The Way The Cookie Crumbles

The Way The Cookie Crumbles

almost 5 years ago3 mins

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Standing on the shoulders of industrial giants, a slew of consumer brands have also been busy selling off business segments recently in an attempt to become more streamlined.

  • Last June, industrial titan General Electric announced plans to consciously uncouple from its healthcare and oil businesses

  • In September, Whitbread bowed to activist investor pressure to separate its hotel and coffee businesses, selling the latter to Coca-Cola for $5 billion

  • European industrial conglomerate Siemens last week announced plans to spin off its struggling gas and power unit into a new company

  • This week, Nestlé followed up the mooted sale of its cold cuts business by announcing it’d entered into negotiations to sell its skincare segment for $10 billion

  • And Walmart’s considering how best to hive off its UK grocery chain after a failed attempt to sell it to a rival

The 1960s brought about a “conglomerate boom”, where companies took advantage of low interest rates to borrow money cheaply and expand into new areas, creating corporate behemoths with several often-unrelated activities housed under a single roof. Investors’ tastes have since changed, however: they now seemingly prefer firms that do fewer things and are consequently easier to understand – and more predictable.

A more easily understood company may attract more investors, and that demand may push its stock price higher, but another reason companies are now seeking to sell off segments is activist investors. These corporate raiders amass a significant stake in a company and then exploit their position to influence a company’s strategy. Though not conglomerates in the traditional sense, consumer staples companies producing a wide range of household products have also been pressured to separate the slower-growth chaff from faster-growing wheat.

Whether a sprawling conglomerate like General Electric or simply a large company like Walmart which does similar things in different countries around the world, the aim when splitting off business segments is usually the same. Cash from a sale can be used to grow the remaining business – and/or distributed to shareholders. New investors may want in on a more streamlined company with the potential to grow profit more quickly – and fresh demand should give the company’s share price a boost.

Large companies often see their values subjected to a “conglomerate discount” – whereby the value of the whole firm falls short of the sum of its individual parts. Investors may deliberately lowball the value of the company’s assets, despite the diversification which comes with having unrelated businesses grouped together. On the other hand, some conglomerates are celebrated for their wide-ranging investments, like Japan’s SoftBank – through its $100 billion Vision Fund, it’s invested in now grown-up startups like Uber and WeWork. And Berkshire Hathaway, chaired by billionaire investor Warren Buffett, marries its insurance businesses with investments in banks, food, airlines, and tech.

In recent years, tech companies like Amazon, Alibaba, and Alphabet (plus others not starting with “A”) have expanded beyond shopping and search into autonomous cars, cloud computing, and drones – becoming larger and more complex. But their time in the sun may be short: calls are growing louder for companies like Facebook to be broken up in a bid to limit their influence. In media, however, firms like Disney grow ever larger: having already acquired 21st Century Fox, it’s now taken full control of Netflix streaming rival Hulu.

On Thursday, Goldman Sachs announced a rare acquisition: it spent $750 million on United Capital Financial, a digitally focused wealth manager. The bank may hope this helps it to attract younger customers – including, perhaps, those with pockets lined by the initial public offerings of companies like Uber, Lyft, and Pinterest. That’s a strategy rival Morgan Stanley employed in February with its purchase of Solium Capital.

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