Corporate breakups are usually an indication that management is frustrated by the value the company is getting in the marketplace.
The idea is to unlock that value by creating a “pure play” investors will prefer.
Sometimes, the break-up doesn't need to even be complete to be successful. EMC's (EMC) spin-off of VMWare (VMW) has been a raging success, with the smaller division now worth nearly 80% of its larger parent. You can buy the whole thing for $50 billion, or the little cloud piece for $38 billion.
That's good business.
That's the kind of value Conoco-Phillips (COP) hopes to unlock from its split into exploration and refining units. It's also the kind of value Kraft Foods (KFT) hopes to unlock by dividing its snack food and grocery businesses. The move comes less than two years after Kraft, deciding it needed scale to compete, bought Cadbury-Schweppes for $19.5 billion.
So who might be the next to divide? Where are there values waiting to be more fully-exploited?
I suggested a break-up of Hewlett-Packard back in June, so I'm not going to go there again. The company obviously is not interested. More is the pity.
Here are some other ideas:
Rackspace (RAX) could easily turn OpenStack into something like VMWare. Just create a separate unit for OpenStack support, build that up over a few months, then spin out a portion of it to the public. The danger here is that the larger company, which is mainly a Web host, might not then get even a portion of the market value it's now getting. That's why you only sell a piece. CoreSite Realty (NYSE:COR), which also runs web hosting data centers, is no high-flyer.
Pepsi-Cola (PEP) might look much better in many hands than it ow does in one. Its valuation is just two-thirds of that of rival Coca-Cola (KO), yet there's all this other stuff in the company – Quaker Oats, Tropicana, Gatorade, Lay’s – any one might stand up well on its own. The company could split-off Gatorade and add more exercise-related entities to it, or divide between food and drink.
Exxon-Mobil (NYSE:XOM) – A vertical division of Exxon-Mobil might unlock literally hundreds of billions in shareholder value. This would go along the lines of previous divisions like Conoco-Phillips COP and (before that) Marathon Oil MRO, which divided horizontally, with exploration and production on one side, refining and marketing on the other. The rationale would be the same, and a break would also help in case of an accident like the one that hit BP last year – the refining and marketing unit would be out of the line of liability.
It's true that breaking up is hard to do. A close friend went through a corporate break-up a little over a decade ago now, if memory serves, and it's as wrenching as a merger for all concerned. But corporations aren't people (even if the law says they are and even if they contain people). You shouldn't let emotions get in the way of unlocking shareholder value.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.