Big may not be so beautiful after all?
We’ve previously written blogs about how big, certainly when it comes to companies, is beautiful. Controlling the pipeline by vertical integration, diversifying into other areas and spreading risk, and not having all of your business eggs in one geographical basket is generally seen to be a good thing. So why are we increasingly seeing businesses focussing on their core markets – and looking to sell off anything considered more peripheral?
In part, it may be down to the current climate. The first rumbles of recession are likely to make markets grow a little more risk averse, and recently we have seen companies pulling their operations back into alignment. Continuing uncertainty over war in Ukraine is also making financial markets nervous.
Those specific concerns apart, diversification can often cause one to focus on the new shiny business and forget what enabled you to buy it in the first place. And there is often a lack of parity between different parts of a business. If you are trading at 6x in part A, and 12x in the rest of the business, then the moneymen will have a clear view about what should happen.
Which brings us neatly to big groups famed for their breadth of business like, say, Fresenius. There’s a clear intention there to have a much more laser-like focus on the core (pharma, hospital) business to the detriment (and likely sale) of the rest. Divestment, or at the very least bringing in co-investors, will follow.
Fresenius isn’t alone here. Vivanta, Spain’s third largest dental group by revenue, rebranded to focus on its core dental activities, with the company divesting its aesthetics division, and changing its name to Vivantadental.
Big US managed care company Centene conducted a strategic review at the end of last year, concluding that “international” was “non-core” and explaining that if assets didn’t complement Centene’s strengths in “Medicare, Medicaid and the marketplace… if it doesn’t fit, it doesn’t stay” – an interesting comment given that Circle Health in the UK and Grupo Ribera Salud in Spain have revenue of over $2bn.
Big may be beautiful, but sometimes leaner is meaner – and likely to be worth more if you get it right.
We would welcome your thoughts on this story. Email your views to Kirsty Withams or call 0207 183 3779.
