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Understand why large companies are deciding to split

Breaking up is the newest craze for gigantic global companies. Johnson & Johnson, Toshiba and GE announced plans to split into multiple entities last week. The trend may just be starting.

Conglomerates are big and heavy. Wall Street hates them because he doesn’t know how to evaluate them properly. Presidents and corporate boards are finally getting the message: flexible is the new big.

The division of Johnson & Johnson into two companies – one for its consumer products and one for its medicines and medical devices – is the latest change in the healthcare industry. Many other large pharmaceutical companies, including Pfizer, Merck and GlaxoSmithKline, have had major separations in recent years or have plans to do so.

Investors are willing to pay a higher price for fast-growing drug, biotechnology and medical device businesses than generics and branded consumer products. At actions J&J’s rose nearly 2% in early trading on Friday (12).

But as the Toshiba and GE divisions show, corporate divorces aren’t limited to the healthcare industry.

“To survive and keep pace with market trends, companies need to look at what their most profitable lines of business are and where they should spend most of their time and focus,” said Liz Young, head of investment strategy at SoFi, in an interview with CNN Business.

“The competition is fierce. Sometimes you have to break it up to rebuild it,” Young added.

Wave of big companies breaking up

Large companies around the world in a variety of industries are getting smaller.

the tech giant Dell recently turned its VMWare cloud business into an entirely separate company. Retailer L Brands split into two companies: Bath & Body Works and Victoria’s Secret.

IBM transformed its information technology services unit into a new company called Kyndryl. As a result, Kyndryl now has more flexibility to joint venture with rivals in the cloud. IBM. For example, she announced a deal with Microsoft on Friday.

“We have a new freedom to enter the market. We can continue to serve IBM customers, but we can also expand partnerships with other technology providers,” Kyndryl Chief Financial Officer David Wyshner said in an interview with CNN Business earlier this month.

Other companies may find that separating divisions gives them greater autonomy to establish business relationships that may not make as much strategic sense when they are part of a colossal conglomerate.

But asset divestitures and sales are also a way for companies to reverse decisions that investors weren’t thrilled with in the first place. One example is that of the telecommunications giants Verizon e AT&T, owner of WarnerMedia, controller of CNN, for example.

Both stocks have lagged behind the broader market in recent years, in part because of falling revenue and earnings growth, but also because of concerns that the two companies have strayed too far from their core businesses by making flamboyant deals. in the media sector.

Verizon bought AOL and Yahoo and combined them into a unit it first called Oath and later called Verizon Media. The acquisition was never worth it. Verizon sold the media division to private equity titan Apollo for $5 billion in September and is holding only a 10% stake in it.

And AT&T is planning to spin off WarnerMedia and merge it with streaming and cable giant Discovery. The deal, which is expected to close in mid-2022, will create a new company called Warner Bros. Discovery.

*(Translated text. Click here to read the original, in English)

Reference: CNN Brasil

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