Not All Corporate Spinoffs Are Beneficial

Over the last few years, many companies have slimmed down by spinning off businesses. Spinoffs have been said to keep companies focused, presumably for better performance. However, although a company can benefit from shedding what doesn’t fit at all, doing spinoffs will not always improve performance. There might be a temporary uptick in stock prices, but spinoffs won’t necessarily lead to revitalization of previously lackluster businesses.

Nonetheless, numerous corporate spinoffs occurred over the last few years. In several cases, the spinoffs took place after pressure from activist investors. But, since giving in to that pressure may or may not improve performance and depends upon the circumstances, it’s encouraging to see situations where companies decide not to do spinoffs.

An example in the news last month is PepsiCo.  According to the February 16-17, 2019 Wall Street Journal article “PepsiCo to Keep Business Intact” by Allison Prang, investor activists were pressuring PepsiCo to spin off its snack food business. But, as the article reports, the company chose not to do so.

PepsiCo’s decision to keep its snack food business has occurred despite previous speculation that the company’s new CEO, who took over in October, might be willing to split up the business. This was suggested in a CNBC online article August 6, 2018 titled “PepsiCo Indra Nooyi’s departure could pave way for split of snack and beverage businesses.” But, according to last month’s Wall Street Journal article, spinning off snack foods is not in the new CEO’s plans.

I see PepsiCo’s not doing this spinoff as a worthwhile decision. The snack food business complements PepsiCo’s beverage business quite well, so shedding the business and becoming more narrowly focused is not likely to be beneficial.

On the other hand, when PepsiCo spun off its restaurant business some time ago, there were good reasons for the divestiture. PepsiCo had owned chains like Pizza Hut, Taco Bell and KFC, but shed those businesses. Owning those fast food chains could hurt PepsiCo’s efforts to sell its Pepsi beverages to other restaurant chains, who would prefer not to buy from a competitor. So, shedding the restaurant business made sense for PepsiCo.

In contrast, reasons for PepsiCo to divest its snack foods business are not so compelling.  Granted, spinning off businesses and increasing focus became quite popular a couple years back. But, not all companies doing spinoffs did well after paring down their portfolio of businesses. In fact, even several years post-spinoff, a company can still find itself struggling to turn itself around.

So, although spinning off a definite misfit makes sense, merely shedding businesses to be more focused is not necessarily a good move.  This is especially true when there are solid reasons to keep the company intact, such as businesses complementing one another, as is the case for PepsiCo’s snack food and beverage businesses. Thus, PepsiCo is to be admired for resisting the pressure and deciding against spinning off its snack food business.

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