You’ve heard the cry break up the banks, haven’t you? Politicians like Senator Elizabeth Warren of Massachusetts continue to press the argument that our global banks are too large, too diversified, and too complex to continue in their present forms.
If that’s what they assert about the global banks, though, what would they say about our global technology companies? Just last week, the telecommunications giant Verizon bought internet pioneer AOL for $4.4 billion. And at roughly the same time, Facebook announced its entry into the business of publishing original news stories.
Why are firms like General Electric and Citigroup shedding their non-core businesses and shrinking down to their core competencies, while others like Verizon and Facebook expand aggressively beyond their fundamental services? Most proponents of expansionary strategies offer the justification that seemingly unrelated businesses can be aggregated in order to recognize underlying synergies.
On the other hand, the potential for synergies was the driving force behind AOL’s ill-fated merger with Time Warner. That 2001 transaction, executed just ahead of the bursting of the millennium era technology bubble, is often judged to be one of the worst merger decisions in business history.
So how are firms to know when diversification is a sound strategy? And how are they to judge when it is a foolhardy one?
There’s never a foolproof way to know the answers to such questions with absolute certainty. Nevertheless, it’s easy to understand why Verizon believes that it can strengthen the revenue potential of its telecommunications backbone by integrating AOL’s online advertising function. And, likewise, it’s a cinch to envision Facebook expanding its online market share by leveraging its existing platform to publish news stories.
Conversely, it’s difficult to envision how GE’s ownership of NBC Television could have helped it sell more jet engines. And it’s hard to argue that Citigroup’s ownership of a Japanese retail bank network could have helped it expand in the United States.
So, at least in retrospect, we appear to be quite capable of differentiating between sound and foolhardy expansion strategies. Regrettably, though, it appears to be far more difficult to proactively foresee such results.