3 Stocks That Have Suffered from Diworsification
These 3 companies have attempted to diversify and failed.
In his famous book ‘One Up on Wall Street’, Fidelity fund manager Peter Lynch describes diworsification as the expansion of a company into an expensive industry that they don’t fully understand.
“Instead of buying back shares or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. This ensures that losses will be maximized.”
As a long-term buy and hold investor, it can be difficult to decide when to sell your position in a company. One important signal that it may be time to sell, however, is when a company diworsifies.
When a company in your portfolio decides to acquire a new business, investors should always be wary. Is this acquisition a seemingly natural way to grow the business further or are they trying to enter a space of which they have a poor understanding of?
These 3 companies have suffered from diworsification in the past by getting involved in overpriced businesses they don’t understand.
Gillette (NYSE: PG), a company known almost solely for their razor blades and shaving creams, went on a spree of diworsifications in the 20th century. Throughout the course of the company’s life, Gillette has diworsified into everything from blenders to digital watches.
In the ‘50s and ’60s, Gillette’s market share dropped from 75% to 60% due to competition from companies such as Eversharp and American Safety Razor. In 1964, Vincent C. Ziegler became the president of Gillette and the business was restructured to be ‘a diversified consumer products company’.
Gillette then began acquiring unrelated companies and launched new product lines including hair-coloring products, shampoos, perfumes and electronics such as digital watches, smoke alarms, and calculators. While some of these products were moderately successful, the majority of these expansions turned into failed diworsifications – who remembers Gillette digital watches?
After the retirement of Ziegler in the mid-1970’s, Gillette began selling the failing business segments and investing in their promising products. Today, Gillette focuses on their shaving line but still face significant threats from competitors. Gillette’s market share now stands at 54%, down from 70% in 2010 due to companies such as Unilever’s (AMS: UNA) immensely popular Dollar Shave Club.
Colgate-Palmolive (NYSE: CL) was founded in 1806 by William Colgate as a candle and soap manufacturer. It wasn’t until 1873 that Colgate began selling the toothpaste that it is now known for.
While a series of early acquisitions led Colgate-Palmolive to be successful, it began struggling in the 1970s as sales began to decline. CEO David Foster decided to expand further, acquiring Riviana foods, producer of long-grain rice, hot dogs, candy and pet food. This proved to be a terrible branding decision for Colgate-Palmolive as the food products were now associated with toothpaste and detergent.
In 1979, Foster resigned and the failing acquisitions were sold off. Just like Gillette, Colgate-Palmolive began focusing on what they were most notably known for. Unfortunately, significant damage had already been done and restructuring attempts were followed with the closing of plants and hundreds of layoffs.
These changes proved to be beneficial for long-term investors. Between 1970 and 1980, share prices fell 6%. However, in the next decade, the stock grew almost 400%, highlighting just how damaging diworsification can be to a company.
Unlike Gillette and Colgate-Palmolive, Coca-Cola (NYSE: KO) were able to diworsify into an unfamiliar industry and leave before things turned sour.
The slowdown of the soft drinks industry from 10% to 3% in 1982 led to Coca-Cola wanting to diversify beyond Coke. In a move which confused both the media and analysts, on June 22nd, 1982, Coca Cola purchased Columbia Pictures for $750 million. This deal was brought on by the CEO of Coca-Cola at the time, Robert Goizueta.
Fortunately for Coca-Cola, they only owned the company for 7 years, selling Columbia Pictures to Sony in 1989 for $3.2 billion — a substantial profit.
Peter Sealey, a Coke executive, was able to learn a lot by working in Hollywood. After working with Columbia Pictures, he returned to Coca-Cola and led their future marketing campaigns, transferring the skills of film making to advertising. Sealey’s ‘Always Coca-Cola’ campaign in the early 90’s became one of Coke’s most popular advertisements to date.
Although this diworsification could have been disastrous for investors, it proved to be lucky in the long run as stock prices grew 667% from 1982 to 1989.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Coca-Cola, Colgate-Palmolive and Gillette. Read our full disclosure policy here.