When Unnecessary Diversification Leads to a Company’s Downfall.

What is the fuss?

Starting a company is exciting—new learnings, new customers, and the magic of seeing revenue grow and profits multiply.

And then, hopefully, one day, an IPO. New responsibility to shareholders. Growth might plateau. Then what?

At this stage, many companies diversify. Some diversify into businesses that have synergies with the core business of the company.

Some diversification is geographical, where the same business model is replicated in a new location/country.

And then comes some unnecessary diversification. The one that doesn’t seem logical, stems from hobbies or side interests of the promoters and, more often than not, leads to the downrating or downfall of the company.

In this post, I give three examples of unnecessary diversification that led to a short-term or medium-term strain in a listed company, learnings from this, and a framework to distinguish good vs risky diversification.

Let’s get started.

1. Packaging company Enters Pet Care Business

What?

Why would anyone do this?