by Jeff Reeves | February 10, 2014 11:39 am
Everyone has enjoyed speculating about buyouts over the past few years, as innovative “disruptors” have gained momentum and old leaders struggling for growth have embarked on expansion via acquisition.
But let’s face it, more isn’t always more. Sometimes a company gets too unwieldy given its disparate businesses and the bureaucracy becomes too much to bear. Take 90-year-old conglomerate ITT Corp (ITT), which broke into three separate companies in 2011 to streamline things.
Or sometimes there are two very different companies operating under the same roof despite very different missions and models. Take Kraft (KRFT), the legacy North American grocery business, and international snacks company Mondelez (MDLZ), which parted ways in 2012 because of very different growth prospects and business styles.
While buyouts and acquisitions undoubtedly have potential by merging two businesses into one for increased scale and growth, spinoffs can unlock plenty of value, too.
So here are some not-so-crazy spinoff ideas we might see in 2014 as some big-name blue chips look to streamline operations and align strategy with structure:
There’s no doubt that Walmart (WMT) has had its issues since the Great Recession, with same-store sales remaining challenged for quite some time.
Walmart is caught between a struggle to compete with e-commerce giant Amazon.com (AMZN) on price and the fact that its megastores are largely rural and largely cater to lower-income Americans who continue to see weak spending and disappointing jobs prospects.
Amid this, however, Sam’s Club has seen some signs of growth. The warehouse does $56 billion in revenue on its own, operating 621 locations in the U.S. and Puerto Rico with about 47 million members, according to its corporate fact sheet.
It’s still a much smaller cash cow than Costco (COST), which does $100 billion in sales, but boasts a very similar number of locations and members. Given the right leadership and strategy, who’s to say that Sam’s couldn’t go toe-to-toe with Costco? Besides, before BJ’s Wholesale Club was taken private in 2011, that warehouse chain boasted only about $11 billion in revenue and roughly 200 locations. Sam’s is already bigger than that, so it can stand on its own two feet.
If Walmart is looking to unlock shareholder value, spinning off a more attractive Sam’s unit might make sense. Furthermore, the domestic warehouse game seems vastly different than the global distribution network that Walmart is working out to fuel global expansion in its big-box stores around the world.
Hey, crazier things have happened.
Hewlett-Packard (HPQ) has been flirting with the idea of a spinoff for some time, admitting in 2011 that it was thinking of quitting computers altogether thanks to profit challenges. The company changed its tune when Meg Whitman took over as CEO, but that doesn’t mean the strategy still can’t be put into action.
Clearly, Whitman has her hands full evolving Hewlett-Packard into a server, services and cloud computing play that can claw enterprise share from entrenched giants like IBM (IBM), Oracle (ORCL) and Cisco (CSCO). And in some ways, HP has already given up on the consumer side of the business with its mothballing of mobile hardware and tablets … so why not just put the laptop and printer division on an iceberg and push it out to sea?
HPQ stock enjoyed a rip-roaring run in 2013, so there might not be any impetus just yet to shake things up. But if continued struggles persist in the enterprise services and software arms of the company, a split might assuage fears that HP doesn’t have what it takes to compete in enterprise with the big guys and isn’t committed to the mission.
Allowing this group to separate and adapt to changes in business technology while the legacy consumer PC and printer business keeps on keeping on might not be such a bad idea in the eyes of many.
Console video games are not exactly the way of the future, but the Xbox division at Microsoft (MSFT) is certainly attractive to some and has seen big growth during the past few years. In fact, one of the reasons MSFT just posted record revenue was a strong Xbox One launch during the final three months of calendar 2013.
This is clearly a different animal than enterprise software, and could benefit from being freed up from the Microsoft bureaucracy to live the life of a true video game software company. After all, hardware is in many minds on the way out — and online services like Xbox Live or megahit franchises like the MSFT-owned Halo series are going to be the big driver of profits for any video game company.
And if you really want to get crazy … why not spin off the entire Microsoft devices unit that includes Surface tablets and Windows phone operations? After all, Microsoft just snapped up the hardware arm of Nokia (NOK), and former Nokia CEO Stephen Elop will be heading up the “devices” division going forward.
Of course, while Xbox is a big revenue driver, it’s not yet a big profit driver. And let’s not even get started about Surface posting profits on its own.
Still, if you want to think big about the future of Microsoft and separate legacy enterprise services and software from the “growth” parts of the company … this would be a way. And who knows? Maybe the shakeup would provide new leadership and agility that resulted in the kind of creative energy necessary to take MSFT devices to the next level.
Coca-Cola (KO) has been in the news lately as it announced a partnership with Green Mountain Coffee Roasters (GMCR) to produce in-home soft drink appliances. The move will provide incremental growth to the beverage giant, and is in line with its core business … which, frankly, doesn’t have much headroom considering the saturation of the Coca-Cola brand worldwide.
PepsiCo (PEP) is normally lumped in with Coca-Cola because it faces the same challenge of how to expand amid big penetration already, and as such, many investors are kicking around possibilities of a SodaStream (SODA) acquisition to find growth and compete with Coke.
But what about a different route? After all, Coke just does soft drinks, but Pepsi remains entrenched in tons of consumer foodstuffs — from Doritos chips to Quaker oatmeal. Why not divest that part of the business into a clear soft drink vs. pantry products duo?
After all, PepsiCo is not unfamiliar with this kind of act. Yum Brands (YUM) and its restaurants that include Taco Bell and KFC were actually a PepsiCo business unit before its 1997 spinoff.
That move proved beneficial to both YUM and to Pepsi. It might be time to consider a similar move, particularly after big mergers over the past 10 to 15 years that include the roll-in of Quaker, Gatorade, Tropicana and other businesses.
Merck (MRK) faces an uncertain future, as do many Big Pharma companies that enjoyed a huge run-up in the days of blockbuster heart treatments … but a burning desire for new revenue as patents on those big-name drugs expire.
So there have been a lot of deals going on in pharma as a result. During the recession, there were megamergers such as the $68 billion purchase of Wyeth by Pfizer (PFE). More recently there have been smaller but substantial biotech deals, including the 2012 purchase of Human Genome Sciences by GlaxoSmithKline (GSK).
But there have also been some interesting splits to note. Take the Pfizer split with Zoetis (ZTS), its animal health unit.
Merck could follow that lead with its animal health unit.
Another example is Abbott Laboratories (ABT) splitting off AbbVie (ABBV) to differentiate its legacy drug business from its high-growth research arm that is working on new products and a bunch of other big brands. Why not separate the pantry from the prescriptions?
At any rate, Big Pharma has seen its share of deals both by companies expanding and contracting the scope of their business. Merck could be a ripe target for one of these moves.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via@JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.
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