Professional Documents
Culture Documents
BREAK UP!
David Sadtler
Andrew Campbell
Richard Koch
Introduction
$1 Trillion on table – Breakup experience till date shows that there will be an
increase of share price by 20%. By breaking up 100 MBC’s (Multi Business
Corporations) in US and UK, a value of $1 trillion can be created.
Value Destruction is the reason for Breakup – First cause for value
destruction by the corporate center. The second reason is from several frictions
that happens.
Breakup for the insiders – The chairman of the company can now become the
chairman of multiple companies. CEO’s salary in many cases is linked with the
share price and as the share price goes up, so will the salary. Senior managers
can now be more focused.
4. Fear of takeover
• Hostile takeover threat was a primary reason for breakup in the UK.
• Many time attempt for hostile take over is the result of the
underperformance; but once spun-off, it releases lot of value and
hence will be difficult for takeover.
5. Competitive conflict
6. Poor performance
8. Quarantining a problem
Difficulty with Focus – It is an elastic concept linked with the concept of “core
business”. Boundaries of core business are often reworded to stretch over a
portfolio.
What is Focus – Not just narrowing the scope of the portfolio. Key to focus is the
existence of a match up between the needs of the portfolio businesses and the
specific skills the center which can help to the business.
Chapter 3 – The real reasons why Breakup creates value
Every business after break up will incur more administrative and financing costs,
still they perform better, because they are released from some constraints that
existed in the group.
Value Destroyers
1. Executive Influence
a. Lack of fit between the owner and owned – There is a misfit between
the center and the business it owns. Center doesn’t understand the
business and may take worst decisions.
In the mid 80’s all the oil majors like Atlantic Richfield, BP, Exxon, Shell
and Standard Oil got into the minerals business. Soon they all had an
average return on sale of -17% whereas the focused minerals
companies had +10%. This drastic difference of 27% is what pays
when a company is focused.
d. The Alienate Syndrome – Many a time one has to go that extra mile
with the customers to get the business. A corporate center which is
never with the customer cannot do this and hence the danger of
alienation is ever present.
3. Central Staffs –Good center staffs can add value, but quite often they are not.
Seller the gainer - Most of the value released from acquisitions goes to the
seller and not the buyer. In most cases, before buying, the buyer will have to
project his plans on the buying company. When there are multiple buyers
bidding, then the buyers will have to offer more in terms of plans. Hence they
end up not just paying premium for the buy, but also will have to invest a lot in
the plan charted out.
Corporate Ambition – When buying out, one needs to know what the
company is worthy of, what it can earn etc. Then it depends on how one runs
the company, the actions of competitors etc to know how well it actually does.
Experience shows that it can vary +/- 50% making the future very uncertain.
Research shows that the corporate center destroys at least 10% of the value of
each standalone component. Hence it can destroy even more than 50%!!
Chapter 4 – Do You need to Break Up?
1. Identify the natural clusters in the portfolio. Final clustering is based on two
facts:
a. How similar are the critical success factors and how easy is it avoid
value destruction?
b. How similar are the improvement opportunities and hence how easy
will it be to develop the skills and resources to exploit them.
iii. Managers hear the heavy footfalls of predators and see the
shadows of suspected stalkers
3. Breaking Up
4. ReBirth
On the contrary, FBC’s are liable to diversify. They can get dissatisfied with
tightly focused business and can get excited with growth, new adventures etc.
4. Selectively invest in Particular breakups – Invest only in those which are likely
to increase the value most.
Chapter 7 – Breakup: The Future
Warren Buffet and Jack Welch can be considered as magicians for holding on to
so many businesses simultaneously. These MBC’s are likely to breakup after
these leaders departure.