Feb
11
2010
11
2010
How Can Splitting Companies into Two Help Shareholders?
An article by 
Motorola is splitting
Recently Motorola announced that it is considering splitting the company into two publicly traded units early next year. One unit would be for its mobile handsets and home television units. While the other unit would be taking care of all the current ailing businesses of Motorola.
Why is Motorola Splitting
So why is Motorola splitting? Is it going to help Motorola run more efficiently in the long run? Are there precedence of this happening in the past ? This article tries to analyze some of these issues.
Philip Morris Did the Same
The best way of describing the success of this strategy is to take the example of Philip Morris. Until last year Philip Morris Shares were unable to grow because of the large number of health care litigation is US. The company was struggling and had no direction. Philip Morris divided itself into two groups. One was Philip Morris International which consisted of the really fast growing economies of China and India. The other was Altria Group which was mainly the US business headquartered in Richmond VA. In last one year Philip Morris international stock has jumped up 33%. Recently it faired a 2010 guidance of $3.85 per share higher than the consensus estimate $3.82 . This led to the analysts increasing their estimate for its earning by 5 cents a share with a buy rating on its share at a price target of $56. Their current stock price is 49%. That is almost 14% rate of return on your investment.
How did Splitting Help Philip Morris
If you look around, you will realize that as businesses grow really big they start dragging with them a lot of liabilities of being big. In Philip Morris’ case it was the litigations in US. As the companies size reduced the number of litigation also reduced. People working at the international entity were able to concentrate on growth while the people working in local division could concentrate on reducing the liabilities and size of the business. Such changes help in brining focus back at large to what is important for customers as well as investors i.e. value for money.
Large Auto Companies Recently Experimented By Splitting
We recently saw this happen with the two big auto companies of US too. When they went into bankruptcy, they were essentially split into two units, one which had all the good assets while the other which had all the liabilities. The bad units liabilities like long term health cost of employees was shared by labor unions and government while GM could concentrate on growth again and come out of bankruptcy.
Where else Splitting Can be Great
Another area where it was proposed to be used was during the financial crises at Citibank. In the proposal Citi was basically divided into two entities . The first entity would be the good bank. That was supposed to own all the good relationships and deposits of the bank. It would also own the highly profitable investment arm unit. The other was the bad bank which was supposed to own all the toxic mortgage backed securities. However the proposal was turned down due to just the enormous size of the bank and the repurcusons it could have on the entire financial industry.
Now lets Look at Motorola
So why is Motorola splitting again? Motorola today has a very profitable mobile business. However the business is also becoming much more competitive especially with the entry of Apple’s iPhone. Motorola is not able to focus on it due to its large size and the problems the other units bring along with them. The split will help Motorola get the focus back on its core business while the other units can try and identify new opportunities in other areas. This makes us comfortable with the strategy of the current CEO and makes Motorola a good long term buy.
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