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Why giant companies are suddenly splitting into pieces

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Why giant companies are suddenly splitting into pieces

Breaking up is the newest craze for ginormous global companies. Johnson & Johnson, Toshiba and GE announced plans to split into multiple entities this week. The trend may have only just begun.

Conglomerates are big and unwieldy. Wall Street hates them, because it doesn’t know how to value them properly. CEOs and corporate boards are finally getting the message: Nimble is the new big.

J&J’s (JNJ) split into two companies — one for its consumer products and another for its drugs and medical devices — is the latest shakeup in the health care sector. Many other Big Pharma companies, including Pfizer (PFE), Merck (MRK) and GlaxoSmithKline (GSK), have either already spun off large divisions in the past few years or have plans to do so.

Investors are willing to pay a higher price for rapidly growing drug, biotech and medical equipment businesses than generics and brand-name consumer products. Shares of J&J were up nearly 2% in early trading Friday.

But, as the Toshiba (TOSBF) and GE (GE) splits show, corporate divorces aren’t limited to health care.

“For survival and keeping up with market trends, companies do have to look at what their most profitable lines of business are and where they should spend most of their time and focus,” said Liz Young, head of investment strategy at SoFi, in an interview with CNN Business.

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“Competition is fierce. Sometimes you have to break it down to build it back up,” Young added.

Wave of big firms breaking up

Large companies around the world in a variety of sectors are finding religion in getting smaller.

Tech giant Dell (DELL) recently spun off its cloud business VMWare (VMW) into a fully separate company. Retailer L Brands has broken apart into two firms: Bath & Body Works and Victoria’s Secret.

IBM (IBM) has spun out its information technology services unit into a new company dubbed Kyndryl. As a result, Kyndryl now has more flexibility to do joint ventures with IBM cloud rivals. For example, Kyndryl announced a deal with Microsoft (MSFT) on Friday.

“We have new freedom to go to the market. We can continue to serve IBM customers but can also expand partnerships with other tech providers,” said Kyndryl chief financial officer David Wyshner in an interview with CNN Business earlier this month.

Other companies may find that spinning off divisions will give them greater autonomy to forge business relationships that may have not made as much strategic sense as part of a colossal conglomerate.

But spinoffs and asset sales are also a way for companies to reverse decisions that investors weren’t thrilled with in the first place.

Take telecom giants Verizon (VZ) and AT&T (T), the owner of CNN Business parent WarnerMedia, for example.

Both stocks have lagged the broader market for the past few years, in part because of sluggish revenue and profit growth but also out of concern that the two companies strayed too far from their core wireless businesses by making splashy media deals.

Verizon bought AOL and Yahoo and combined them into a unit that it first branded as Oath and then renamed Verizon Media. The acquisition never really paid off. Verizon sold the media division to private equity titan Apollo (APO) for $5 billion in September and is retaining just a 10% stake in it.

And AT&T is planning to spin off WarnerMedia and merge it with cable and streaming giant Discovery (DISCA). The deal, expected to close in the middle of 2022, will create a new company named Warner Bros. Discovery.

Source: cnn
Via: norvanreports
Tags: Merck (MRK) and GlaxoSmithKline (GSK)MicrosoftPfizer (PFE)ToshibaWhy giant companies are suddenly splitting into pieces
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