The big got bigger for so long, they feel ready to be a little smaller again.
Call it a change in temperament, a change in focus or just a change in the tide — but the corporate impulse to grow ever larger, diversify and cross-pollinate has led to the big breakup.
The uber conglomerate GE decided to split ways with itself last month and is separating into three businesses, focusing on aviation, health care and then power and digital. When H. Lawrence Culp Jr., GE’s chairman and chief executive officer, pitched the split to investors, he argued that each company on its own would benefit from “greater focus,” “tailored capital structures” and “their own boards of directors.”
Similarly, Johnson & Johnson is separating into a consumer business and a pharmaceutical and medical-device business.
Together, GE and Johnson & Johnson sound a clear rallying call for the go-it-alone strategy that others — both in and out of fashion — have been pursuing.
VF Corp. spun off its denim business with Kontoor Brands, Victoria’s Secret and Bath & Body Works shook hands and parted company, Saks Fifth Avenue spun off its web business, Macy’s Inc. is considering the same, and more.
There’s more than just a change of corporate heart at work.
The markets are an active player in these decisions, with investors encouraging splits and looking to drill down so they can place bets on the best part of the businesses. (Saks is something of a poster child now that it’s looking to take the e-commerce business public at a big valuation — a value unlock that has activists knocking on Macy’s door).
While those are long-standing relationships that have been broken, there’s also at least a decade of dealmaking out there and some of it will have to be undone with corporate breakups.
“Post 2008, quite a few companies went on a shopping spree believing they will be able to diversify, enter new categories, accelerate growth and extract synergies,” said Michael Toure, founder and CEO of strategic advisory firm Toure Capital. “The reality is that they often overpaid for assets — synergies are difficult to extract and founders and key management talents quickly left the boat post acquisition.”
But even if they’re taking a step back now or shuffling more businesses to the public market, don’t expect the dealmakers to go away.
“Given the level of innovation and pace of growth [and] changes happening in the market today, I believe large companies do not have any other choice than to continue to be acquisitive,” Toure said. “But they will now do this through very careful and prolonged due diligence processes, more deal structuring ensuring founders and management team members stay on board and motivated for a longer period of time. And will also very often not price any of the potential synergies in the valuation proposed.”
So there’s something of a cleansing going on in the market, with big businesses selling off bits and buying up others — as was the case with VF, which followed the Kontoor spin-off with the Supreme acquisition.
But selling isn’t always something fashion does well.
“When you’re in a business that is growing, it’s really hard to assess whether that growth trajectory is going to stay or not,” said Matthew Katz, managing partner at advisory firm SSA & Co. “As businesses are growing, it’s hard for them to make a hard choice.
“As entrepreneurs, we tend to fall in love and stay in love,” Katz said.
But — just like everything else — it’s a process that is becoming smarter and more digitized.
Katz said the capital markets are becoming more sophisticated and ready to shuffle funds to where they need to be to support businesses in their various life stages.
There are better analytics that help companies drill down and understand how to get the most out of their invested capital, he said.
Underneath it all is the constant searching for something new, something better, some new growth story or brand or revelation to sell to investors, a promise to grow and grow and grow — until it’s time to sell again, then split and sell on into forever.
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