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June 28 saw the corporate breakup of News Corp (NASDAQ:NWSA), the world’s 2nd largest media-entertainment conglomerate with some $34 billion in revenues worldwide.
The split took over the headlines and had investors in a tizzy.
When you own equity in a company that undergoes a corporate breakup, you may stand to earn major profits – if it’s the right approach for that particular company to stimulate earnings and growth.
Money Morning’s Chief Investment Strategist Keith Fitz-Gerald explains how corporate breakups can benefit – or sting – investors:
- “Many times there is a breakup premium attached to a stock when assets are worth more than the sum of their parts. The same is true of revenue streams that are suddenly freed of costs that belong to other divisions or products.
“Conversely, if a breakup goes badly, that’s usually because investors find problems that weren’t apparent when the entity was held whole.”
Rupert Murdoch, News Corp’s 82-year-old media mogul CEO, touted that the News Corp breakup would “unlock value” for shareholders by creating one firm focused on television and film, and another on newspapers and other publishing entities.
On June 11 he encouraged shareholders that the split would “unleash the true potential of our quite unparalleled portfolio of assets, brands, and franchises.”
And so shareholders jumped on board.
The TV/film side was spun off under the name 21st Century Fox (NASDAQ:FOXA). The publishing arm, which includes the Wall Street Journal, the New York Post, and UK publication giants, retains the News Corp name.
Time will tell if Murdoch’s approach was right for News Corp’s and 21st Century’s prospects.
But News Corp isn’t the only company to try a strategic breakup to stimulate growth and shareholder value.
For instance in 2011, Kraft Foods, the largest food manufacturer in the U.S. and 2nd largest in the world behind Nestle SA (VTX:NESN), announced a major split.
As a result, each shareholder received one share of the new company, Kraft Foods Group (NASDAQ:KRFT) for every 3 shares of Kraft Foods stock. Kraft Foods then changed its name to Mondelez International Inc. (NASDAQ:MDLZ) and now consists of the overseas snacks operations.
The list of companies employing the strategic breakup strategy goes on and on…
So how does this strategy work, exactly?
“Corporate breakups make sense when you’ve got uniquely identifiable business segments that are growing faster than their peers. The concept is actually very, very simple,” Keith explains. “Vulnerable or less-profitable divisions are budded off. Absent all the weight or drag on earnings, the other divisions can perform more profitably.”
Keith highlights that companies ripe for splitting are ones with liability management issues, like pending litigation against a specific division, or with particular product units, lines, and divisions that just aren’t performing.
While not all companies pass Keith’s litmus test, here are 4 we believe would stand to benefit from a corporate breakup. The fourth might surprise you…
#1: Microsoft (NASDAQ:MSFT)
“To me, it’s the quintessential company that should be broken up,” Keith explains. “The CEO can’t control everything he needs to make that company grow, and as a result, it’s been stagnant for years.”
Keith isn’t alone. Pundits have been questioning a Microsoft split for years.
And recently, the company showed a big miss in earnings for its fourth quarter ending June 30th and for the entire fiscal year 2013, largely due to the flop of its Surface RT tablet.
The company could entirely benefit from reorganization and a split up.
“They’ve got good R&D, good thinking, and arguably good product; yet, they’re so big it’s like trying to turn the Titanic in a bathtub,” Keith quips.
#2: Apple (NASDAQ:AAPL)
“Apple runs a risk right now. Following Steve Jobs’ death, it has not been able to sustain the frenetic product development it needs,” Keith points out.
Apples shares were down nearly 40% from a record $702.10 in September, and closed up $21.52 to $440.51 on Wednesday in NASDAQ trading during the day.
Analysts are all over the boards on Apple’s road to recovery, but Keith boils it down:
“They’re talking about everything from iWatches to iTV to God knows what else. Maybe this company would be successful if it could separate the innovators from the MBA’s.”
#3: Hewlett-Packard (NYSE:HPQ)
Here is a company that just can’t win lately – its poor run of falling earnings and revenues over the last few years continues its run.
Falling PC sales were likely its biggest hit, but HP has extended itself into so many different product lines.
“They’ve got so many different products, and a long history of separating, and coming back together again. I’m not sure the original corporate identity even exists anymore,” Keith says.
Maybe if HP underwent a corporate breakup, separating out their product lines and sticking to it, the company would be able to restore its inner potential.
#4: Big banks
That’s right – big banks.
“Logically, I don’t think you can discuss corporate breakups without mentioning the 800 -pound gorilla in the room, and that’s the big banks,” Keith says. “I think the big banks should be broken up.”
People need to start realizing that banks are huge businesses, and they’re growing ever-larger. Just look at the numbers:
JPMorgan Chase (NYSE:JPM) is sitting at the top with $2.39 trillion in assets at the end of the first quarter. Bank of America (NYSE:BAC) has $2.17 trillion in total assets. Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) are at the three and four spots with $1.88 trillion and $1.44 trillion, respectively.
“The banks are so complicated and so big, and they’re totally above the law,” Keith noted. “They place the taxpayers at significant risk. It’s become less about value and more about self-preservation for these banks.”
With the recent bipartisan push for a new Glass-Steagall Act, Keith isn’t alone.
For more on the Glass-Steagall Act and efforts to breakup big banks, check out our latest article on Ending Too Big to Fail…
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