General Electric is one of the best-performing stocks in the S&P 500 this year.
And it’s all because of a breakup.
Spin-offs — or the act of a company getting rid of a business line — could be coming back en vogue in an era of slowing growth and profit pressures. It’s corporate America’s way of breaking up with its underperforming products and services, then letting them survive on their own.
Big names like Alibaba and JD.com have foreshadowed breakups in recent days, while other companies like Uber and Teck have mulled over their own spin-offs.
Big and bold, or small and nimble?
Big, bold conglomerates have become the norm in today’s stock market. Over the past decade, people have rewarded entrepreneurial companies for taking on new ventures — a product of low rates and a system flush with cash. The outcome? A bunch of Frankenstein-like companies juggling multiple situationships.
Just look at Amazon. Is it an online retailer, a grocery store operator, a cloud services company, or a streaming content studio? All of the above, actually. Owning your entire life seems to be the goal of big tech, and that requires a lot of strategic expansions.
It seems times are changing, though. It’s easier to explore new strategies in good times, but is this the smartest approach when a recession could be around the corner? Investors aren’t so sure. They’re rewarding cost-cutting and value over entrepreneurship and creativity, putting the pressure on companies to slim down and focus.
And with that, we could see more spin-offs pop up. Spin-offs can happen for a variety of reasons, but they primarily occur when businesses want to unload a certain product or strategy that isn’t working for them. Did you know that Coca-Cola spun off a movie production studio in the 1980s, or that Quaker Oats spun off Fisher Price in the 1990s?
It’s not just the economy, either. Antitrust arguments are building against big tech, which could lead to some breakups in the name of the law. This could take time, but it’s a credible threat against some of the brands that dominate our daily routines.
No matter the cause, the pressure seems to be building. Last week, Alibaba announced it’d be restructuring its company into six parts, setting the stage to eventually spin off some businesses. JD.com announced a breakup of its own, filing for its property and industrials units to go public on March 30. Earlier this year, Johnson & Johnson split from its consumer health business. In total, 23 US companies have broken up with — or spun off — a business line this year, and more are rumored to be on the way.
After the breakup
These breakups seem to be pleasing investors, too.
Back to GE, an unexpected market leader this year. GE is the stereotypical conglomerate – a $100 billion, 130-year-old company that’s picked up a lot of business lines over the years. In January, GE broke up with its healthcare business, a line that brought in 25% of its revenues in 2022. GE shares have rocketed higher since the spin-off, gaining 42%, with almost a third of that rally coming in the week after the breakup. Funnily enough, GE’s healthcare unit (now ticker GEHC) is up almost 44% over that same period. How’s that for revenge?
It’s not just GE, either. Alibaba shares are up 15% since they announced the restructuring on March 27. And JD.com shares rose 8% the day they broke news of their own spin-off. In these situations, investors may be telling us that the individual parts are worth more as separate entities than one giant company. They could also be encouraged by the efficiencies of small, nimble companies free to unlock value in their own ways.
Either way, it’s important to remember that breaking up isn’t always the end of the story. Spun-off companies tend to have a mixed track record post-break up, even if the announcement causes excitement. In fact, an S&P index of recently spun off companies has trailed the S&P 500 in four out of the past five years. Many spin-offs get cuffed up again through an acquisition, and some even go bankrupt.
But occasionally, spun-off companies flourish on their own. 47% of companies that were spun off over the past 10 years — and still operate as independent businesses — have outperformed their former partners since the breakup. Change the time frame to this year, and nearly 60% of spun-off companies are doing better than their exes. Look at PayPal, Mondelez, AbbVie, and T-Mobile — they were all once jilted spin-offs from other companies.
Know what you own
While breaking up can be hard to do, companies are finding it a little bit easier these days. Executives are using spin-offs to unlock value for their shareholders, although the jury’s out on just how successful each breakup will be.
Even if your companies aren’t splitting, it’s important to understand what you own. Companies evolve over time, and you may end up holding a stake in a business you didn’t realize you had.
*Data sourced through Bloomberg. Can be made available upon request.