Thursday, March 15, 2012

Should Pepsi Divest Frito Lay?

As many of my readers know, I am often skeptical of diversification strategies. I prefer focused firms that place their undivided attention on one business. However, I do believe that many investors and analysts react in a knee-jerk fashion when a firm's share price lags - they quickly recommend a break-up or divestiture. They think this move will magically increase the share price. While such moves often do increase shareholder value, they don't always create value.

Recently, some investors and analysts have called for Pepsi to divest Frito Lay. However, it does not appear to me that Pepsi's recent struggles are primarily due to a poor diversification strategy. I don't see Pepsi investing in unrelated businesses with no synergies. I see them struggling to deal with the changing beverage market, and I see them failing to maintain the strength of their core brands whose growth has stalled. Still, I don't think divesting Frito Lay magically solves those problems. Breakup is not an elixir. For investors and analysts, it's an easy, ready made solution... While it may add value in many cases, it shouldn't be viewed as the answer in every case where stock price slumps.

No comments: