In his 1995 book Diversification, Refocusing, and Economic Performance, economist Constantinos C Markides argued that companies are more likely to streamline if they are underperforming rivals in specific business lines.
More than two decades later, that pressure remains. Consider Unilever (ULVR). It managed to evade the pursuit of US rival Kraft Heinz for a variety of reasons, as we discussed in February, but the question of shareholder value was thrown into sharp relief.
In 2016, Unilever generated an underlying operating profit margin of 9.7 per cent in home care (think Cif cleaning products), 9.9 per cent in refreshment (Magnums and the like), 17.9 per cent in foods (Hellman's) and 19.1 per cent in personal care (Dove). That's quite a range.
Only that foods margin was lower year on year due, in part, to higher overheads. Thus bosses have decided to sell its spreads business (which includes Flora), and to combine food and refreshments in a bid to expand margins more quickly. Interestingly, the company said it would review its dual-corporation legal structure - it has both a UK plc and a Dutch equivalent - which it said added complexity to making such changes. Bosses wish to achieve "greater simplification and strategic flexibility".
Reckitt Benckiser (RB.) is also reviewing its food business, which includes French's mustard and ketchup. When it came to reporting, the consumer goods major had already been splitting food from its core product lines relating to health, hygiene and the home. The sell-off might be a surprise given the adjusted operating margin of 28.7 per cent in 2016, but that also fell by 50 basis points last year, and Reckitt has bigger fish to fry with its Mead Johnson acquisition, which puts the turbo boosters under its consumer health turnover and its emerging markets exposure.
Moving to the media sector, UBM (UBM) is a great example of corporate refocusing. Founded by David Lloyd George in 1918 as United Newspapers, it spent most of the previous century building up its newspaper and PR operations; but that strategy didn't last. The company has since refocused on its events business, culminating in the sale of its PR Newswire business in 2016.
Shareholders that received a 55.3p special dividend won't have been complaining, and the company's share price rose more than a third last year, after managing double-digit growth in 2015. But doesn't that leave the company less diversified, and more vulnerable to wobbles in the global economy?
I asked chief executive Tim Cobbold precisely that in an interview last month for our Boardroom Talk podcast series. "The additional value we create by being focused outweighs any, shall we say, risk diversification," he told me. "Often, shareholders are better placed to choose how to diversify their risk than businesses." His job, as Mr Cobbold sees it, is to protect shareholders as much as possible from the inherent cyclicality of the events business. In practice, that means getting the right geographic and sectoral spread and concentrating on larger events that have previously proved more robust through the cycle.
It is a matter of academic debate whether diversification helps a company to outperform. Business synergies - both revenue and cost - and the other benefits of scale are common justifications for diversifying acquisitions. But the short-term merits of refocusing can be just as attractive, as the UBM example demonstrates. Also, we should note BHP Billiton's (BLT) decision to put some of its onshore US drilling acreage under review, after pressure from activist Elliott Management.
For the longer-term investor, management teams will need to be clear about how corporate actions taken now are defending the value of the business over the longer term.
