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Breaking up isn’t hard to do


Despite the return of M&A, many companies are opting for disposal to bring focus back to the business

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Microsoft chief executive Steve Ballmer likes to make up words. Indeed most of his sweat-soaked presentations seem to include some new business construction. With dis-synergy Ballmer outdid himself. The word came up as Balmer responded to a question posed last year by an analyst seeking to establish whether breaking up Microsoft would free the company to explore new business opportunities.

While the word may be new, the concept of breaking up companies for their own good is not. Microsoft decided against it, but more businesses are beginning to question whether acquisitions really offer the best route to growth. Indeed for some, there appears to be better prospects through disposal of non-core assets

The examples are numerous. Take Zurich, the giant insurer, which recently announced the disposal of one of its non-core UK subsidiaries, Zurich Specialities London. There are countless other examples: banks have divested themselves of lease finance companies, healthcare businesses have realized that offering MRI scans is different to providing long term residential care, and utility companies continue to decide they are better off sticking to selling electricity and leaving broadband provisions to the experts.

There is precedence for this. Consider what faced Tyco CFO Chris Coughlin when he took arrived at the troubled telecoms business in 2005. A whole board of directors had recently been replaced in the wake of the accounting scandal that led to the conviction of former chief executive Dennis Koslowski. Coughlin’s job was to assess the company’s position – it had moved into other sectors including healthcare and electronic component manufacturing - and set a strategy to continue its recovery. And while the markets were expecting a return to acquisition trail, Coughlin instead threw out a curve ball.

“So in 2005, as we looked at what it was going to take to grow the health care business, we eventually concluded that it may be better off on its own. In addition to being a large group, with about $10 billion in annual revenues, it was well organized, it had integrated many of its acquired businesses, and it had a seasoned management team.

“And once we had reached that conclusion with the health care business, we started to look at the rest of the portfolio. Given our shareholder base, we concluded that it probably made sense to pull apart the electronics business as well, enabling that business to invest more effectively during the down cycle, which might be more difficult as a part of a multi-industry player.”

It’s hard to argue with such logic. Tyco’s performance since has proved Coughlin’s prescience, posting healthy growth rates and returning to acquisitive growth.  The leaner, hungrier group has been able to move with greater fleet of foot in identifying potential targets.

Bigger is not always better

The increasing incidence of breaking up businesses, paring companies down to the core, is the culmination of several years of activity.

The nineties and early 2000s saw a rash of consolidations across a range of sectors. Drugs companies bought care homes, bus companies invested in rail franchises and accounting firms bought consultants. It was the fashionable thing to add a bolt-on acquisition to your business.

And it wasn’t just cheap credit that drove the M&A boom of the years before the crash. Human nature – and particularly the nature of most CEOs  - dictates that leaders must be seen to be doing something in order to satisfy those watching the company. Few CEOs are comfortable simply sitting tight and allowing the business to chug along happily. So acquisitions suddenly seem more attractive as a way of assuring the markets that you are doing the right thing.

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Breaking up isn’t hard to do
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