More companies should do the splits

Bigger is better for directors, but that’s not the case for shareholders. So which companies could unlock more value in separate parts?

Directors and chief executives always say they’re in it for shareholders, but it’s becoming increasingly clear that if they were, they would do the splits – that is, demerge.
 
Obviously that only applies to companies that contain more than one business, but actually most do: businesses that don’t look like conglomerates often are, and it would usually be far better for shareholders if they split up.
 
The demerger of News Corporation, owner of Business Spectator, is an obvious case in point: its shareholders have cleaned up since the demerger of its entertainment and publishing arms was announced last year and implemented this month. News had previously been seen as just a big media business, but it turns out to have been a conglomerate in need of a demerger.
 
Likewise Brambles, which has announced that it is hiving off its Recall document storage business from the Chep pallet operations, having failed to sell it. The share price jumped more than 3 per cent on the news.
 
Merrill Lynch has studied 19 demergers since 2000: the average outperformance against the market of the parent in the 12 months after the demerger was 7 per cent and the average outperformance of the spin-off was 15 per cent.
 
In some cases, shareholders were huge winners. Foster’s and Treasury Wine Estates outperformed 27 and 40 per cent respectively; AMP and Henderson Group, 17 and 33 per cent; Amcor and Paperlinx, 231 and 13 per cent. And some were disasters: Toll and Asciano underperformed 35 and 51 per cent and Burns Philp and Goodman Fielder underperformed by 25 and 17 per cent.
 
But the averages tell a pretty clear story and raise the question: which other companies should split?
 
Incitec Pivot is an obvious one: it should split its fertiliser and explosive businesses. Wesfarmers should break itself up into several parts: retailing, coal mining, insurance and chemicals. Other possible candidates for demerger include Seven Group, Leighton, Orica, Telstra and BHP Billiton (again).
 
In fact any company that has a tab on its website saying “Our Businesses” should probably demerge, to allow each business to be properly valued and its managers to concentrate.
 
But the conglomerates that might unlock the most value for shareholders by demerging are the banks.
 
At the start of the 2000s each of the big four moved into wealth management through big acquisitions, except for ANZ Bank which did it through a joint venture with ING, fully acquired in 2009. Commonwealth Bank bought Colonial, NAB bought MLC and Westpac bought BT.
 
None of those acquisitions has ever really worked. Banking and wealth management are oil and water, and the cross selling that was supposed to make it worthwhile has been very difficult to bring off.
 
It’s a fair bet that demerging the banks, so the bankers could concentrate on banking and the wealth managers concentrate on whatever it is they do, would create more value.
 
But given the obvious benefit to shareholders of most demergers, why don’t most companies do it? Because big companies pay big executive salaries of course, and in general the bigger your company the more important you are.

Alan Kohler will be debating Malcolm Turnbull on Coalition NBN policy at a business lunch at the Sheraton Wentworth in Sydney on August 1. To book a ticket click  here.

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