Non-core acquisitions

Sometimes the management of a company will come under fire from its shareholders for a policy of "non-core acquisitions."

The idea is that a company should "stick to its knitting," should do what it does best. If a company has been successful in the past in the "core" area, then it has an edge there -- not just the initial success itself, but the institutional know-how built up over time, and the fact that suppliers and customers in that field have both presumably grown accustomed to its face.

There is another thought behind the complaint about "non-core acquisitions." This is the idea that "we, the stockholders don't pay you, the managers, to diversify our portfolios for us. We'll do that for ourselves."

Let's get back to the point at which we left the matter yesterday. Presumably, if I've just bought stock in Comcast, it is because I wanted some exposure in my portfolio to the risk-reward profile found historically in the type of business I know Comcast to be in. If I also want something safe (or something more risky but promising) in there, I'll also buy that. It impedes my ability to get the balance I want if the managers of the particular stocks involved are shifting their own profile.

Now we can move forward a step. I can't say I have much sympathy with this sort of complaint. After all, managers are also often criticized for failing to diversify. Suppose Blockbusters had stuck doggedly to its brick-and-mortar stores (its "core assets") and ignored the fact that the technology for movie-purchase was changing on them. They'd be defunct. But they did anticipate the change and diversify in time, doing "non-core" things in the process, which is why they're a tenable company today. Of course, along the way they made a few false steps, such as a deal with Enron but ... hey ... that's show biz.

My point then is simply that the core/non-core distinction is not itself very useful, and that when we find it being invoked, we should try to look more closely at what is really at stake.