Multi Business Companies: Breaking up is hard to do

The Discussion Issue

There are many companies that operate in multiple businesses. While the motives for this push into multiple businesses is varied and sometimes merited (synergy, shared costs etc.), it does create scenarios where a company can find itself having to allocate capital across these businesses, with very different risk profiles. If the company fails at this task, its value will suffer, and the company may find itself targeted by activist investors seeking a breakup of the company. Not all activist moves for breakups are well thought through or well intentioned but they all have the effect of bringing to the surface the different characteristics (risk, growth and cash flows) of the many businesses that comprise a single company. That discussion may be uncomfortable for managers but it is a good one to have.

The Activist Push

While the push for breaking up companies has been around as long as markets have been around, there seems to be an increase in activity on this dimension. Start with this Wall Street Journal story that points out that not only are more companies being targeted for break ups, but that the targeted companies are getting bigger.
http://online.wsj.com/news/articles/SB10001424052702304899704579391190297827908

As you look at the companies highlighted in this article, they range the spectrum from natural resource companies to consumer product companies.

The Sony Bid

Sony may be an iconic Japanese name brand but it has had a tough decade, losing a hundred billion (not a typo) in market capitalization over the last decade. It has also managed over the last two decades to spread itself across multiple business, broadly categorized into entertainment and electronics, with each of these businesses having sub-businesses. In fact, taking a look at the annual report from 2013 for Sony, here is the picture of the range of their businesses:

If you are wondering what is in each of these groupings, the following page may or may not help you:

It was a surprise to some people when Dan Loeb targeted Sony for a breakup last summer. You can start with the news stories about the bid:
News story: http://www.bloomberg.com/news/2013-05-15/sony-s-100-billion-lost-supports-loeb-breakup-real-m-a.html
You Tube video: http://www.youtube.com/watch?v=mtwzGevk58A

Sony's response was predictable, insofar that it rejected the break up bid:
http://rt.com/business/sony-loeb-rejected-japan-107/

The story is not over. Loeb continues to be one of Sony's largest stockholders and is still pushing for a break up.
http://www.bloomberg.com/news/2014-02-09/sony-woes-seen-prelude-to-loeb-inspired-breakup-real-m-a.html

Key Questions

1. The companies that have targeted for break ups are in many businesses, but not every company that is in multiple businesses gets targeted. What are the characteristics of a company that make it more likely to be targeted by activist? (Think like an activist and look for screens that you would use to identify good targets).
2. While the risk story is not central to many break ups, assume that you are looking at a congolomerate, spread across businesses with different risk profiles (and across different countries). If this conglomerate has followed a practice of using a single hurdle rate across the company for many years, what are the consequences for growth, investing and value at the different business units? (Classify the businesses based on risk and think about which ones will have over invested, which ones will have under invested and how this will play out when you break up the company.)
3. Take a look at Sony's businesses. Based on our discussion of the determinants of betas (discretionary or non-discretionary product/service, fixed costs), make a judgment on how much market risk investors will see in these businesses and follow through by thinking about how hurdle rates need to vary across these businesses.
4. If you were a Sony investor, which side of the argument (Dan Loeb or the management) would you come down on? Why?
5. Underlying the Sony fight is the question of corporate governance. As a Japanese company, Sony has insulation against challenges, some of which are instiutional and some of which are political. Using the corporate governance angle, generalize about what you would expect to see in multibusiness companies in markets with strong corporate governance versus ones in markets with weak corporate governance.