This is being done in the name of “shareholder value,” which is Wall Street-speak for “a higher stock price.” The theory is that the separate pieces of these mega companies will be worth more than the undivided company would be if it stayed together.
There’s no way to tell if these split-ups will work out better for shareholders than keeping the companies together. It’s all being done on faith.
Let’s look briefly at the one breakup that has been completed: IBM’s spinoff of its managed services provider business, which now calls itself Kyndryl. (No, that’s not a typo.) When last I looked, Kyndryl stock was down about 30 percent from what it fetched on Nov. 4, when it first started trading. Not encouraging.
I’ve got no way of knowing how the three pending split-ups will do, if only because parts of them won’t be completed until 2023.
Toshiba, which is breaking up under pressure from shareholder activists, hasn’t done particularly well in the stock market. I don’t see any particular reason Toshiba’s pieces would do better than the whole.
J&J is betting that its two separate pieces — the consumer business that it’s spinning off and the drugs and medical devices businesses that it’s keeping — will carry higher price-to-earnings ratios than the whole company does now.
But the breakup won’t be completed for 18 to 24 months, according to the company’s announced timetable. Good luck on predicting the earnings and P/E ratios that consumer products companies and pharmaceutical companies will have in 2023.
The one company that I bet will be successful in splitting is GE. I say that because I have a lot of confidence in its chief executive, Larry Culp, whose deft dealmaking helped lead the successful transformation of Danaher Corp. (in which I own a significant stake) from a reasonably successful manufacturing conglomerate into a highly successful health care conglomerate.
Culp was named GE’s chief executive three years ago, six months after being asked to join the firm’s board of directors. Unlike the heads of the three other companies that we’re discussing, Culp is an outsider. Which in the case of GE, is a good thing.
Here’s why. Under the 20-year regime of the late Jack Welch, GE grew chaotically, becoming a giant industrial company, a giant financial company and a pretty big media company. Welch preached the virtues of centralized control and centralized finance — the opposite of today’s breakup approach.
GE was the most highly-valued company in America for a good part of the 1990s, and people flocked to study its financial and management techniques.
Welch, who stepped down in 2001 and died last year, was regarded as a genius for assembling a huge group of unrelated businesses and hitting his earnings targets almost every quarter. Fortune magazine named him manager of the century in 1999.
When Welch’s handpicked successor, Jeff Immelt, tried to rationalize the company, problems began to surface. In the financial panic of 2008 and 2009, GE needed both a costly $3 billion infusion from Warren Buffett’s Berkshire Hathaway and federal guarantees on part of its debt to stay afloat.
Culp had become an enormously successful manager by stressing lean management, low overhead and smart dealmaking, yet even he couldn’t fix GE’s swollen bureaucracy and operational problems.
I suspect that the three separate pieces will do better than GE would have done by continuing to hobble along — but as I said, there’s no way to tell.
When I started looking into these four breakups, I noticed several other good examples of business moves that were popular and looked terrific on paper but didn’t work out in practice.
Take AT&T, which decided three years ago to add programming to its distribution business and become a big-time player in the streaming universe.
It shelled out $102 billion to buy Time Warner, whose shareholders at the time included me. Oops. AT&T is dumping what it now calls WarnerMedia into a new company and will end up with about $60 billion less than it paid. That, in turn, will force AT&T to cut its dividend next year, inflicting serious damage on retail investors who depended on it for reliable and ever-growing dividend income.
Then there’s Zillow, which seemed to be surfing a popular trend by buying and selling thousands of houses as U.S. home prices were rising by double digits. Although Zillow talked a great game, it couldn’t execute. It recently dumped its home-flipping business and took about $800 million in losses.
Given how close we are to Thanksgiving, I could trot out additional examples of what I’d call “business turkeys” if the cliche didn’t make some people wince.
But by now, I hope, you’ve gotten the point. You should look at companies one by one rather than buying into the buzz du jour. And you should also remember that today’s trend can be tomorrow’s trash.
And regardless of whether you agree with a single word that I’ve written here: I wish you and yours a happy Thanksgiving.
Disclosure: I own a significant stake in Johnson & Johnson and plan to keep both parts of the new J&J. I have a small stake in General Electric and will probably sell the two nonaviation parts that the company spins off and put the proceeds into GE Aviation, which Larry Culp is slated to run. I haven’t owned AT&T stock since June 2018, when I sold the shares I got in exchange for my Time Warner stock.