Big conglomerates split up to make way for small businesses – The Ticker


A new trend among many of the world’s largest companies is emerging as several conglomerates have announced plans to split into smaller companies in an effort to increase shareholder value.

The idea is that the separate pieces of these companies will be worth more than the company as a whole.

Within a week, Johnson & Johnson, General Electric Co. and Toshiba Corp. announced their intention to split into smaller firms, indicating that investors are starting to favor smaller, more streamlined firms over large conglomerates.

The split of a company does not guarantee a positive outcome for the shareholders.

AT&T Inc. bought Time Warner after a bitter battle with the Justice Department, only to do away with the company three years later, when Warner Media was worth $ 60 billion less than when it was originally purchased. The spin-off forced AT&T to cut dividends, marking an unsuccessful business split.

Toshiba could follow suit, with the decision to split the company largely driven by increased pressure from activist shareholders after years of scandal and mismanagement. The company’s stock price hasn’t performed particularly well either, leaving little reason to assume that the parts of the company will do better than the company as a whole. The split-up of a conglomerate does not translate into losses for shareholders either.

“Corporate splits typically occur in one of two situations,” said Michael Farr, president and CEO of investment firm Farr, Miller & Washington. “In the first, investors feel that there is not enough symbiosis between the disparate divisions. In the second, investors feel that the value of a company is not properly recognized by the market.

Farr believes the second case applies in the case of Johnson & Johnson’s decision to go their separate ways.

Johnson & Johnson has announced its split into two separate publicly traded companies. The part of the business dedicated to its pharmaceutical and medical devices division, which has been booming since the launch of its COVID-19 vaccine, will be the business that the company will retain. Its spinoff will include its mainstream brands including Band-Aid bandages, Tylenol pain relievers and Johnson baby products.

Johnson & Johnson announced that the separation of consumer goods would allow better allocation of resources and help the company make smarter decisions. The new stand-alone consumer company would focus on growing its brands.

GE is a good example of Farr’s number one reason for corporate splits.

GE will split into three publicly traded companies for its aviation, healthcare and energy businesses. Prior to the split announcement, GE would have had 13 individual operating segments at its peak in 2003. After the announcement, GE shares jumped as much as 17% in pre-market trading.

“By creating three industry-leading global public companies, each can benefit from greater focus, tailored capital allocation and strategic flexibility to generate long-term growth and value for clients. , investors and employees, ”CEO Larry Culp said in a press release. .

Although many large companies have started to separate for a variety of reasons, conglomerates are not going anywhere. On the contrary, the break-up of companies like GE essentially marks the new wave of conglomerates: Big Tech.

Companies like Apple Inc., Amazon.com Inc., and Microsoft Corp. mark a new wave of Big Tech conglomerates. Unlike GE, these companies are not defined by the limited scope of significant capital and effective management practices. They already have these elements. Instead, what sets them apart is the way these companies handle the flow of data.

The disparate activities within Johnson & Johnson, GE and Toshiba are irrelevant to each other. Their data is isolated from other business units, preventing the business from moving forward as a whole.

Big Tech companies have mastered the ability to operate multiple business lines ensuring that every unit of their business benefits from shared data.

Shareholders are not convinced that companies like Johnson & Johnson and GE will operate the same. However, splitting up these companies can ensure more focused management and reduce bureaucratic expenses.


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