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Corporate Breakups: Why Smaller is Better for Some Brands

Ryan Rieches

Is a bigger company better or is a more focused company better? Is diversification through building and maintaining a “house of brands” better than aggressively streamlining to focus on expanding market share for “core” brands?

Recent business headlines don’t appear to favor empire builders. Underperforming brands, business lines with marginal prospects and even robust operating units are being jettisoned as investors put a premium on companies that excel in narrowly focused areas with strong growth potential. Consider Hewlett-Packard. When Meg Whitman took over as CEO of HP in 2011, she dismissed the idea that the company might split in two, proclaiming, and “Together we are stronger.” But now HP is breaking up, as Whitman recently announced plans to sever its PC and printer business from its enterprise technology business. Her new mantra: “Being nimble is the only path to winning.”

Now the new Hewlett-Packard Enterprise—focused on computer servers, data-storage equipment, software and consulting services—will have to innovate and make strategic acquisitions without the benefit of being wedded to a cash-cow printer business, which will be part of a separate company named HP Inc.
In effect, both companies will still be doing business under a brand name that is synonymous with the rise of Silicon Valley as the center of the technology universe. While it makes sense to associate with that legacy, the corporate names Enterprise and Inc., in my view, don’t bring much distinction in terms of heralding a new era.

More unravelling is coming. Carl Icahn, for instance, has been persistent in calling for eBay to spin off its PayPal unit. Initially dismissive of the proposal, eBay CEO John Donahoe now is championing the recent decision by eBay’s board to create two publicly traded companies in the second half of 2015. Although the digital payment and ecommerce units, operating as relatively independent siblings for over a decade, have mutually benefited each other, the rapidly changing landscape necessitates a shakeup if PayPal is to fully capitalize on a hot market with tremendous potential. Viewing the spinoff from a purely marketing perspective, this move makes sense as both eBay and PayPal have distinct, recognizable brand names with loyal customers – and a growing global market for each individual brand offering. (Of course, just as PayPal will need to stand on its own to battle Apple in mobile payments, eBay will have to step up its game to contend with the Alibaba juggernaut.)

The pace of corporate spinoffs and brand portfolio rationalizations isn’t likely to slow given the cheers and pressure from Wall Street, which is reaping huge fees from the breakup bonanza. Investors, moreover, seem biased in favor of radical action to rationalize corporate structures and sharpen focus on core business lines.

Consider Abbott Laboratories, which in 2013 split into two publically traded companies. The medical products company retained the Abbott name while the research-based pharmaceutical unit became AbbVie, which has excelled at developing therapies and related innovations for the global marketplace. At the time of the split, the corporation had a valuation of $103 billion. Today, the market values Abbott Labs at $63 billion and AbbVie at $93 billion, for a combined total of $156 billion. Clearly, the opportunity to grow the pharma side of the business independently, under a separate brand, has been a home run.

The Narrower the Focus, the Stronger the Brand

For diversified conglomerates, Philip Morris is proving to be a bellwether. The company, in an effort to diversify from its core tobacco brands, acquired Kraft Foods in 1988. Rebranding itself under the name Altria, the company made other acquisitions, becoming a house of brands with a value of $185 billion in 2007. Subsequently, Kraft and Phillip Morris were spun off as separate companies. In 2012, Kraft took it a step further by spinning off its fast-growing global snack foods company under the name Mondelez International. Today, the combined value of the companies is $315 billion.

There are many other related examples. General Electric, after selling off its consumer home appliance business to focus on its B2B core and with its stock price in a slump, now finds itself under increased investor pressure to shed its health-care business. Its recent decision to spin-off its financial division focused on private-label credit cards and rebrand under Synchrony Financial has led to a very successful IPO.

Conoco Phillips, the world’s largest independent pure-play energy exploration and production company, spun off its downstream assets as a separate company, Phillips 66, in order to focus on the two different sides of the business. In just two years, its market capitalization has grown from $91 billion to $135 billion. Investors also have applauded Time Warner’s decision to shed magazine publishing, AOL and cable systems, thus positioning itself as a producer of entertainment content — moves that have set the table for the company’s HBO unit to launch a stand-alone, online streaming version of its service next year.

It remains to be seen whether HP’s breakup will enhance long-term value and create similar opportunities for boldly seizing initiative. But in general, spinoffs do serve a fundamental principle: Brands become stronger when they are focused on a specific market and stand for something unique.

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