Opinion

Why are conglomerates breaking up?

N Madhavan | Updated on: Nov 15, 2021
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Are break-ups on the rise?

Yes. They are. Hold on! We are not talking of splitsville among couples but in the corporate world. In the last week, multiple conglomerates across the world have announced that they would be splitting up their businesses. On Tuesday, 129-year-old US industrial powerhouse General Electric (GE) said that it will split into three companies.

A few days later, on Friday, Japanese conglomerate Toshiba Corporation, founded in 1875, unveiled plans to break-up into three companies. On the same day, 135-year-old healthcare major Johnson & Johnson declared that it would be separating its consumer products and pharmaceutical businesses.

What is happening in GE?

GE, after years on contemplation, finally decided to split its business into three — each focusing on aviation, healthcare and energy.

The healthcare business will be spun-off in 2023 and energy unit by early 2024. The current company will focus just on aviation.

How is Toshiba being split?

Toshiba has chosen to split its business into three. Energy and infrastructure division will be hived-off into one company while its hard disk and power semiconductor business will be housed in another.

The third company will manage its other assets including the stake in flash memory chip company Kioxia Holdings.

What about Johnson & Johnson?

Johnson & Johnson has chosen to break-up its consumer products and pharmaceutical and medical device businesses and house them in separate companies.

The pharmaceutical and medical device business, which manufactures and sells prescription drugs including the Covid vaccine, will retain the Johnson & Johnson name. It will also retain advanced technologies like artificial intelligence and robotics. The company is yet to identify a name for the consumer products entity which will own brands such as Band-aid, Listerine etc.

Why are they breaking up?

GE is doing so to simplify its business, reduce debt and revive its fortune in the equity market where its stock has been underperforming for years. Toshiba, which has been hit by repeated scandals, is hoping that this move would appease activist shareholders seeking complete overhaul of its operations. They, in fact, want the company to be taken private.

Johnson & Johnson hopes that these changes would help accelerate profitable growth and enable it to improve healthcare outcomes across the world. The common theme seems to be greater focus on respective businesses, better capital allocation, long-term growth and in the process, creating value for all stakeholders.

Are the investors happy?

Shareholders of GE appear to be happy. Post-announcement the share price jumped to touch three-year high. It is still a far cry from being the most valuable company in the US.

It also had to suffer the ignominy of being dumped from Dow Jones Industrial Average in 2018 after being part of the blue-chip index since 1896. Johnson & Johnson too saw its stock price moving up after the plan was announced. But in the case of Toshiba, the story was different. The stock price fell by about 4 per cent immediately as investors are not satisfied with the move.

Though it did recover partially, there are fears that the deal may not get the shareholders nod at the extra-ordinary general meeting that is likely to be convened in March next year.

Published on November 15, 2021

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