While Many Firms Focus, Sony Doubles Down on Diversification

Source: Bloomberg

In recent years, many companies in highly developed economies have chosen to divest unrelated business units. Many break-ups of conglomerates have occurred, including at major firms such as GE, United Technologies, Fortune Brands, and Danaher. However, the Wall Street Journal reports today that Sony has chosen to move in the opposite direction. The newspaper states that, "Sony said it planned to buy the portion of its financial unit that it doesn’t own for about ¥400 billion ($3.7 billion), highlighting the electronics maker’s strategy of keeping a diverse portfolio of businesses."  That business unit includes life insurance, auto insurance, and banking products and services.   

Over the past few years, Sony has faced pressure from an activist investor, hedge fund Third Point LLC, that has argued for a breakup of the conglomerate.   Third Point has made the case that mixing video games and other electronics businesses with financial products and services does not make economic sense. Sony Chief Executive Kenichiro Yoshida has countered that owning the financial units enables Sony to diversify risk effectively, and that the financial units benefit from the trusted brand name and reputation for quality that Sony has established in various electronics businesses.   Interestingly, these types of arguments tend to be rejected by investors in the United States, but Sony's investors seemed enthusiastic about Yoshida's decision to double down on the finance businesses.  Sony's share price rose on the news that the firm had rejected Third Point's proposal and chosen to purchase the remainder of the finance unit that it did not already own. 

This decision strikes me as a powerful example of how unrelated diversification is viewed quite differently in various regions of the world.   Academic research has clearly shown that unrelated diversifiers may not make much sense in countries such as the UK, Canada, or the United States. However, HBS Professor Tarun Khanna and others have argued that markets are not as efficient, and key institutions that act as information intermediaries are not as well-established, in countries such as India and China.  In other words, the institutional context matters.  In an influential article for Harvard Business Review many years ago, Khanna and his colleague, Krishna Palepu, argued that Japan appears to a middle ground... not quite India or China in terms of institutional context, but not the same as the US and other western nations either.   They argued that unrelated diversifiers have many disadvantages in western nations and many advantages in countries such as India.  Japan appeared to be a case where conglomerates had some advantages, though not nearly as many as in emerging economies such as India and China.  It seems that investors believe that this situational assessment may still hold today, more than twenty years later.  That's one way, at least, to interpret the investor reaction to the Sony news this week.   Institutional context, it appears, may evolve very slowly amidst the otherwise rapid pace of change and globalization.