Is Breaking up Really So Hard to Do?

November 15, 2021

Last week saw announcements from two large multi-national corporations that they would start to break up and split off some of their core lines of business. Corporate splits and spin-offs are nothing new, but these two grabbed my attention as both companies involved (GE and Johnson & Johnson) were historically known for their stance that large conglomerates were beneficial for shareholders. They have reconsidered their view, and both companies are now planning to split into more focused, nimble operating groups. It is a trend that might be good for shareholders, as it will allow for corporate governance of each new company to better align with the goals and strategy of each.

Originally born of the merger of two electric companies in the late 1800s, GE has been a stalwart of American investing for generations. It took the initial strategy of its creation, the consolidation of smaller businesses into a powerful market competitor, and ran with it for over 100 years. Before stagnating through and after the Great Recession, GE had built an empire consisting of retail manufacturing, industrial manufacturing, financial services lending, healthcare, and media divisions. However, since then, the company has struggled with some investors blaming the disparate lines of business and the increased corporate governance this requires, and others blaming it on circumstances out of GE’s control.

Johnson & Johnson was also founded in the late 1800s and followed a similar trajectory and strategy as GE. The company used the steady cash flows of its consumer products divisions, which manufactured and sold such staples as Tylenol, Listerine, and Band-Aids, to buy up more brands before moving into the riskier but higher rewarding path of pharmaceutical research. The pharmaceutical line has since thrived and is now at the point where separate corporate governance structures may make sense.

Better governance is possibly the most significant stated reason for both of these companies’ upcoming splits. Each of the new companies, five in total, will have its own Boards of Directors, C-Suites, and management teams tailored to the demands of their unique circumstances. These splits are being positioned as a win for everyone involved, shareholders and customers alike, as more aligned governance can increase shareholder value and provide a better, more targeted product for customers.

These two announcements may not constitute the beginning of a trend just yet, but that these splits are from two of the longest-standing followers of conglomerate theory does give a striking clue as to where things may be headed. Maybe others, such as the recently announced Toshiba split, will begin to see the benefits of smaller, focused business units, meaning we may see more of these splits going forward. A world with better corporate governance should interest both investors and society alike.

Carey Blakley