Recently, we have been hearing more about corporate breakups. For example, On June 23, 2022 Global Finance ran an article subtitled “Corporate breakups like Kellogg’s are popular again–and it’s not just in the US”. Kellogg is splitting itself into three companies, one for cereals, one for snack foods, and one for plant based products.
With corporate breakups popular, it’s a good time to revisit some key points about spinoffs. Just to clarify, spinoffs are when companies break apart by spinning off some of their businesses. I’ve written previously about spinoffs and I’ve been quoted in US News on the topic. So, I’ll reiterate some important points. Spinoffs don’t necessarily solve the problem of lackluster growth. Yes, it’s true that extremely scattered strategies can weaken performance and that spinoffs often do result in greater focus. However, this does not mean that narrowly focused strategies are always the best business model. Putting businesses together in ways that fit well can be very successful, even if there is somewhat less focus.
Furthermore, smaller company size after a spinoff may not necessarily improve growth prospects, unless there is some sort of strategic change or some shift in market conditions. During the pandemic, market conditions changed. Food companies saw increased sales of eat at home items as consumers sheltered in place to protect against the virus. Also during the pandemic, Procter and Gamble saw increased sales of its cleaning products as consumers were more concerned about sanitation. Thus, P & G’s improved results were heavily due to a shift in market conditions that favored its products, much more so than due to P & G’s previous spinoffs.
Granted, it is possible that spinoffs may offer a little bit of size benefit if a company had grown far too huge. It has been said, for example, that after the breakup of the company, Kellogg’s cereals will no longer have to compete with its snack foods for resources.
However, the possible benefits of spinoffs shouldn’t be overemphasized without paying enough attention to the downside. With spinoffs, companies can lose economies of scale and may no longer experience synergies that can occur when the larger company remains intact. Furthermore, even if cereals do not have to compete with snack foods for resources, the resource pool that either of those two can access after the spinoff can be smaller than the combined resources available before the spinoff. So, product categories no longer having to compete with one another does not necessarily mean better access to resources.
The important point is that, for the most part, performance improvement doesn’t come from breaking up the company. Improved performance is usually due to a stronger strategy or to favorable shifts in the market, not due to spin off. So, although corporate breakups are popular, they aren’t generally the answer for improving company performance. Instead, companies need to pay more attention to their strategies, and make the strategic choices that are of most benefit to the business.