They say that Breaking up is … Profitable to do?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Corporate breakups seem to be all the rage these days. In order to unlock shareholder value, corporations will divide into separate companies. Since Fortune Brands decided to break up its liquor and home furnishings & security businesses into two separate companies, both have flourished. The liquor business, Beam (NYSE: BEAM), is up 40% since the breakup. The home furnishings & security business, Fortune Brands Home & Security (NYSE: FBHS), is up an even more impressive 85%. During that same period, the S&P 500 is up only 13%.
News Corp (NASDAQ: NWS) is another company that recently announced a planned corporate split. This breakup will see the company’s newspaper and book publishing operations under one roof, while its movie, TV and other media assets will operate separately. Due to this breakup news, News Corp is currently making a series of new 52-week highs.
Why did Fortune Brands go down this road? And why are News Corp and many others deciding to do the same?
Dr. Loren Lee, Ph.D. of Harvard University, argues that there are five stages to the typical breakup. Dr. Steve Duck, Ph.D. of the University of Iowa says there are six stages. Obviously neither of these professors were talking about corporate breakups, which is what I will attempt to do. Using my admittedly limited knowledge of their work in the field of psychology, I will completely butcher the work of these two fine, learned individuals in order to make their psychological models fit my very tortured analogy, in what will surely be described as an absolute travesty. Many apologies in advance to Processors Lee and Duck for what I am about to do.
I now present to you the Five Stages of Corporate Breakup:
First Stage: Dissatisfaction
One or both divisions of a company are dissatisfied with the current state of the corporate relationship. They may not be ready to admit it to each other, and they certainly aren’t ready to admit it to their little shareholders. But though they refuse to admit the problems staring them in the face, there is definitely trouble in this corporate household.
The faster-growing division is experiencing discontent, feeling held back, constrained, stifled by its slow-growing division. Likewise, the slower-growing division is resentful toward its faster-growing partner. Sure, it is growing faster, but at what cost? It is reckless. It is taking too many risks. Risks that the slower, but more stable, division isn’t comfortable taking.
Second Stage: Exposure
Both divisions finally come clean with each other. They admit that this corporate relationship is no longer working. Neither is happy with the current arrangement. Admitting this is never easy. Is the breakup your fault or the other’s fault? Maybe it is both. Maybe it is neither. Maybe it is due to circumstances out of your control. Maybe you’ve just naturally grown apart over the years. Whatever the reason, the two divisions have decided that they are better off on their own. But what about the shareholders?! Won’t someone please think of the shareholders?!
Third Stage: Negotiation and Compromise
With their problems laid out on the table, out in the open, these two divisions need to figure out how to fairly divide up the combined assets of this corporate household, as well as decide on a custody agreement for the shareholders. After careful discussions, both divisions eventually agree to what is the most equitable solution.
The faster-growing division will take with it the growth-minded investors, as well as the higher price to earnings multiple that comes along with it. The growth-minded investors always loved their cool faster-growing division. The slower-growing, more stable division will take with it the higher dividend yield, as well as the income-seeking investors that know how to appreciate a good dividend yield. The income-seeking investors will never take the slow-growing division for granted. No siree!
Fourth Stage: Going Public
With the negotiations complete, resulting in a fair and amicable agreement, it is time to let the public know. The two divisions need to gently explain the situation to their shareholders. Reassure the shareholders that the two divisions still love them very much.
Both divisions are happy with the arrangement they’ve made. They are ready to say their final goodbyes. It may have been a rocky ride at the end, but both will still have the memories of all the profits they made. No one can take that away from them. No one.
Fifth Stage: Rediscovering Self-Worth
With the break-up complete, it is time for these two divisions, now separate companies, to see what they can accomplish on their own. Time to discover their own strengths and weaknesses with the other gone. And time for shareholders to properly value the contributions these two companies make to their portfolios. It might not be easy at first. There might be some stumbles along the way. But ultimately, both of them -- both of them and their shareholders -- will be all the better for it.
Good luck, my little companies. Godspeed.
(This has to be one of the strangest things I’ve ever written)
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