Why are Big Companies Splitting Themselves Up Again?

    

It’s happening again. After years of mergers, acquisitions, and strategies of mega-revenue growth wesplit-business are seeing a trend again of large companies deciding to break themselves up or spin out certain businesses. General Electric, J&J, and Toshiba are the latest joining DuPont, Merck, Pfizer, Dell, L Brands, IBM, and many others over the last year. 

 

During the past few weeks, this phenomenon has been the #1 topic of discussion in many of our global Business Acumen programs so I am happy to share in this blog some of the primary reasons why this is happening and what it all means.

 

(For transparency, Advantexe works with several of these companies and the information shared in this blog presents learning lessons and reveals no inside or confidential information.)

 

Basically, there is a very easy answer to understanding this all: big conglomerates are big, unwieldy, slow, and can suck up a lot of cash with the hope that someday there is a big reward in terms of growth or appreciation of value. Wall Street hates these mega-corporations because they don’t know how to value them and it’s hard to understand what levers to pull to drive results and increase value. As a result, Corporate Boards are taking action and thinking differently. Smaller and nimble is now the new big.

 

Advantexe works with many different types of pharmaceutical companies and the industry is going through rapid transformation. J&J is splitting into two companies, one for drugs and medical devices, and one for just consumer products. Other companies like Merck have spun out business units that no longer fit the corporate strategy but can thrive with their own leadership and strategy. The fact is that investors are willing to pay higher prices for clean, simple, fast-growing businesses rather than businesses with balanced portfolios of older drugs and traditional therapeutic categories that are steady but not very sexy.

 

“Unlocking Value”

 

For many of the readers of this blog who have been through an Advantexe business simulation, you will remember that point in time when you asked the question, “If we have different business units, can we have different strategies.” The common Advantexe answer is that you can do whatever you want, but the data shows that the more successful companies like Tesla, Apple, Walmart, Amazon, and the Ritz-Carlton all have one unique value proposition that transcends all their businesses. The big idea of a spin-off is to give a business the ability to have its own unique value proposition and target customers with a crisp and clear message of how the company will meet the needs of its customers.

 

The financial math of these spinouts is very straightforward. Let’s consider Conglomerate X. Conglomerate X has a market capitalization of $6 billion. It’s been flat and unfocused for a number of years because there are two business units with different strategies. One is a Product Leader and the other is an Operationally Efficient low-price player. Conglomerate X decides to break up into two brand new businesses, one that will be totally focused on innovation and product leadership and the other a low-cost operationally excellent play. Shareholders decide to keep their stock in both companies split. When they split, the Innovative company is worth $4 billion, and the low-cost company is worth $2 billion. But because they can focus, the innovative company grows quicker and increased its value by 25% to $5 billion and the low-cost company accelerates its revenues and grows its value by 20% to $2.4 billion. The total value of both companies is now $7.4 billion which is up 23% in a year which is most likely a lot more than if it hadn’t split. Over time, those values will continue to accelerate because the new companies can remain focused on their strategy. This is called unlocking value!

 

What does it mean to me?

 

Big changes like spinning out your business can be terrifying. What does the future hold? Will I still have a job? Will there be new leadership? These are all reasonable and logical questions.

What I can share based on years of experience working with and training people who end up in a new company after a spin-out is that it can present fantastic opportunities for growth. New jobs, new markets, new customers can become the catalyst for new personal opportunities.

 

I was speaking with a friend who had spent more than 20 years in her version of Conglomerate X and in her case her business unit was spun out and then purchased by another company that had a similar strategy. She shared how amazing the experience has been to have complete alignment around strategy and support of budgets when executing. And already in just 3 months since the deal was consummated the stock price is up more than 15%.

 

In summary, big companies who split themselves up are making smart strategic decisions that create true economic value for employees, investors, and especially customers who benefit from increased focus.

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Robert Brodo

About The Author

Robert Brodo is co-founder of Advantexe. He has more than 20 years of training and business simulation experience.