Big conglomerates split apart to make way for small companies


ClearCutLtd |

Omar Sinani

A new trend among many of the world’s largest companies is emerging as several conglomerates have announced their plans to break apart 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.

Over the span of a week, Johnson & Johnson, General Electric Co. and Toshiba Corp. announced their plans to split into smaller companies, indicating that investors are beginning to value smaller, more streamlined companies over larger conglomerates.

Breaking apart a company does not guarantee a positive outcome for shareholders.

AT&T Inc. purchased Time Warner after a strenuous battle with the Department Of Justice, only to spin the company out three years later as Warner Media became worth $60 billion dollars less than in its initial purchase. The spinoff resulted in AT&T being forced to cut its dividends, marking an unsuccessful corporate split.

Toshiba may follow suit as the company’s move to split was largely motivated by increased pressure from activist shareholders after years of scandal and mismanagement. The company’s stock price has not been doing particularly well either, leaving little reason for one to assume that the company’s pieces will do any better than the company as a whole. A conglomerate splitting apart does not translate to shareholder losses either.

“Corporate splits usually occur under one of two situations,” Michael Farr, the president and CEO of the Farr, Miller & Washington investment firm, said. “In the first, investors feel there isn’t enough symbiosis among the disparate divisions. In the second investors feel that a company’s value isn’t being properly recognized by the market.”

Farr believes that the second case applies in the case of Johnson & Johnson’s decision to split.

Johnson & Johnson announced that it will split into two separate publicly traded companies. The portion of the company dedicated to its pharmaceutical and medical-devices division, which has been thriving since the launch of its COVID-19 vaccine, will be the business that the company will keep. Its spinoff will consist of its consumer brands, including Band-Aid bandages, Tylenol pain relievers and Johnson’s baby products.

Johnson & Johnson announced that the split from consumer goods would allow for a better allocation of resources and help the company make more tailored decisions. The new stand-alone consumer company would focus on growing its brands.

GE is a good example of Farr’s first reason for the corporate splits.

GE will split up into three publicly traded companies for its aviation, healthcare and  energy businesses. Before the split was announced, GE had reportedly 13 individual operating segments at its peak in 2003. After the announcement, GE’s shares surged up to 17% in premarket trading.

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

Though many large companies have begun splitting up for various reasons, conglomerates are not going anywhere. Rather, the breaking up of companies like GE essentially marks the new wave of conglomerates: Big Tech.

Companies like Apple Inc., Inc. and Microsoft Corp. mark a new wave of Big Tech conglomerates. Unlike GE, these companies are not defined by the limited scope of large capital and effective management practices. They already possess these elements. Instead, what distinguishes them is the way in which these companies manage data flow.

The disparate businesses within Johnson & Johnson, GE and Toshiba have no significance to one another. Their data is isolated from the other units of the company, which prevents the company from advancing as a whole.

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

Shareholders are not confident that companies like Johnson & Johnson and GE will operate the same way. However, splitting such companies may ensure a more focused management and cut down on bureaucratic expenses.