Company breakups have been around since the beginning of time. Businesses come together for so-called synergies and then split up when it becomes clear those synergies would never be realized or appreciated by investors. Some are forced by the government, like Standard Oil in 1911, but others voluntarily break up to extract value for shareholders, like ITT in 1995.
On Nov. 9, General Electric (NYSE:GE) announced that it would break up into three separate companies focused on aviation, healthcare and energy. This really shouldn’t be a surprise for investors. CEO Larry Culp has quietly been positioning the company for its final curtain call.
The move was long overdue. I’m not against conglomerates, per se, but there has to be an overarching reason for collecting so many seemingly unrelated businesses under one roof. If there isn’t, it’s mere empire building. But, of course, we all know how that goes. Think of Rome, Britain, Russia, Mongolia; the list goes on.
The GE split makes sense for all its stakeholders. Here are seven other companies whose breakup would have the same benefit:
- Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B)
- Amazon (NASDAQ:AMZN)
- Disney (NYSE:DIS)
- Keurig Dr Pepper (NASDAQ:KDP)
- Honeywell (NYSE:HON)
- Simon Property Group (NYSE:SPG)
- Johnson & Johnson (NYSE:JNJ)
Company Breakups: Berkshire Hathaway (BRK.A, BRK.B)
Warren Buffett’s baby finished the third quarter with a whopping $149 billion in cash. If its cash were an S&P 500 company, it would be the 60th-largest, just ahead of T-Mobile US (NASDAQ:TMUS) in the 61st spot.
Investment-focused media have become obsessed with speculating on what Berkshire might do with the cash hoard. A close second is an obsession with tracking Buffett’s buys and sells each quarter. If you’re curious, he was a net seller of almost $2 billion in stock. That’s $850 million more than in Q2 2021. Of course, he did buy back $7.6 billion of Berkshire stock.
Now, of any CEO, I’m confident Buffett is the last one who would veer off course and split up the business. But in May 2018, I discussed the idea of breaking up Berkshire. At the time, I wrote:
“I think Berkshire Hathaway should create a second mini-Berkshire that would take about 70-80% of the cash along with the smaller operating businesses owned by Berkshire Hathaway, hire a CEO familiar to Buffett and Munger, and start building a mini version where smaller transactions would make more sense.”
I could easily see Greg Abel, who will be the company’s CEO once Buffett no longer holds the role, executing something along these lines. And while he’s at it, I wish Berkshire would eliminate many of its equity positions, keeping the top 10. We all know Apple (NASDAQ:AAPL), Bank of America NYSE:BAC), Coca-Cola (NYSE:KO) and several others are the real gems of its portfolio.
The argument for breaking up Amazon isn’t a new one. However, in 2021, it appears to be gaining some ground. The company already has tentacles in many parts of your life, and it’s working to grow that influence. It’s the ultimate form of recurring revenue.
CNN Business contributor Clare Duffy said this about the company in June:
“On any given day, you might receive a package you ordered from Amazon, log onto a website hosted by Amazon, ask an Amazon device about the weather and grab groceries at a Whole Foods owned by Amazon. Amazon is more than just the ‘everything store.’ It’s become something of an ‘everything company’ that touches nearly every corner of our lives and the economy.”
If you’re not convinced, consider how much advertising revenue they generate. According to eMarketer, Amazon’s digital ad revenue is expected to grow 55% in 2021 to more than $24 billion, giving it an 11.6% market share.
Interestingly, industry experts have suggested Amazon could reduce the regulatory burden by spinning off its cash cow, Amazon Web Services (AWS). But that seems unlikely since the division provides the profits to fund all of its other initiatives.
Another thing to consider is Amazon’s awful treatment of its frontline workers. Jeff Bezos talks a big game about changing the world, but the company’s Human Resources department says otherwise.
Company Breakups: Disney (DIS)
Disney reported disappointing Disney Plus subscriber numbers for the fourth quarter ended Oct. 3. It added just 2.1 million customers in Q4 2021, its lowest quarter of growth since it launched the family-focused streaming service in November 2019.
Worse still, analysts were expecting it to deliver 10 million new subscribers in the quarter. Instead, Disney Plus finished the fiscal year with 118.1 million subscribers worldwide, just 60% higher than a year earlier.
It was enough of a disappointment that there appears to be a disagreement about the streaming platform’s next direction. Former CEO Bob Iger, who’s now the Executive Chairman, believes it should stay family-friendly. Current CEO Bob Chapek thinks it needs more adult-focused content to up its viewership.
“As we celebrate the two-year anniversary of Disney Plus, we’re extremely pleased with the success of our streaming business, with 179 million total subscriptions across our DTC portfolio at the end of fiscal 2021 and 60% subscriber growth year-over-year for Disney Plus,” Chapek said in its Q4 2021 press release.
Whatever the powers that be decide, Disney has got to do more to push the stock higher. Over the past 10 years, it has had an annualized total return of about 16.7%, equal to the entire U.S. market. For an iconic brand like Disney, that’s not cutting it.
I don’t see why it doesn’t spin off the Disney Parks, Experiences and Products division — 29% of revenue and 40% of operating income for the quarter — and focus on its media and entertainment properties. Disney’s just not delivering for shareholders.
