You often hear about companies merging, through acquisitions or mergers, but the reverse also happens. Listed funds then continue with only one or two activities. They then sell the rest or put it on the stock exchange separately. So they get smaller.
This has been happening more often lately, as recently at General Electric. At the beginning of this century, this conglomerate was still the most valuable company on the stock exchange, now it wants to divide itself into three separate companies.
Companies in the Netherlands are also splitting up. For example, DSM only wants to continue with activities that focus on nutrition and health. The branch that makes strong fibres, among other things, may be sold.
Philips and Ahold Delhaize
Philips previously decided to focus on building medical devices. That’s quite different from the huge conglomerate it once was, which under light bulbs made televisions, computers, chips and telephone exchanges.
And last week, Ahold Delhaize announced that it wanted to sell part of the shares of Bol.com on the stock exchange.
“It is a wave, sometimes there are more splits, later companies take over more,” says Ralph Wessels, head of investment strategy at ABN Amro. In the 1970s and 1980s, conglomerates that were active in many fields were fashionable and now they are no longer, adds RTL Z trade fair commentator Durk Veenstra.
Wessels thinks that companies splitting off parts now can lead to them clumping together again later. According to him, there is a chance that Bol.com and Coolblue will eventually merge to counterbalance Amazon.
The idea behind a conglomerate is that if things aren’t going well in one sector, you can make up for it with the performance of activities in other sectors, he says. “But if you focus, you can work more efficiently,” says Wessels.
If you have several divisions that can share certain cost items – so-called synergy benefits – then the sum of these parts may be worth more than the parts individually.
If those synergy benefits are not there, then the individual companies are actually worth more than if they are together in one group, he explains.
Investors want to cash in the value that is in such a conglomerate, but that is not coming out now, by breaking it up.
Investing in parts that run well
Managers are not always eager to split up their companies, according to Wessels. After all, if you are the CEO of a larger company, you are more respected and you may be able to ask for a higher salary.
But there is some rationale in the idea of splitting up, he thinks. For example, companies more often split up if there are very clear trends that you can respond to as a company, such as sustainability or an aging population, he says.
Philips, for example, sees the greatest benefit in medical devices. “As a company, you better invest your money in parts that you think will do much better.”
Not good at everything
“You cannot dominate in everything, management’s attention is limited,” adds Professor Henk Volberda, professor of strategy & innovation at the University of Amsterdam.
“When companies are active in different areas, they become a kind of investment company, where the management invests in the different divisions,” he explains.
And, according to him, shareholders hate that, because then the profitable parts pay for the loss-making divisions. “They want clarity about where they invest and they don’t want management deciding where the money goes,” Volberda said.
‘Only money counts’
“Shareholders are different from management. They are not interested in whether Philips or General Electric will still exist in a hundred years, they are only interested in returns,” said Volberda.
“From the point of view of the company itself, it is not always desirable to split up. For example, it can be attractive for Shell to invest the revenues from oil and gas in renewable energy, instead of splitting them, as activist shareholder Third Point wants,” said the professor.
old vs. new economy
It is striking that it is companies from the ‘old economy’ that are splitting up, says Volberda. “Everything that ‘new economy’ companies like Amazon and Alphabet touch now turns to gold. Amazon is now very successful with cloud services too. But as they become established companies and face more competition in all areas, then perhaps they too will one day be split up.”
According to Volberda, there is a big difference that tech companies may be less likely to split than the conglomerates that are now or have already done so.
He takes Philips as an example, when the now independent lamp division Signify was still part of the company. Customers who bought a lamp did not automatically purchase medical devices from Philips, Volberda explains.
Tech companies are specialized in binding users with different services by linking data. Once you have an Apple phone, you are quickly inclined to also take matching earplugs, streaming and cloud services from the company, because that is so easy.