Breaking up is hard to do, but beneficial

Provided by The Australian Investor

Monday 30th July 2001

Just as we were getting used to the boom times of mega-mergers, the wheel has turned again. Now, it seems, some corporates can't spin-off their assets quick enough. In Australia, the trend to grow by acquisition has been paralleled to some extent over the last few years by an opposite trend to break-up corporate structures. It seems likely that more shareholders this year will be asked to consider whether a break-up of their company is in their best interests. So, what are the qualitative implications of corporate break-ups?

The recent news that Pacific-Dunlop is to be the latest to deconstruct itself is an addition to the growing list of major companies that have, for a variety of reasons, decided to break apart. Australian Gas Light (Australian Pipeline Trust), BHP (One Steel), Amcor (Paperlinx) are among those that have in the past year or so, spun-off divisions as listed entities in their own right. Others such as Cable and Wireless Optus are working through a break-up process at the moment. Rumours abound that Coles Myer is considering shaving off under-performing divisions such as Target, Katies and OfficeWorks in the wake of some disastrous performance figures.

All these movements have different motivations. Interestingly for shareholders, some appear to have been driven, at least in part, by growing stakeholder pressure. For instance, Amcor's decision to spin-off its paper division under the Paperlinx banner (allowing Amcor to focus on its packaging business) may have been a reaction to pressure Amcor was under from green groups and a very active shareholder group regarding its environmental policies.

Pacific-Dunlop's move has been driven to a large extent by shareholder activism, with influential groups such as the Australian Shareholders Association at the helm. The company has been aggressively targetted by shareholders over the last 12 months - including institutions - particularly on governance issues. This must have been a major factor as the company seeks to re-align and re-characterise itself with its best performing brand division, Ansell, at its core, whilst sheering off under-performing labels in a range of disparate areas such as clothing, batteries, sports goods, automotive and tyres.

Such direct reactions to stakeholder pressure are rare however, even if the Amcor/Paperlinx case can be confirmed. Indirect reactions by corporations to increased stakeholder concerns and action are more common.

In an era of increased awareness about corporate operations, better understood shareholder rights, and more sophisticated civil activism, the large conglomerate-style operation is obliged to keep tuned in to a bigger, far more complex, world than it has probably ever been confronted with. The range of stakeholders to be dealt with, even those directly related to the company, such as its shareholders and customers, is more widely dispersed, more demographically broad and, most importantly, more willing to question company operations than at any other time in corporate history.

As such, it is clear that corporate leaders are deciding to pare down, at least in part, to escape the ever-growing tendrils of the globalised stakeholder. Better to focus on core products, core issues, core groups and core solutions rather than trying to reach too far and leaving themselves unguarded for a swift backdoor civil or stakeholder campaign.

Doing so makes good qualitative sense. It is the embodiment of a shift in corporate culture. The growing awareness among corporations is leading to the generation of a more engaged corporate mindset. Whereas in the past, in the first glow of globalisation, the mantra was "think global act local", the phrase now is "think local act local".

It's almost as if multinational corporations are adopting the approach of small business. Small businesses are closer to their market and their stakeholders, largely because they are dealing with them at a 'street' level rather than from the 40th floor. This allows them to better attune their operations to be in step with the community in which they do business. Greater flexibility, due to their smaller size, further enhances their ability, in a structural sense, to better engage with their stakeholders.

For shareholders it can be seen that the qualitative gains of this trend are valuable. As corporations begin downsizing their operations, rendering them more manageable and tightly focussed, shareholders will be more easily able to understand their company's strategies, and also to gain the necessary information regarding its operations. The problems created by cross-border, cross-sector businesses for shareholders will be ameliorated to some extent by the company's focus on core products and strategies. Better awareness should result and that's good for all concerned - both the company and its stakeholders.

Does this mean the end of conglomerate? Certainly not, at least in the short term. The waves of mergers may slow as the economic cycle moves off the boom time notch, but they will continue as companies seek to buy market share as a form of quick growth. In Australia, companies such as Wesfarmers seem set to remain conglomerates, while others such as PBL and Fosters appear to have set their sights on becoming more exposed to non-core markets (casinos and wine respectively).

Break-ups however will become more common. The surge in major mergers over the last 3 years has been linked to the rise in prominence of the shareholder. Adding short term value by whatever means has become something of an obsession with corporate leaders here and overseas as they attempt to placate their investors and, it must be said, to enhance their own bonus packages. The financial sense of this approach remains elusive to many as a long list of failed and failing mergers testifies. Similarly, the benefit for shareholders, in qualitative terms, has been slim in comparison to the added burden of tracking ever widening issue parameters, investment portfolios and controlled interest activities. Many are waking up to the fact that the corporate break-up makes more sense.

While generalising is always a dangerous game, its fair to say that qualitatively inclined shareholders will find much to support in the break-up of corporations. Economies of scale theories have their place, but there is a point at which topsy-like expansion must be reined in to ensure core values and strategies are given the attention they deserve. A more sustainable corporate culture and well-developed shareholder democracy will be more readily applied in such a context.

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