Can large companies simply buy large companies from smaller industries in order to a) get passive income and b) have alternate industries to fall back on?

Question

EDIT: And they just leave those sub companies as they are (provided they are already making profit), so the only thing that changes it that the excess profit could go to the whole company; they leave it to function the same

ALSO EDIT: Not necessarily passive income (mb) but just to expand the larger companies reach- theoretically could one country have non-negligible stakes in every major industry through this method?

Thank you all this was actually very helpful 😀

In: Economics

Answer 1

Famous fund manager Peter Lynch called this “diworsification”. It’s fairly common and when a successful company in one industry tries to apply their domain expertise to an unrelated industry it usually doesn’t work out as expected and is a drag on the original company.

Answer 2

If you are a large company and you choose to buy another company in a different industry to hedge against your own, how do you think that makes shareholders feel? Confident? This is a very bad move for the value of the original company’s stock.