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When corporate spin-offs work – and when they don't

Breaking up conglomerates is all the rage, but history tells us that such businesses have a patchy history of boosting shareholder value
June 20, 2024

Whenever a big diversified company reveals its intention to break up into its constituent pieces, a familiar question is sure to follow: is this, at last, the end of the conglomerate? Declarations to this effect were heard far and wide in late 2021 when US titans GE and Johnson & Johnson (US:JNJ) and Japan's Toshiba (JP:6588) each announced plans to split. The death knell has sounded again in recent weeks thanks to the forthcoming break-up of chemicals behemoth DuPont de Nemours (US:DD).

In reality, the emergence and dissipation of giant, multi-industry companies are arguably somewhat cyclical processes. The low interest rates and stock market swings of the 1960s, for instance, are credited with driving a conglomerate boom in the US. Proponents of these outsized organisations argued that a diversified company with numerous (often unrelated) lines of business was better placed to weather market volatility. Yet by the 1980s, antitrust scrutiny and weak performance had forced many of America’s corporate giants to slim down and sell up. 

Critiques of conglomeration are now well established. Intricate structures are more difficult for investors to understand and underperformance by one division can mean a group is valued at less than the sum of its parts (commonly known as the 'conglomerate discount'). The rise of active and passive funds has also made it simpler for even the most casual investor to easily diversify their portfolios themselves.

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