In the following post, D’Amore-McKim School of Business Associate Professor Samina Karim talks about the trend of company splits and lessons learned from these strategic business decisions.
Recently it seems that the news is abuzz with the announcement of several significant company splits. But even as these firms are breaking up, still other firms are embarking on some of their biggest acquisitions – and no, these are not ‘mergers’, that’s a term we see in press releases to make the target organization feel better. Neither acquisitions nor splits are new; but executives should learn from them by observing these firms’ evolution and rationale for strategic change, since both acquisitions and splits have associated costs and involve significant integration and de-integration efforts.
In the past year alone, we’ve seen the announcement of some of the biggest acquisitions to date. Dell’s acquisition of EMC for $67B is the largest all-technology acquisition so far, about double of HP’s 2001 acquisition of Compaq. Johnson and Johnson, which has been highly acquisition active for decades, just made its largest acquisition of Synthes for $21B. And there are so many more, Foxconn to buy Sharp, Activision Blizzard just completing its purchase of King Digital Entertainment, etc. All of these are dwarfed by AB InBev as it moves to acquire SAB Miller for over $100B to become a global brewing behemoth.
Each of these acquisitions beefs up some existing businesses but also expands into new areas. Through EMC, Dell will gain VMware and move beyond its server business further into enterprise solutions with data storage, virtualization software, digital security software, and cloud computing. By buying Synthes, J&J wants to bolster its DePuy division and solidify its position as the market leader for orthopedic surgical devices. Foxconn will gain supplier bargaining power over Apple by gaining Sharp’s advanced screen technology. Activision Blizzard is finally in the mobile gaming market with King Digital’s highly addictive Candy Crush Saga (oops… am I revealing too much?). AB Inbev continues to be a conglomerate of brands (which is not uncommon… think Volkswagen and LVMH) but will now foray into Africa, a huge potential market. All of this sounds great, doesn’t it? Of course the answer is yes, if – and there’s a big IF when it comes to acquisitions – the planned restructuring and integration are successful and the projected market advantages actually come to fruition.
On the flip side, we’re observing experienced firms that are choosing to become smaller and more focused. The media refers to these strategic moves by a variety of names, including divestitures, spinoffs, or splits. Whatever terminology you want to use – they each signify situations in which the firm’s leadership believe they would create more value by separating portions of the organization from one another. We can learn from a few recent examples as they are splitting under different circumstances and for different reasons.
First, let’s think about food. There are clearly different food preferences around the world – but some things are universal: kids like snacks. In a bold split back in 2012, Kraft split into Mondelēz International and Kraft Foods Group; the former runs the global snack business (i.e. Oreos… yum) while the latter focuses on popular domestic brands such as Kraft cheese products and Jell-O. So Kraft’s rationale was to create more value by dividing across geographies and their respective popular brands, isolate the brands that are US-centric and pitch everything else to the global market that often gobbles up (excuse the pun) Western brands. Other firms, such as Alcoa, announced last November that it plans to split along its value chain, keeping upstream, commoditized aluminum operations with the Alcoa name and moving downstream businesses in aerospace and automotive industries into a yet-to-be-named spinoff. Alcoa executives gave a rationale for isolating the company’s profitable parts; this means the firm is hoping to create market value by being more transparent about which businesses are profitable versus not.
This logic should sound familiar when we consider recent technology splits. As consumer/personal systems (involving computing, printing, and storing) become more generic, firms are trying to grow, unfettered, their more lucrative enterprise service businesses. This led to Hewlett-Packard’s split last Fall into HP Inc. and Hewlett Packard Enterprise, the former manages personal systems whereas the latter oversees enterprise and financial services and software. Xerox just announced earlier this year that it, too, would split after four straight years of declining profits and sales. Similar to HP, Xerox will have one firm run the document technology business and another firm run business process outsourcing. Both these examples highlight splitting legacy hardware businesses from more profitable service-based business models.
The market – and the firms judged by the market – certainly care about profitability but also weigh risk, uncertainty, and the pace of change into the equation of expected returns. For example, even in the cases of HP and Xerox we see that the service landscape is changing quickly as enterprise clients seek cloud-based services and cognitive computing services. Several other recent splits also distinguish between businesses that are more dynamic and uncertain than others. Abbot Labs split in 2013 and separated this risk for investors by creating AbbVie, which pursues new drug discovery and invests in more R&D versus its less uncertain endeavors such as medical devices, diagnostics and nutritional products which remain under Abbott. We’ve seen media conglomerates do something similar as they split their legacy publishing businesses from the digital and Internet based businesses. News Corp split in 2013 by keeping its print publishing arm (which includes the Wall Street Journal) under the legacy name, and forming 21st Century Fox as the digital media company that would manage the more dynamic film and television markets which are facing fast-paced competition in content creation and delivery. Gannett Company followed suit in 2015, keeping its publishing news arm (which includes USA Today) under the existing name, and creating TEGNA Inc. as a broadcasting and digital company that oversees TV channels and internet businesses such as Cars.com.
From these examples we can observe several different rationale for splitting corporations into smaller, focused firms. By separating risky businesses from less risky ones, the former corporation provides two different investment opportunities for investors, letting investors self-select based on their own risk tolerance. Being focused also makes the financial numbers more transparent; this is usually associated with accountability and clarity around decisions made (or not made – which is just as important, folks!) and their outcomes. Lastly, and perhaps most importantly, having focus impacts how a firm can change (i.e. its flexibility, or options of what it can do) and how fast a firm can change (i.e. its agility). Smaller, focused firms, can limit executives’ attention landscape and simplify decision-making processes.
These potential outcomes of splitting look great in writing, similar to the justifications for acquisition mentioned above. The real issue going forward is whether firms will be successful reconfiguring their organizations to meet both internal design challenges and external industry challenges. For acquirers, they will need to internally integrate (to varying extents) the target into the parent organization and its way of doing things. This involves understanding what was bought and why. Though some targets may initially be promised autonomy, it is a difficult promise to uphold as decision rights ultimately fall to the parent firm. The corporations that are splitting face a different task; they need to de-integrate (i.e., disentangle, separate, unembed – wait, is that a even a word?) assets, people, processes, and workflow. This gets especially complicated for those with internal capital markets and shared functional groups (e.g. IT systems). On the external front, acquirers should have strategies for their continuing businesses (e.g. establishing economies of scale, product proliferation) and embrace different strategies for their new business areas (e.g. service-based models and different value chains). The challenge for those splitting will be to identify opportunities and actually execute flexibility and agility to gain a competitive advantage against rivals. Not surprisingly, some of these focused firms will pursue an acquisition-heavy strategy and be tempted to grow. Executives at these spinoffs should be wise about choosing focused growth and not diversifying back into their pre-split legacy firms, leading them back full circle from whence they started (oy vey!).
So here is some unsolicited advice for these newly split organizations: remember why you split in the first place, try to hold on to the benefits that come from splitting, and use acquisitions (sparingly) to grow judiciously.