What is a 'Diversified Company'

A diversified company is a company that has multiple, unrelated businesses. Unrelated businesses are those which:

  • Require unique management expertise.
  • Have different end customers.
  • Produce different products or provide different services.

One of the benefits of being a diversified company is that it buffers a business from dramatic fluctuations in any one industry sector. However, this model is also less likely to enable stockholders to realize significant gains or losses because it is not singularly focused on one business.

BREAKING DOWN 'Diversified Company'

Companies may become diversified by entering into new businesses on its own, by merging with another company or by acquiring a company operating in another field or service sector. One of the challenges facing diversified companies is the need to maintain a strong strategic focus to produce solid financial returns for shareholders instead of diluting corporate value through ill-conceived acquisitions or expansions.

Example of a Diversified Company

Some of the historically best-known diversified companies are General Electric, 3M, Sara Lee and Motorola. European diversified companies include Siemens and Bayer; diversified Asian companies include Hitachi, Toshiba, and Sanyo Electric.

The general idea behind "diversifying" is the spread or smoothly of financial, operational, or geographic risk concentrations. Financial markets generally focus on two sources of risk: unique or firm-specific risk and the other, systemic or market risk. According to capital market theory, only market risk is rewarded, because a rational investor always has the opportunity to diversify, hence eliminating unique or idiosyncratic risk

Knowing investors vary capital costs based on risk-return profiles, businesses often use a strategy to diversify themselves from within. Critics can point to entities growing for the sake of growth under the guise of diversification. Bigger businesses generally pay executives more, enjoy more press, and can fall prey to entrenchment and status quo. Whereas one observer might see diversification; another may see bloat.

The best management teams can balance the alluring desires of business diversification with the practical pitfalls of growth and the challenges it brings with it.

RELATED TERMS
  1. Diversified Carry Basket

    A diversified carry basket uses diversification to reduce a trader's ...
  2. Company Risk

    Company risk is the financial uncertainty faced by an investor ...
  3. Diversification

    Diversification is the strategy of investing in a variety of ...
  4. Idiosyncratic Risk

    Idiosyncratic risk refers to factors that impact a particular ...
  5. Specific Risk

    Specific risk is a risk that affects a minimal number of assets, ...
  6. Foreign Fund

    A foreign fund is a fund that invests in companies outside the ...
Related Articles
  1. Investing

    Understand Risk Before You Diversify

    Before investors can use diversification to maximize investment returns, they need to understand unsystematic risk and systematic risk.
  2. Investing

    The Importance Of Diversification

    Diversification is a technique that reduces risk by allocating investments among various financial instruments. Learn how to maximize your return without increasing substantial risk in your portfolio.
  3. Investing

    How to Diversify Your Portfolio Beyond Stocks

    Find out how to get diversified in asset classes beyond stocks to reduce portfolio risk. Learn how diversification can help you reach your financial goals.
  4. Personal Finance

    Diversifying Equity Compensation: 6 Considerations

    Six considerations to take into account when attempting to diversify your equity compensation.
  5. Managing Wealth

    Introduction To Bond Investing

    Learn how you can create a diversified portfolio with bonds.
  6. Investing

    The Dangers Of Over-Diversifying Your Portfolio

    If you over-diversify your portfolio, you might not lose much, but you won't gain much either. Find out how to maintain a well-balanced set of investments.
  7. Investing

    When Geographic Diversification Fails

    Geographic diversification is becoming an ineffective investing strategy, but there are others that pay off in the long term.
  8. Managing Wealth

    Why and How to Diversify Beyond Asset Class

    Diversification is a must for investment portfolios but it isn't enough. Investors have to have different exposures within asset classes.
  9. Investing

    6 Types of Diversification for Your Portfolio

    Here are six forms of diversification you should include in your portfolio.
  10. Investing

    How to Diversify With a Style-Based Approach

    Investors who want a truly diversified portfolio should also consider diversifying by style.
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center