Most investors know that several giant conglomerates such as GE and Toshiba are considering splitting into smaller, more focused businesses. But are these movements the harbinger of a trend? Are other large companies on the verge of splitting their operations, whether for profit or regulatory reasons? In this segment of Backstage Pass, registered on November 19, Fool contributors Toby Bordelon, Travis Hoium, Rachel Warren and John Rosevear discuss the upcoming Johnson & johnson (JNJ -0.25% ) spin-off and the potential for further spin-offs of the conglomerate.
Toby Bordelon: I want to open it up to Travis and John if you have any comments, but first let me share this very quickly. This is from one of their [Johnson & Johnson’s] presentations they made on this subject. You can see right here – you see the separation between pharmaceuticals. This is the pharmaceutical / medical device industry, not the consumer. This business is going to be that 65% / 35%. You can see what’s going on here. It’s much more pharmaceutical than devices right now.
[Switches slides] And that’s the consumer side. You see some of these mainstream brands that they have here – as you probably know, Tylenol being probably the best known, but also stuff like Band-Aid, Listerine, Neosporin, that sort of thing. So a lot of it is pharmaceutical / device companies – it will largely be a pharmaceutical company in the future.
Rachel Warren: Yes of course.
Bordelon: Trevor, do you have any comments? Travis, rather, not Trevor. Sorry.
Travis Hoium: Yes. I was just going to say, when I read about it, it sounds like a lot of other conglomerate splits we’ve seen. In the ’80s and’ 90s, the theory was to put all of those uncorrelated assets together and you’ll end up with a lower cost of capital and … more shareholder value. We’re just undoing that.
But in this case, it seems that the core skills of the two companies and the customer bases are different. If you are dealing with the regulatory environment for pharmaceuticals and medical devices, I wouldn’t be surprised to see these two go their separate ways eventually.
Hoium: But it’s a whole different ball game than selling me Tylenol for my kids, or bandages. As you said, one is a consumer business and the other is essentially a business. It seems to me that this makes a lot of sense. It would just allow the business to focus more. These are the kind of conglomerates that don’t seem to have done anything really groundbreaking in a long time, and so maybe that gives them a little more attention to be a little more innovative and spur growth a little more. long term. [That] was my reading on it. I do not know if that’s true.
Warren: Yes, I’m curious to see if we’ll see more of the big pharmaceutical companies doing this over the next few years. Is this just a one-off thing, or will Johnson & Johnson be a bit forward-thinking? A different situation, but for example, at the end of 2020, Pfizer split up what was really unprofitable – not like Johnson & Johnson’s consumer health business – but what Pfizer did was divest its generics business, Upjohn. In doing so, it was able to achieve huge business growth in addition to that of its COVID vaccine. It can be very beneficial and allow both companies to develop well, but maybe one won’t hold back the other.
Bordeaux: It’s interesting, Travis, you mentioned the innovation aspect. J&J gave us a COVID vaccine, but interestingly it was more of a traditional vaccine and not the mRNA that we saw from Pfizer and Modern. Maybe there is something there.
HoÃ¯um: And maybe it allows them both to invest and to acquire companies that are doing … I know this is very common in the pharmaceutical space, in particular, if you are funding this moonshot project, and then your hope is to be bought by Pfizer or Johnson & Johnson. Maybe it gives them the opportunity to do it where they aren’t as distracted by consumer affairs. At least that would be my bullish thesis on that.
Warren: I’m excited about it.
Bordeaux: I think I like it too. I think I like it. I’m curious to see if we’ll have any more short-term breakups. So far we have GE, we have Johnson & Johnson, we have Toshiba.
HoÃ¯um: I keep thinking about 3M. Do you divide that into eight companies?
Warren: Wow. [laughs] It would hurt my brain.
HoÃ¯um: It’s everywhere. I used to work on it, and it does so many things that I don’t even know how you would do it. They slowly split up a few companies over time, but they were little pieces like the pharmaceutical company they had that I’m sure not many people knew about. This is the one I keep thinking about. Toby, I think I mentioned it last week, but I just can’t seem to get it in my mind.
Bordeaux: I do not know. It’s always something when you think of a company like this. When you dig them, you think to yourself, “Wait a minute, I had no idea about that part.” That tells you something. When you find that part of the business like, “I had no idea they had done this and I don’t know if I care now that I know it.” “
There are a few more, I guess, that you might think of that are huge. But I think what we’re seeing here – Johnson & Johnson, the split makes sense to me. It’s a clear split. It seems pretty obvious. You mentioned the big tech companies. It seems less clear, because there is more synergy between the companies. You know what I mean? You talk about – would Microsoft part ways with …? I do not know.
People have argued before that Microsoft should give in and give up certain things. But you look at this business and it all works well together. There are a lot of synergies in this business. Something like this makes sense to me.
HoÃ¯um: Amazon would be natural …
Bordeaux: Yeah. I think you are right. I think big tech companies, Amazon makes the most sense because you can say, okay, let’s take AWS, let’s take retail.
HoÃ¯um: But if they had done that, I think they would have done it when Bezos left.
HoÃ¯um: You talked about it, Rachel, with this deal, you make these big strategic splits, these strategic changes. Microsoft did it when Ballmer left. You do this at this CEO transition point.
HoÃ¯um: There will be an argument against. Amazon is one of those companies where, unless the stock starts to go down, they won’t make a deal like that, but it’s the one that feels natural to me.
Bordeaux: I think it’s important to make a distinction too. We’re talking – with GE in particular, but also with J&J to some extent – a conglomerate, which is different from a large corporation. When we were back in the 80s, you think, ABC / Capital Cities, and a bunch of others. GE at its peak. When we think of a conglomerate, we think of a company that has trades that do not necessarily make sense together. It’s just these disparate lines of business, run by themselves. BerkshireThis is a good modern example of that, where you don’t necessarily get any benefits from putting all of this in place beyond centralizing operations like HR. It’s different from those tech companies which actually you have multiple companies but they work together.
Yeah. Travis, Comcast, a good example too, was putting things together. Even sometimes they might look similar, but they can work on their own. There is not really a clear advantage or link between the lines of business.
HoÃ¯um: There is one company that I think would be better divided.
HoÃ¯um: Let NBC Universal’s content business focus on content and compete with Netflixes and the Disneys. And let the cable industry simply be a cash generator. It is not a growing business.
Bordeaux: Yeah. Be a utility, right?
HoÃ¯um: Be a public service and get as much money out of it as you can, while you can. But these two don’t necessarily make sense together. So maybe we’ll talk about it next week.
Bordeaux: May be. Jean, go ahead.
John Rosevear: I was just going to say that we’ve seen similar things with some of the big auto suppliers, where they’ve split the business into old tech and new tech, because old tech – internal combustion – throws a ton of money, but it is not high growth. Then the new business has a lot of growth potential, but maybe not a lot of money. You could argue to keep them together, but they decided that you get more shareholder value by dividing them.
We’ve seen it with Delphi, we’ve seen it with a few other big vendors, where the industry is going through a transition, so the old part gets separated from the new. You can make an argument either way, but it’s an interesting trend – the growth side versus the cash cow side.
Bordeaux: Yeah. We can see it, I think, in the energy sector as well, in terms of transition. Activists argued for Shell: âLook, separate, separate your renewables from your old business,â then Shell comes down and says, âYeah, we’re going to do a restructuring, but not that. We’re going to do something different.â So they rejected this idea. But it’s the same aspect – an industry in transition, I think, creates opportunities for some things like this. We’ll see what happens.
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