The recent burst of break-up activity among diversified companies continues. Tyco has announced its intention to break up into three separate firms: security, fire- protection and flow-control. The split follows a 2007 break-up in the wake of the Kozlowski scandals. At that time, Covidien and TE Connectivity became independent companies. With this announcement, the Kozlowski empire has been dismantled completely. I'm not surprised by the move. The firm had become more focused after the 2007 spin-offs, but it still remained a company with limited synergies among these business units. In an era of lower economic growth, firms cannot justify these diversification strategies as easily. They have to show the economic value of diversification. If not, they must try to create shareholder value by freeing the units to operate as independent, focused companies. In the past, economic growth masked some of these sins of diversification at many firms.
Showing posts with label synergies. Show all posts
Showing posts with label synergies. Show all posts
Monday, September 19, 2011
Tuesday, August 2, 2011
McGraw-Hill - Breaking up is hard to do
Posted on 5:40 AM by Unknown
The Wall Street Journal reports that Jana Partners (a hedge fund) and the Ontario Teachers' Pension Plan have increased their equity stake in McGraw-Hill and may be pushing the company to break up in the near future. I found the news quite interesting, because it's been apparent for quite some time that the whole was not worth more than the sum of the parts. Last year, a team of my first-year MBA students performed a strategic analysis of McGraw-Hill for their course project. They concluded that McGraw-Hill's businesses did not fit together. The company operates a financial services unit, which includes the S&P credit rating agency. It also operates a large, but struggling, education unit (which sells textbooks, for example), and it has several television stations in its portfolio. McGraw-Hill divested Business Week last year. The synergies among these varied units are rather limited.
Of course, investors have known this for some time, as has the management team. Even a team of first-year MBAs could see rather easily that one had a hard time justifying this strategy given the limited economies of scope. Yet, the company has remained intact. It shows how difficult it can be for management to break up a company... particularly one that has a long and storied history of family ownership and leadership. Chairman and Chief Executive Harold McGraw III's great-grandfather founded the company in 1888. I'm sure that the family legacy makes it difficult to ponder breaking up the firm. One reason for that may be that a break-up might put the company in play. Firms may swoop in to try to acquire the various parts, and the firm may have a hard time remaining independent and family-controlled.
Of course, investors have known this for some time, as has the management team. Even a team of first-year MBAs could see rather easily that one had a hard time justifying this strategy given the limited economies of scope. Yet, the company has remained intact. It shows how difficult it can be for management to break up a company... particularly one that has a long and storied history of family ownership and leadership. Chairman and Chief Executive Harold McGraw III's great-grandfather founded the company in 1888. I'm sure that the family legacy makes it difficult to ponder breaking up the firm. One reason for that may be that a break-up might put the company in play. Firms may swoop in to try to acquire the various parts, and the firm may have a hard time remaining independent and family-controlled.
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