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MARKET COMMENT
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There are two schools of thought regarding diversification. (There always are when it comes to any theory on management.) Firstly, we have those who believe that a company should stick rigidly to its core business. Diversification, according these management gurus, distracts management and, even worse, dilutes financial resources away from key profit generators. On the other hand, there are others who promote diversification as a means of reducing company specific risk. The theory of having your fingers in many pies has worked well for quite a number of companies. It would, for instance, take a very brave man to suggest to Jean-Pierre Garnier, chief executive of GlaxoSmithKline (LSE: GSK)(NYSE: GSK), that the company should divest its interest in Lucozade and Aquafresh. It would allow the pharmaceutical company to focus solely on prescription medicines and its competitors have taken just such an approach. Pfizer (NYSE: PFE), for example, recently sold its sweeties business to Cadbury Schweppes (LSE: CBRY) and also got rid of its shaving operation, Shick, to Energizer Holdings. Today, two FTSE 100 companies, with obvious non-core operations, reported results. Associated British Foods (LSE: ABF), the purveyor of Twinings teas and the bakers of Kingsmill bread, posted an 8% rise in sales and a 13% hike in underlying pre-tax profit for the full year. Those are impressive performance figures for, what is normally regarded as a staid and mature food producer. However, one cannot help but feel that perhaps Primark, the company's cut-price clothing chain, is somewhat out of place within the group. The unit accounts for 15% of total turnover and about a fifth of operating profit. It was one of the largest discount clothing retailers in the UK. GUS (LSE: GUS), formerly Great Universal Stores, is almost synonymous with home shopping. How many of us have not at some time thumbed through either an Argos or Additions catalogue. Apart from Argos, it is also involved in the DIY sector through its Homebase operation. Yet, despite its obvious strength in retail, which accounts for some 73% of group sales, it still hangs on to Experian, a major player in consumer credit information. GUS was brave enough to cut Burberry (LSE: BRBY) loose last year, and perhaps it is now time to let Experian go it alone too. Spin-offs can free up surplus funds that can be returned to shareholders. Buying shares in a company in the hope of benefiting from a spin-off is never a strong enough a reason to invest. However, in the case of Associated British Foods and GUS, the underlying businesses are strong and any spin-off would be a welcome bonus. The writer own shares in GlaxoSmithKline.