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Most Diversification Efforts Fail, Study Shows

May 7, 1987 GMT

NEW YORK (AP) _ More than half the efforts by big companies to diversify their businesses 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 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 made by 1980, 53.4 percent had been disposed of by January1987.

Some businesses got out at a profit, but ″that’s very rare,″ Porter said.

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 Inc., 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 percent of the acquisitions it made by 1980. Close behind was RCA, now a unit of General Electric Co.

General Mills spokesman Dean Belbas said the company had just completed a major restructuring and is ″strongly focused on its core businesses.″ CBS spokeswoman Anne Luzzatto said the company had no comment.

Leading the list, Johnson & Johnson, Procter & Gamble Co. and Raytheon Co. dumped just 17 percent of the acquisitions they made by 1980. Their rankings were the same when joint ventures and start-ups were counted.

Diversification succeeds when the old and new units can transfer skills back and forth or share activities, such as Philip Morris Inc.’s acquisition and improvement of Miller Brewing Co., Porter said.

Philip Morris failed with Seven-Up Co., in contrast, because it overpaid and then discovered it didn’t know anything special about the soft-drink business, he said. Seven-Up was sold last year.

Philip Morris spokesman Tom Ricke said the company had no comment.

The worst strategy is ″portfolio management,″ in which a company turns itself into a conglomerate of unrelated businesses, Porter said. The acquirer usually pays a premium price for a stock that one of its shareholders could have gotten more cheaply through a stockbroker, he said.

The wave of corporate restructuring under way now suggests that things are improving, although slowly, Porter said. ″I think managements are a little better at this than they were 10 years ago,″ he said.