Imagine a GE thats no longer known for its light bulbs, and a Johnson & Johnson without its rows upon rows of products in the pharmacys home health care aisle. Both conglomerates have recently announced plans to splinter into separate businesses.
General Electric (GE) is dividing into three distinct companies, while J&J will let go of its consumer unit to focus on its prescription drugs and medical devices. What is driving this shift of large corporations intentionally shedding major segments of their businesses after decades of growth and acquisition? And how will these changes affect investors and their stock?
TL;DR
- The era of major conglomerates controlling multiple business segments isnt entirely over, but plenty of them are spinning out portions of their businesses.
- GE announced its splitting into three separate publicly-traded companies after 129 years in business.
- Johnson & Johnson, of the same era, is planning to divest of its consumer-facing unit that sells home health products like Band-Aids and baby powder, and focus on expanding the pharmaceutical side of the company.
- Some companies may split in order to mitigate consequences of poorly-executed acquisitions, and others may do so to better serve the public in their core businesses.
- Most individual investors may not be impacted, as the changes are expected to be tax-free and shareholders will likely receive some form of shares in the newly formed companies.
What happened to cause the GE split
Experts have said that GE is likely splitting in order to provide greater focus within each of its three core businesses. Though the corporation enjoyed multiple decades of expansion and a largely successful twenty-year reign of CEO Jack Welch, struggles ensued around the turn of the century.
GE Capital, the companys finance arm, felt the pressure of the 2008 financial crisis and floundered. By 2017, when John Flannery assumed the CEO mantle, he vowed the new GE would be streamlined to end the giant conglomerate era.
In 2018, the blue-chip index of the Dow Jones Industrial Average dropped GE. Soon after, the company forced Flannery out of leadership. Current CEO Larry Culp noted that GEs split into three firms means its following in the pattern of other industry conglomerates like Siemens and Honeywell International.
The GE healthcare division is expected to spin out in 2023, followed by its energy business in 2024. Only GEs aviation sector will retain the GE name once the full transition is complete. By the end of the split, we’ll see GE companies in health, energy, and aviation.
Larry Culp, GEs CEO, said that paying down $75 billion of its debt since its 2018 peak helped enable the split. The company already sold off portions such as appliances and finance. This new split, Culp said, will create three companies that are stronger, easier to manage, and easier for investors to understand.
Details of the Johnson & Johnson split
After 135 years in business, Johnson & Johnson is moving away from the consumer products division that drove most of its revenues during that first century. J&J brands such as Neutrogena, Aveeno, Listerine, and Johnsons Baby havent grown as quickly as the drug segment of the business.
Meanwhile, its pharmaceutical business has developed key therapies for illnesses including prostate cancer and pulmonary arterial hypertension, as well as one of the three COVID-19 vaccines authorized for U.S. administration.
Johnson & Johnson will keep its name and continue to hold the title of worlds largest health products company, according to CFO Joseph Wolk. The new Johnson & Johnson will become a pharmaceutical and medical-device firm.
Reasons for large public companies to split
In some cases, conglomerates might elect to perform a split like GEs in order to rectify past mistakes, such as an acquisition gone awry. Verizon and AT&Ts media acquisitions come to mind, which were pricey and didnt pay off as hoped for the telecoms.
Firms like GE and J&J are moving in a different direction than companies like Amazon and Alphabet, which continue to add diverse and often unrelated business segments to their holdings.
Companies may be splitting up because its hard for Wall Street to know how to value them. Another cause: Spun-out divisions can make decisions that are more advantageous to them specifically, without concerns of appealing to the other segments in a large conglomerate.
Many experts say companies want to improve performance by enabling each separate business to hone in on its strengths. As Morningstar analyst Joshua Aguilar told CNBC, Its tough to manage such disparate businesses. This gives each business the opportunity to make its own investment and determine its own destiny.
GEs chief executive Culp also said the change heightens focus and accountability for leadership.
The Wall Street Journal noted that in the case of J&J, the pharmaceutical division requires different corporate skill sets to manage, so splitting could make sense from that standpoint. The company says that lawsuits impacting its consumer division (like the talcum powder cases) did not factor into the companys decision to split.
Other firms that have performed similar splits include Dell (which spun off its cloud business) and IBM (which spun off its information technology services unit).
What will happen to the stock of public companies after they split?
Each segment of these conglomerates intends to become its own publicly-traded company. In the case of GE, aviation is the only portion of the company that will retain the GE moniker.
Its not always clear-cut what will happen to shares currently held by investors, as the companys pricing may shift upon announcements of a corporate split.
Companies that choose to split may benefit from more laser-focused efforts in one area. However, the shedding of some segments of the businesses could also put greater pressure on the core business to succeed.
Without the diversification provided within the conglomerate structure, these companies depend more firmly on the portion that remains, so a downturn in one area could be more damaging than before.
GE and J&J havent solidified the plans yet, but it is assumed that current shareholders will receive dividends when the different businesses complete their spinoffs. Later, once the divisions are complete, each company will have its own stock. Both GE and J&J say the change will be tax free.
Bottom line
Major conglomerates like GE and Johnson & Johnson could benefit from dividing up their efforts within each of their respective new companies.
Experts don’t expect shareholders to be greatly affected. However, the new focus of each publicly traded entity could add challenges with diversification, as they will no longer have multiple divisions to provide balance in economic downturns for one part of the company. Certain investors may benefit from portfolio adjustments once the splits go live.