For the past few years, the rule has been consolidate, consolidate, consolidate. Every time we turn around, some company has been devoured by another. In many cases, the acquired organization was assimilated, in others, it simply faded into oblivion as its new owner inhaled the intellectual property it wanted and killed the rest.
Over the past few weeks, however, we have seen turnabout. It appears that some of the acquisitive organizations may have bitten off more than they wanted to chew. Or else, the tyranny of the markets has forced them to “create shareholder value” (code for lining the pockets of investors, not serving customers, in some cases, I suspect). In either case, the result is the same: several major companies have announced that they’re splitting up, and another is selling an entire product line.
First we heard that HP is dividing into an enterprise organization and one concentrating on PCs and printing. Then Symantec decided to rediscover its core business, security, and spin its information management businesses off into a separate company, while CA Technologies spun off its popular Arcserve backup and recovery business. And eBay is turning its PayPal division into a separate company.
We have IBM divesting its x86 server business to Lenovo, which already adopted the IBM PC and has made a success of it, and we are also seeing Big Blue paying $1.5 billion to Globalfoundries to adopt IBM’s commercial semiconductor business. Yes, it is actually paying someone to take over what is, admittedly, a money-losing business.
What we will see as a result of these changes, according to business analysts, is better focus and increased shareholder value.
As companies grow, they become more complex, and complexity is harder to manage. A fast-growing business is a different beast to a slower-moving established one, and it needs to be run differently. That makes life difficult in organizations containing old and new. No one decision can serve both sides well, nor, frequently, can any one management structure. Thus, things can get messy.
In an article in Business Insider, Professor Mohanbir Sawhney of the Kellogg School of Management at Northwestern University explained that enterprises clean up their structure by splitting. That way, the parts of the business that need investment to help them grow can be managed according to their requirements, while mature businesses can be managed to achieve profits. Growth businesses, he said, are managed for future performance and will accept short-term losses for long-term gain. Investors look at the potential. Investors in mature businesses won’t tolerate this; they look at the traditional measurements like earnings multiples.
He also thinks that technology companies trying to serve both business and consumer markets face special challenges, citing HP’s example. “HP was everything under the sun,” he said in the article. “Tablets, smartphones, and PCs all the way to enterprise. The way you manage the enterprise is different: clients are different, sales cycles are different. Consumer is a fashion business. You have to have a good sense for industrial design – that’s Apple, that’s Sony.”
Separating the faster and slower growth components lets each move at its own speed, and not be held back by its other half. Separating the components by necessary management style lets each be more effective in their own markets.
Now we get to the “shareholder value” bit. I confess, the market irritates me. It overreacts to little things, and investors are prone to manipulation by shrewd but devious folks who know how to maximize their own profits, sometime to the detriment of both fellow investors and the companies in which they invest. All it takes is a whisper in the right ear, and rumours that affect investor perceptions of a company can prompt wild buying or selling, ‘adjusting’ the prices along the way.
The tyranny of the market also forces companies to think short-term, so they can satisfy investors and analysts each quarter. And even if they do meet the analyst targets, stock prices may still take a beating if investors decide it’s not enough (some make the Ferengi look like philanthropists). It’s no wonder that Michael Dell took his company private so he could think long-term without being penalized.
Nonetheless, a company split gives investors choice. They can decide to go with the hare — the faster-growing, but sometimes riskier segment — or stick with the tortoise and be content with a steady, reliable state.
At least, until we go full circle yet again.