The effects of the financial crisis of 2008 still reverberate, eight years on. The collapse of one tumbling global bank brought down the entire financial system worldwide. With the nasty turndown, investors started betting on companies that were Too Big to Fail. Regardless of the fact that a business was stagnant and wasn’t galloping briskly, investors found solace in those large numbers, for them bigger the sales better the scenario. Thereupon, in 2011, when Hewlett-Packard suddenly proposed a plan to split the company into two, shareholders discouraged it. To them, by separating HP’s PC unit from its enterprise products and services appeared as a gamble that could leave both its units susceptible to market swings. The proposal was put off, and the CEO who proposed the split was immediately fired.
A few years later, things have taken a 180-degree turn. Stock market investors today are risking on companies that have a narrowly focused vision. Too many units in a company are tantamount to a greater chance for dispersed distraction for management. Today, activist investors are enthusiastic to take little stakes in large companies and call for splits, expecting profits to follow.
When HP revived its 2011 plans of breaking up the company into two, shareholders celebrated the split with good cheers, HP’s stock skyrocketed and nobody questioned its plans! HP is ushering itself towards a new trend set by technology companies in Silicon Valley, including eBay and IBM. By adhering to investor’s ravenousness for simplicity, the older much bigger HP is leaving behind ripples of spinoffs and divestitures revamping Silicon Valley that has just yet started. Chris Ventresca, co-head of global mergers and acquisitions at JPMorgan Chase explains that during the financial crisis investor’s honored size, sales and diversity in terms of business units. Today, investors are more confident in companies that are robust with a narrow focus, regardless of its numbers and diversity.
Bowing to activist investor Carl C. Icahn, eBay in October, reported that it would split its PayPal units into a separate publicly traded company. The move comes after eBay’s sale of Skype to Microsoft a few years ago. IBM, on the other hand, has regularly cast off units that were no longer a fit for its strategy.
In 2014, it sold off its low-end server business to Lenovo, the Chinese company that had previously acquired IBM’s personal computer business. Recently some analysts also called for Microsoft breaking up into different companies focusing on software, video games, and search.
Two Is Better Than One
According to the numbers from a recent study conducted by the University of North Carolina’s Kenan-Flager Business School, spinning off equals increased financial strength and shareholder value. It was founded that shares of North American conglomerates were outperformed by recently spun off rivals by an average of 11.4 percent in last decade. It was also found that within three months of companies announcing their split, shares outperformed rivals by more than 6 percent. The overall change in the attitude of investors is now prompting turmoil that goes beyond the technology industry. A whirlwind of spinoffs and divestitures has reshaped the media business too. Similarly, more and more private equity firms are now willing to gain good business, and investors are stocking up good will in new companies with a narrow focus. Companies vulnerable to losses have wider choices when it comes to selling off units.
Time Warner trimmed down to the core, spinning off its TV and movie studio group. Lately, it has also spun off AOL, Time Warner Cable, and Time Inc. News Corporation owned by Rupert Murdoch was breaking up in two, with the new company today known as 21st Century Fox. Gannett, publisher of USA today also announced similar plans to casting off its newspaper units to focus only on TV operations. Industrial companies are also trimming down. DuPont split into two after being pressurized from activist investor Nelson Peltz. Dow Chemical was under pressure from activist investor Daniel S. Loeb, although it keeps on stripping off smaller businesses. General Electric sold its appliance business and spun off its retail finance unit.
Pharmaceutical companies, Procter & Gamble and Abbott Laboratories too have spun off in recent months. It was the HP split that got the most attention and left other companies driving into an upheaval.
HP was established 75 years ago, when two Stanford University students, William Hewlett and David Packard, started making sound equipments in a garage. The company turned into the biggest producer of PCs on the planet, a dominant supplier of printers and ink and a huge supplier of servers, programming and supplies for different organizations. In 2011, when Meg Whitman was anointed CEO after the fizzled residency of Léo Apotheker, she got her hands on a troubled company that was vulnerable to more mammoth losses and needed streamlined focus. This is the case with most large corporations in Silicon Valley today. Companies have balance sheets that have degraded to the point of losing their legacy and thus are, susceptible to intense pressure from investors for streamlining their portfolio. For such companies spinning off a business unit into a company doesn’t necessarily mean a secure future and profitable outcomes. Investors of such spun off companies don’t get to enjoy big numbers as they previously did during the financial crisis. While the trends of splitting off doesn’t promise taking away all of their troubles, it does give a glimpse into a future where things are more transparent and easier to handle. An incredibly smart and amazing move, it surely guarantees to boost companies back on their competitive levels that they once enjoyed.
