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.  

Can Burger King Be Saved?

Business Week reports that we will have yet another change in ownership structure for Burger King.   According to the magazine, "Now, merely 18 months after the venerable Home of the Whopper was sold to buyout shop 3G Capital, it is again returning to a stock market listing by taking over the ticker of Justice Holdings, a special purpose acquisition company owned by famed activist investor William Ackman."  Meanwhile, the chain continues to struggle.  McDonald's has done a tremendous job of remaking itself over the decade and driving comparable store sales growth as a result. Wendy's has become the #2 burger chain in North America.  New players such as Chipotle and Panera have taken share, while regional burger chains such as Five Guys and In-and-Out Burger have thrived.  Internationally, McDonald's and Yum Brands have done very well, particularly in places such as China. 

What happened to Burger King?   First and foremost, I think the chain suffered from the fact that it was owned by corporate parents pursuing unrelated diversification strategies for several decades.  Pillsbury owned Burger King for many years.  Then, Diageo - the alcoholic beverage company - owned Burger King during the 1990s.  Diageo essentially treated Burger King as a cash cow to finance growth in its alcoholic beverage businesses (much like rival Allied Domecq did with its ownership of Dunkin' Donuts).   Since Burger King was not the focus of either Pillsbury or Diageo, it has not received the type of strategic focus and investment required to succeed in an increasingly competitive marketplace.    Over the past decade, it has been owned by several private equity firms, but instability in ownership has been an additional challenge - two private equity firms have owned it over the past ten years, and now we are seeing yet another ownership change.  Dunkin' Donuts, of course, also was acquired by a private equity firm when Allied Domecq finally stopped pursuing its unrelated diversification strategy.   However, in Dunkin's case, the firm thrived under private equity ownership.   A renewed focus on the business led to growth and high profits, leading to an IPO.