Why Do Firms Spin-off Divisions, and Is it Good for Investors?
A look at the General Electric, Johnson & Johnson, and Toshiba Spin-off announcements
Breaking up is hard to do — and sometimes takes a while. In the last few weeks, there have been a flurry of announcements from iconic firms, all founded well over a century ago, regarding their pending breakup into two or three public companies: General Electric (ticker GE), Johnson & Johnson (JNJ), and Toshiba (TOSYY). I’ll take a look at the reasons behind both conglomerates and spin-offs in general, and each of the pending spin-offs in particular, as well as the short-term market reaction, and what the longer-term prospects are for investors.
Why Firms Diversify–and Then Breakup
The notion of the benefits of a conglomerate — a firm with a number of diverse and often unrelated business — tends to go in and out of fashion. On the one hand, conglomerates can be seen to provide diversification benefits by reduce risk. For example, while one business may see slow growth or even a decline in sales and profits, another prosperous business may have an offsetting effect. Studies have shown that during the 1960s conglomerate wave, markets reacted positively to the announcement of an acquisition of another firm in an unrelated…
