Musings On Markets

Breaking up may have been difficult to do for the Carpenters, but it appears to be easy to do for some ongoing companies. Kraft Foods: Kraft Foods split itself into two companies: a division that sells candy and snacks (Oreo, Cadbury, Tang) globally and a division that sell grocery brands in the US (Oscar Meyer, Jell-O).

Netflix: Reed Hastings, the CEO of Netflix mentioned that the company would separate its DVD rental business (and present it the name Qwikster) from its streaming-only service (which will continue to be called Netflix). Tyco: Tyco announced its intention to break itself up into three separate companies: a home security business (ADT), a device offering controls, and valves to energy, drinking water, and mining markets and a commercial fire and security business. This represents the closing salvo in a multi-year effort by Tyco to deconglomeratize (I know.

What happens in a rest up? A break up can have taxes implications for the investors in the mother or father company. Fortunately, that the facts of the break up ultimately need to be made open public to investors, who can thenassess the control, tax and pricing implications. The bad news is that the details may not be accessible during the original announcement of the split up. Does breaking up seem sensible?

  • Thinking about trading
  • Provides a recurring cash stream
  • The residence was a primary residence for both spouses for at least 2 years
  • Other income-earning international property
  • Projects can happen to have less risk when real options are considered
  • Debt to collateral percentage is below 60%

Market errors: The easiest rationale for a rest up is that the market is mistakenly valuing the whole company at significantly less than the amount of its items. Many experts/ activist investors utilize this “sum of the parts” discussion to drive companies that they feel are being underappreciated to break up. While the tale is intuitive, I’d be skeptical of any discussion that is premised entirely on “market mistakes”, partly because most “sum of the parts” valuations are actually “seat of the trousers” valuations. Contaminated Parts: One department of an organization may be saddled with actual, recognized, or potential liabilities that are so large that they move down the valuations of the rest of the company.

The simplicity story: Multi-business companies aren’t only more difficult to manage, but they are also more difficult to value. With companies like United and GE Technology different businesses within each company can have very different risk, cash flow and growth characteristics and creating a consolidated number can be cumbersome.

In memories, traders may forget the complexities of valuation, trust the managers and value these multi-business companies highly. In bad times, they’ll not be as charitable and will punish complex companies by discounting their value. Breaking up the companies in bite-size pieces that are easier to trade and value may therefore increase value, particularly if you are in a “crisis” market. The tax story: When taxes codes are complicated (and when are they not?), companies might be able to lower their taxes expenses by artfully breaking themselves up.

Loss of economies of scale: Combining businesses into an organization can create cost savings. Thus, a combined group of consumer product businesses may reap the benefits of being consolidated into one device, with distributed distribution and advertising costs. Splitting up with lead to a lack of these savings. Reduced access to capital (and higher cost): If external capital marketplaces (stock and relationship) is undeveloped or under stress, combining businesses into a consolidated company can provide usage of capital. The excess cash moves from cash wealthy businesses may be used to fund reinvestment needs in cash-poor businesses. Lost synergies: I am generally a skeptic about synergy but it does exist.