The most high profile rewiring is General Electric, in decline since 2008, which announced that it is spinning off its businesses into three separate companies – Aviation, Energy and Healthcare. Toshiba, another company that has been struggling for a decade, announced that it is going to split into three as well – Infrastructure, Electronic Devices and Flash memory. Johnson and Johnson, which joined the Covid party a bit late, revealed that it is splitting into two – Healthcare and Medical Devices.
While quickly being rewarded by Wall Street with their stock prices going up after the announcement, the hard work is yet to begin. GE Energy, now without its HQ’s backing, will find itself a much smaller player in the field that Siemens dominates. Toshiba’s Flash Memory will be overwhelmed by Micron’s superiority and J&J’s Medical Devices will have its share of pure play device companies that have captured the lion’s share of the market already.
The rationale from the CEO and board of directors of these companies is that the other divisions are not synergistic anymore and as such, spinning them into separate companies allows the entities to perform better. The question is – if they were not synergistic, why were these acquisitions made in the first place? GE, for example, under Jack Welch, made acquisitions of over 1000 companies, many of which have been abject failures.
Future Wealth’s View
All of these companies, at some point, will become case studies for Harvard’s MBA program on how permanently failing organizations figured out how to close down permanently, one spin off at a time. In one of the best books written on corporate management titled “The core competency of a corporation” by Hamel and Prahlad, they state that building core competencies means investing in needed technologies, infusing needed resources and forging strategic alliances.
The powers that be at conglomerates like GE and others have construed this to mean acquiring companies are random to expand to areas that they have no business venturing into – GE, a power and aviation company till then, spent $14 billion for film and TV assets, $10 billion for a biosciences firm, tried a $45 billion acquisition of Honeywell and failed, $5 billion for a data analytics company and the list goes on.
Just as these acquisitions did nothing to make these companies stronger in their core markets, spinning off parts of their company is not going to help either. As investors, it would behoove us to understand the economics and strategic direction of these companies and their spin offs rather than be swayed by the near term uptick in their stock prices.
It is a deceptively difficult task to emerge from the depths of failure to become successful again. The CEOs will cash out and be gone soon leaving gullible investors holding the bag. Watch out!