Running Businesses Are Like Parenting - If You Love Them You Must Let Them Go

By: Mike Teng
Submitted: 2007-01-17 15:33:25
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When the children grow up, parents will have to learn to let them leave the security of their homes in order to pursue their dreams of studies, careers and marriage. Companies too have to learn to part with their businesses at the appropriate time. Some need to close down, while others sold away or be broken up. Usually, this is a difficult decision as the company does suffer from empty nest syndrome too, similar to doting parents when their children depart from their homes.

Divestment, demerger or break-up is taking place all the time and will have more impact than downsizing, delayering, etc. AT &T was amongst the first big boys to break up. Luthansia has sectioned off its air-freight operations. Sandoz in Switzerland released its chemical division.

A reason for the break up is to obtain better focus. A CEO of the group cannot make the right decision for the subsidiaries as he is not able to know all the details pertaining to its subsidiaries. Therefore such big conglomerates cannot compete against their specialist competitors. People work better when they have some say about their work. The central controllers blame the subsidiaries for siefdoms and empire building. The central head office bureaucracy builds up and bogs down the business.

Getting a fair share price is another cause. Investment bankers actually encouraged this too. The share price of a big group is the average of the group’s performance. If the better subsidiary is broken up, it will have a higher share price value. When the group is split up, it is like a share split. Share split is a popular way for listed company to attract more investors to its shares. For instance, a listed company with a US $80/share when split into two of US $40/share each will attract more buyers to its shares as the split share becomes more affordable.

Another reason is to reduce debt. When the subsidiary is geared up, cash is passed to the parent company and the subsidiary sectioned off with the debt. Fear of takeover is another reason. For instance, ICI kept its chemical and pharmaceutical divisions under common ownership until the pharmaceutical division was threatened to be taken over by Hanson. To ward off a takeover, ICI spun off Zeneca, the bioscience company.

Some do it to separate two parts of the company, which are competitive. While others do it to rid of a troubled unit before it pulled down the whole group. For example, tobacco companies break up for fear of litigation against it.

However, there are exceptions to the rule. GE did not break up to stay competitive. Instead, Jack Welch decided the best course of action for GE in the 1980s was to rid itself of the businesses that GE is not faring too well. Those companies that were spun from GE did better than if they had stayed in the GE family. For IBM, Lou Gerstner was not convinced to break up IBM in order to turn it around. Instead Lou moved the organisation to focus on services. Lou was proven right not to break up IBM, which his predecessor John Akers had wanted to do.

Like a woman giving birth to the child, it is difficult to let the child go. You must enjoy and be able to manage it. You must earn what you are worth. Do not let the ego and emotions get in the way, stop if it is not working well.

Evaluate your businesses, some may fare better if they are spun off. For others, which are terminally ill, it may be better to close them down and bury them.

Article source: Expert Articles