There have been two trends dominating the shape of the corporate landscape in the past decade: On the one hand, large publicly listed corporations have been urged by investors to focus their activities and divest unrelated businesses blaming diversification of the corporate business portfolio for performance deficits when compared to single-business benchmarks. On the other hand, private equity firms have been experiencing tremendous growth rates with a single value proposition to its investors – superior return – disregarding and even taking advantage of focus movements of corporations.
On the side of public corporations, there has hardly been any topic as high on a CEO’s agenda as the level of diversification and scope of businesses the company is active in. After decades of conglomerate merger activity and dominance of broadly diversified companies, an increasing professionalism of capital markets and their investors has led to pressure on unrelated multi-business firms. Diversified firms are blamed for cross-subsidizing negative NPV projects, destroying value instead of realizing synergies with their corporate centers, as well as less robust incentive, performance management, and control mechanisms than single-business firms (Koltes, 2005; Smolka, 2006). Markets are therefore quicker than ever to discount the valuations of diversified companies.