Starbursting
Breaking up companies is back in fashion
The Economist
Mar 24th 2011
NEW YORK
FOR weeks, speculation has been rife that Pfizer, the world’s biggest pharmaceuticals company, will break itself into pieces, a restructuring move known as the starburst. The firm is considering reducing itself to what Ian Read, its boss, calls its “innovative core” by spinning off not just its four smaller non-pharmaceutical divisions (nutrition, consumer health, animal health and capsule-making) but also its huge “established products” division.
If this happened, reckons Sanford Bernstein, a research firm, Pfizer’s annual revenues would shrink from around $67 billion to at most $40 billion. It would be the most notable example yet of the revival of starbursting. So far this year, firms on the world’s stockmarkets have spun off bits of themselves as separate listed companies worth a total of $92 billion, Citigroup calculates. That compares with $54 billion in all of last year, and if the current rate continues, it will easily beat the pre-crisis record of $234 billion in 2007.
So far this year the biggest such deal has been Fiat’s spin-off of a division that makes lorries and tractors, valued at $18 billion. This is still overshadowed by the largest on record, Altria’s $108 billion spin-off in 2008 of its Philip Morris International cigarette business. America’s largest deal this year is Motorola’s hiving-off of its handset-making business, worth $10 billion. ITT, a serial starburster, recently separated off its defence and information business, and a water company, leaving behind a smallish engineering group. The trend is catching on around the world: Carlos Slim, a canny Mexican billionaire, is spinning off Minera Frisco, the mining arm of his Carso conglomerate, worth $7 billion.
One of the main reasons for the starburst revival is that companies seeking buyers for parts of their business are not getting good offers from other firms, or from private equity. Foster’s, an Australian drinks group, is prepared to sell its wine business but, if no decent offer is forthcoming by May, will spin it off.
Another driving force is the “conglomerate discount”—when stockmarkets value a diversified group at less than the sum of its parts. There is talk that Lufthansa, which Citigroup reckons would in pieces be worth twice the parent company’s market value, may spin off its in-flight catering business. Although the conglomerate discount is not usually as extreme as that, its sharp increase in the past year is one of the main reasons companies are regaining their enthusiasm for spin-offs, says Carsten Stendevad of Citigroup. By comparing conglomerates’ constituent businesses with similar, stand-alone ones, Mr Stendevad calculates that they now trade at a discount of around 9%—more or less where things stood before the crisis of 2008.
That this discount is real seems to be confirmed by the positive stockmarket reaction to the latest starbursts. From 20 days before the announcement of a spin-off to 60 days after, the combined value of the parent and spun-off children has on average outperformed the market by eight percentage points, says Mr Stendevad.
The conglomerate discount is far bigger in America and western Europe than in Asian and emerging economies. This may be because in these countries a big conglomerate with political connections and an understanding of how to operate in a difficult market can spread its expertise across many industries. Indeed, there is a conglomerate premium of 10.9% in Latin America, according to Citigroup. This may be why, in some parts of the world, conglomerates are becoming even more diversified: witness Samsung Electronics, which is moving into pharmaceuticals.
America’s big tech firms are also bucking the starburst trend and diversifying. Oracle, a software giant, has moved into hardware, and Hewlett-Packard, a computer-maker, is expanding further into software and services. Their big corporate customers increasingly want a one-stop shop for their information systems.
There is still plenty to the argument that first caught on in the 1980s that breaking up a conglomerate lets managers focus more effectively on the needs of each of the parts of the sum. Yet nowadays the market is relatively pragmatic in its view of conglomerates. Steven Kaplan, an economist at the University of Chicago Booth School of Business, reckons that “as long as your conglomerate is doing well, you can probably keep it together, but when it doesn’t work, it gets broken up.”
Even so, this year’s surge in spin-offs and the rise in the conglomerate discount certainly suggest that new diversifications are likely to be far outweighed by corporate break-ups. Until, that is, management gurus and investment bankers cook up a new theory to justify conglomerates, and the cycle of integration and disintegration starts all over again.
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