The latest such move was made by Hewlett-Packard CEO Meg Whitman, who decided to split the venerable but troubled IT giant into two companies, one consisting of its slow personal-computer and printer businesses, and the other selling faster-growing computer services, data-storage gear, software, consulting operations and other services for corporate-technology departments.
It was a major move, but such gambits have become increasingly popular as hedge funds and other investors now are pressing companies to part ways with slower-growing operations and focusing their efforts on the most promising ones as shareholders seek to take advantage of bullish markets and inoculate themselves on the down side. Corporations around the world have spun off $1.6 trillion worth of subsidiaries and business lines so far this year, just behind the record-setting pace of 2007, according to Dealogic.
“Big had long been a synonym for better in corporate America—for CEOs expanding their companies and for investors looking for insulation from sudden changes in markets,” said The Wall Street Journal. “But these days, the sun isn’t shining on empire builders.”
Added The New York Times, “Today, stock market investors are betting on companies with tightly focused visions. Too many divisions are seen as a distraction for management. And activist investors are eager to take small stakes in big companies and call for breakups, betting that profit will follow.”
Hewlett-Packard faced acute challenges in the slowdown of its traditional hardware business and the need to keep up with competitors such as Apple that are exploiting cloud-based services. But when the company announced a similar plan in 2011, investors balked because they were afraid each enterprise would be too vulnerable separately, and the CEO who proposed it was ousted. How times have changed.
Whitman’s move increases the focus on CEOs of other companies who have been pestered lately by activist investors to do something similar. They include PepsiCo CEO Indra Nooyi, DuPont CEO Ellen Kuhlman, Dow Chemical CEO Andrew Liveris and General Electric CEO Jeffrey Immelt. None of them face difficulties as imminent as those that confronted HP’s Whitman, but their gadfly shareholders are just as intent. For example, Immelt already has disposed of certain parts of the GE conglomerate—such as appliances, and retail finance—only to find that he hasn’t done enough to please some equity-fund managers.
It helps the cause of the breakup activists that some recent splits have gone relatively well. Kraft Foods and Mondelez, for example, arguably are faring much better separately—the former, with CEO W. Anthony Vernon running mostly domestic and traditional grocery brands such as Velveeta and Oscar Mayer; the latter, with CEO Irene Rosenberg supervising faster-growing global and snack brands including Oreo and Cadbury—than they did together under the old Kraft Foods umbrella.