More breakups seen after conglomerates fall

NEW YORK/PHILADELPHIA Thu Jan 13, 2011 7:25pm EST

Related Topics

NEW YORK/PHILADELPHIA (Reuters) - Now that iconic conglomerates like Marathon Oil, ITT and Fortune Brands have bowed to restructurings and breakups, other companies may feel pressure to separate disparate businesses.

Marathon Oil Corp (MRO.N) will hive off its refinery and pipeline operations while ITT Corp (ITT.N), itself the product of a three-way split in 1995, is breaking in three again. Meanwhile, companies that once prided themselves on their diversity, such as Fortune Brands Inc FO.N, Motorola and now possibly Sara Lee Corp SLE.N, have or are splitting apart.

"If you see the presence of two large business units that are frankly different and are driven by different dynamics, then you have to ask yourself: 'What is management doing that is really extracting equal value from both or even value that is greater than the sum of the parts?,'" said one banker.

"If they're not, then maybe they ought to separate these things," the banker said, asking not to be named because he was not authorized to speak to the media.

Diversified companies in areas from technology to manufacturing to drugs could be candidates for breakups or spinoffs, several bankers said, with possible names including security software company Symantec (SYMC.O), communications equipment maker Harris Corp (HRS.N), helicopter manufacturer Textron Inc (TXT.N), pharmaceutical company Pfizer Inc (PFE.N) and healthcare firm Johnson & Johnson (JNJ.N).

Among energy names, El Paso Corp EP.N could face pressure to split up its upstream and pipeline businesses, and oilfield services company Rowan Cos Inc (RDC.N) could consider splitting into manufacturing and drilling businesses, bankers covering the sector said.

A wave of split-offs often leads to sales of individual units to rivals and would also bolster what many already expect to be a big comeback in M&A activity -- fueled by cheap debt and record cash piles -- this year.

"Now is an excellent time to consider M&A transactions," said Steve Koch, co-chairman of Credit Suisse's M&A Group.

"In order to be successful at M&A, some companies need to go through this type of restructuring process to be better positioned for success with further strategic moves."

Of course, dealmaking trends tend to run in waves. Many companies insist they are benefiting from diversification brought by earlier mergers and have no plans to make massive changes.

"Some, like J&J, argue that they do well being diversified because when one part of the company is ailing, the other is doing gangbusters, etc.," said one health care investment banker. "But they have many companies within a company."

J&J, with a market capitalization of $171 billion, produces products ranging from Band-Aids to medical devices to prescription drugs. It posted disappointing third-quarter quarterly revenue as sales of U.S. consumer products plunged 25 percent following recalls of Tylenol and other brands.

Breakups are "certainly the fashion of the day," said a third investment banker.

"A couple of these have been activist driven, so part of the driver is based on shareholder pressure," he said. "But we may see there be an aftereffect from these. People who may have thought about it in the past are all probably dusting off their analyses this week."

BIG ISN'T ALWAYS BAD

Big isn't necessarily bad, of course. Not all diversified companies need to be broken apart to unlock value for shareholders.

ITT had a large defense business that caused the entire organization, which also has faster-growing operations like water and industrial businesses, to trade "very poorly" like a pure play defense company, a fourth banker said.

"So clearly there was a value unleashed by doing this," he said. "If you look at other conglomerates -- United Technologies (UTX.N), Honeywell (HON.N), Textron -- most of them are trading at much higher multiples. So you don't get the value creation," from a split, the banker said.

Several bankers said that well-managed mega-conglomerates like General Electric Co (GE.N) are often sold for more than the sum of their different businesses and are prime examples that diversification could create positive synergies.

In some ways, the breakup wave is perhaps a natural consequence of armies of bankers looking for new ways to engineer change at big companies.

"There's always a wave of consolidation and then breakups. It's the ebb and flow of Wall Street. It gives bankers something to do," the health care investment banker said.

(Reporting by Soyoung Kim and Michael Erman in New York and Jessica Hall in Philadelphia; Writing by Jessica Hall; Editing by Phil Berlowitz)

FILED UNDER: