Heard on the Street: Breakups such as the split Emerson Electric is contemplating don’t always work out for shareholders
By Lauren Silva Laughlin Oct. 5, 2019 7:00 am ET Contrary to the lyrics, breaking up is quite easy to do, at least on Wall Street. But it often leaves investors with long-term heartache.
The industrial sector in particular has embraced breakups. General Electric’s big unwind was triggered by cash needs. The company plans to reap some $38 billion from divesting assets including its biotech division to Danaher and selling its controlling stake in Baker Hughes. United Technologies said it would break apart, though it recently bulked up again with a deal to buy Raytheon. Arconic and Danaher have both undergone splits.
Corporate chiefs often give at least one of three justifications for building conglomerates. They can achieve cost savings from merging headquarters, for example. But it helps if there are other overlapping costs as well. Executives might be able to cross-sell or upsell products. Or perhaps their business lines are similar but on different cycles. Aligning them can smooth out lumpy cash flows and enable a business to take on more debt.
Opacity is another problem. Marathon Petroleum has three main businesses and a separately listed master limited partnership. Emerson makes thousands of industrial products, many of which don’t overlap. Investors don’t like what they don’t know, and often discount it.
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