Keurig Dr Pepper (KDP)
You’re probably thinking: Why would I recommend breaking up KDP when Keurig Green Mountain and Dr Pepper Snapple Group only got married in July 2018? That’s a fair question.
When they merged more than two years ago, it created the seventh-largest U.S. food and beverage company with sales of $11 billion annually. At the time, CEO Bob Gamgort said:
“The combination of these two great companies creates the scale, portfolio and selling and distribution capabilities to compete differently in the beverage industry. With a large stable of iconic brands and the leading single-serve coffee brewing system on the market, KDP has the ability to satisfy any beverage need or consumption occasion—hot or cold, at work or at play, at home or on the go—and the capability to get our brands to consumers virtually anytime and anywhere they purchase beverages.”
That was the theory, anyway. As of Nov. 19, its shares have appreciated by 44% over the past two years. The S&P 500 is up 68% over the same period.
Gamgort would argue that the company’s growth is only just picking up speed. The last two years were focused on integrating the businesses. The CEO expects KDP to generate $4 billion in free cash flow over the next three years, which he plans to use to go on a mergers and acquisitions (M&A) binge.
“That’s the attractive algorithm going forward: Very competitive on an organic basis, but significant upside to deploy that $4 billion, which equals $20 billion M&A capacity,” Bloomberg reported Gamgort said.
If he can’t bag the elephant, share repurchases and special dividends will happen.
My biggest problem with this kind of merger is that all sorts of promises are made, then a lot of time passes before investors can see if the union was successful. Yet, at the same time, the CEO is handsomely rewarded regardless of the deal’s success or failure. The two businesses would be fine operating separately.
Company Breakups: Honeywell (HON)
Of all the companies on this list, Honeywell has been the most proactive about spinning off businesses that didn’t fit its vision for the company’s future.
In October 2016, the company spun off its AdvanSix (NYSE:ASIX) resin and chemical business. Honeywell stockholders got one share of ASIX for every 25 HON shares. As a result, ASIX stock has had an annualized total return of 22.2% over the past five years. That’s 550 basis points higher than HON over the same period.
In October 2017, the company announced plans to spin off its Homes and ADI Global Distribution business into one company and its Transportation business into another.
At the end of October 2018, the company completed the spinoff of its Homes and ADI Global Distribution business. Known as Resideo Technologies (NYSE:REZI), it’s performed slightly better, moving sideways over the past three years. Honeywell shareholders got one REZI share for every six shares held.
In June, Honeywell announced it would combine its Quantum Solutions Business with Cambridge Quantum to form a new company. Honeywell would own 55% of the combined entity, with Cambridge Quantum shareholders owning the rest.
It still finished the third quarter with four large operating segments: Aerospace ($2.7 billion in sales), Building Technologies ($1.4 billion), Performance Materials and Technologies ($2.5 billion) and Safety and Productivity Solutions ($1.9 billion).
Theoretically, it could split into four segments and deliver greater shareholder value.
Simon Property Group (SPG)
In recent years, partly as an act of self-preservation, mall owner Simon Property Group has been buying up struggling brands but providing significant rental income to the company as a tenant at many of its malls.
Call it synergy or brand extending. Simon is no longer just a mall company. The Indy Star recently reported on some of its acquisitions:
“But since the pandemic began, Simon has jointly purchased retailers Brooks Brothers and Lucky Brand Jeans out of bankruptcy via a partnership with New York City-based Authentic Brands Group called SPARC Group LLC. The joint venture absorbs troubled retailers at reduced overhead costs.
Simon also added JC Penney to its portfolio of retailers via a partnership with rival Brookfield Property Partners. And, the company completed its acquisition of rival mall operator Taubman Centers, Inc.”
CEO David Simon would probably argue that spinning off its other investments beyond real estate would make it just another retail REIT. That’s a possibility.
Another possibility is that investors will learn to appreciate the proactive nature of the brand-building side of its business relative to the ownership and operation of real estate.
Its investments in brands such as Brooks Brothers could be the beginning of a new business that finds great retail and hospitality companies, helps them grow and then takes them public or carries out some other exit. That would be addition by subtraction.
Company Breakups: Johnson & Johnson (JNJ)
The Nov. 12 announcement that Johnson & Johnson was spinning off its consumer health business into a separate public company was a long time coming.
Here, you had a division with Band-Aid, Listerine and Tylenol brands competing with medical devices and Covid-19 vaccines. It reminded me of the old Sesame Street skit where they got kids to pick out the image or object that didn’t belong.
CNBC reported on CEO Alex Gorsky’s thought process for the split:
“‘It’s in the best long-term interest of all our stakeholders,’ [Gorsky] said on ‘Squawk Box.’ ‘Our goal is really to create two global leaders – a pharmaceutical and medical device business that has great potential today … and of course, the consumer business that’s got iconic brands.’”
There is no question that medical devices and pharmaceuticals are the bigger moneymakers for the company. The consumer health business accounted for approximately $15 billion in sales, or 16% of J&J’s overall sales in 2021.
Gorsky’s replacement as CEO, Joaquin Duato, will lead the pharmaceutical and medical devices business, while the leadership for the consumer health business has yet to be determined. The separation of the consumer health business is expected to take 18 to 24 months.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.