’s list. By January, it had divested itself of 87% of the acquisitions it made by 1980.