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