Shrink to greatness? It's not always that simple

Two businesses are not always more valuable than one

By Olaf Storbeck

LONDON (Reuters Breakingviews) - Breaking up feels like a giant step for company bosses, but for shareholders it can look like a small one. Denmark's biggest company Maersk announced it was splitting up on Sept. 22 into separate logistics and energy businesses over the next two years. Its shares barely moved. Carving up many-headed corporate beasts often makes great sense, yet not always.

A great reason for a corporate split is to free decent companies from internal red-tape, and give managers a chance to focus. Hewlett Packard, the tech company that split into HP Enterprises and HP Inc in October 2015, has delivered an annualised 45 percent and 20 percent total shareholder return respectively since then — compared with an annual minus 6 percent in the preceding five years. Siemens' spinoff of lighting business Osram in 2013 has trodden a similar path.

It's no wonder that activists often push for a breakup as a way to create value. European investor Cevian is lobbying Swiss engineering group ABB to do so. Rolls-Royce, which makes engines for planes and also marine vessels, or UK group AB Foods, which makes sugar but also, oddly, runs one of Britain's most successful clothing stores, perennially face similar calls.

But shrinking to greatness is not always the fast track to creating additional value. Maersk's component parts may not necessarily work better apart. Both are capital intensive and exposed to risks beyond management control, like the vagaries of the oil price, fickle trade growth and shipping sector overcapacity. All these forces have turned against the company in recent years. The operating margin, which stood at 15.5 percent in 2013, tumbled to 4.6 percent last year.

True, there can be a one-off boost. Since Maersk replaced its chief executive in June and announced a strategic review, its shares have gained more than a fifth, reducing the discount to Maersk's sum-of-the-parts value from 40 to 28 per cent, according to a Jefferies calculation. But disentangling the group will take up to two years. Moreover, the fundamental challenges in shipping and oil remain the same.

Sometimes, what gets divided may even get reunited. Kraft Heinz has been reported as a potential bidder for Mondelez, after the latter U.S. food group failed to buy chocolatier Hershey. That would undo the split of Mondelez and Kraft in 2012. Two businesses are not always more valuable than one.

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