Companies will take breakup pitch too far in 2022



NEW YORK (Reuters Breakingviews) - Old-guard companies are at risk of dismemberment. With titans like General Electric or Toshiba breaking up, bankers will try to run the same playbook in 2022 for technology, energy and automotive firms transitioning their businesses. They should remember that casting out their best shots at staying relevant is a very different proposition from carving up the disparate pieces of an industrial conglomerate.

GE, Japanese giant Toshiba and healthcare firm Johnson & Johnson were at the forefront of a renaissance in corporate splits in 2021, all opting to spin off various units. The theory is that, by allowing their unrelated businesses to stand apart, they can be more efficiently – and more richly – valued by the market.

It seems like an easy enough trick to replicate. A car company primarily making gas-guzzlers could spin out its electric vehicle efforts to win a Tesla-like multiple. An oil company might separate clean energy operations. Or a chip firm with profitable designs should step away from the vast investments required to be a leading manufacturer.

These ideas have all been floated for automaker General Motors, oil major Royal Dutch Shell and chip kingpin Intel, which need to spend big to remodel their legacy business. Spinning out new initiatives might be tempting, especially for those whose profitability is crimped by all that spending. Intel’s shares fell 12% when it said its profits would take a hit as it invests in manufacturing. GM predicts its electric cars will only become as profitable as gas-powered cars in 2030.

But while GE’s healthcare team probably didn’t need a jet engine business under the same roof, GM’s car efforts benefit from integration. The company expects to save up to $30 billion in spending on the path to becoming fully electric by reusing existing equipment and upgrading its current plants, rather than starting from scratch. Intel’s cash flows are the lifeblood of its chip plants. And spinoffs are not a guaranteed winner: DuPont’s spins collectively trade at a lower market cap than the old combined company.

Nonetheless, some of these firms are already testing the waters, like Intel which in December said it would look to list its auto-oriented unit Mobileye. When taking meetings with bankers in 2022, it and others should be wary of offers to separate from the rest of the family jewels.

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(This is a Breakingviews prediction for 2022. To see more of our predictions, click here


- On Nov. 9, General Electric said that it would separate into three public companies by spinning off its healthcare division in 2023 and its renewable energy and power division in 2024, leaving a company focused on jet engines.

- Subsequently, on Nov. 12, both Japanese conglomerate Toshiba and U.S. healthcare company Johnson & Johnson announced that they would spin off business units. Toshiba will separate its energy and infrastructure business and its devices and storage business into standalone companies, while Johnson & Johnson will split its consumer health business from its pharmaceutical business.

(Editing by Lauren Silva Laughlin, Sharon Lam and Karen Kwok)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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