Divorce, 1990s Style
"Imperial Chemicals Industries P.L.C., Britain's largest industrial company, reported gloomy profits today," the New York Times reported on July 31, 1992, "but its shares soared as it announced a plan to split itself in two." Last year, ICI almost fell victim to a hostile raider, Lord Hanson—who vowed to break up the giant. Now the company plans to do the job itself, splitting off ICI Bioscience, which would include a passel of fast-growing businesses. (Share price went up 8 percent upon announcement.)
Earlier this year, the New York Times reported that Westmark International planned to split in two—share price leaped 21 percent on the day of announcement. (Then there's Burlington Northern, which divorced railroad and energy operations in 1988—and in the next 12 months watched market value more than double to $9 billion. Now it's thinking about dividing up again.) But all that's small change next to the saga of AT&T.
On January 7, 1982, AT&T's stock market value was $47.5 billion, according to Fortune magazine. Ten years later (June 24, 1992), AT&T and the seven Baby Bells it spawned had a combined worth of $179.9 billion. The 279 percent increase in market value contrasts with a 66 percent increase at IBM over the same period.
What if IBM had been split up, Fortune wondered, in a July 27, 1992, article titled "Breaking up IBM." In fact, last November, IBM CEO John Akers, in the most dramatic reorganization in the company's history, granted substantial autonomy to 13 subordinate units, quickly dubbed Baby Blues. The announcement caused the firm's stock to spurt—even though a $3 billion reorganization charge was levied at the same time.
"The Fortune 500 is over," Peter Drucker intoned in the Fortune 500 issue of the magazine last April. Overstatement? Maybe. But there's no question that sluggish giants around the world—Hitachi, Siemens, Philips, ICI, Sears, GM, IBM, DEC,
etc., etc.—are finding their size is an intolerable millstone in an increasingly frenetic marketplace.
The historic response to marketplace change, starting with DuPont and General Motors in the 1920s, has been decentralization. But it looks like that's not enough. The problem is decentralization seldom takes hold. A still sizable corporate headquarters and the pronounced culture that led the big company to succeed in the first place continue to cast very long shadows over subsidiary operations.
An IBM may well decentralize (again and again and again), but the "IBM way" remains an inhibiting force, from Fort Lauderdale to Paris to Tokyo. Occasionally something drops through corporate cracks: The early days of IBM's renegade PC developers in Florida were marked by spunk, purposeful disdain for the hierarchy—and stunning success. But as the PC operation grew, it came more and more under headquarters' sway, and lost its zip. Another renegade band in Rochester, Minnesota, thumbed its nose at traditional IBM definitions of markets and customers, and created the remarkable AS/400 minicomputer. But these exceptions almost prove the rule.
It looks as if splitting up the enterprise is the only answer, though there may be some halfway houses—none more interesting than the scheme created by Thermo Electron, the $800 million Massachusetts-based, high-tech company. Founder and CEO George Hatsopoulos egged on the entrepreneurial spirit from the start, granting stock options to divisional execs (he began divisionalizing almost immediately). But Hatsopoulos discovered that with continuing growth, such incentives weren't enough to keep entrepreneurship flourishing. His answer: Sell minority interests in subordinate units to the public. Thermo has done so with eight businesses, including its former central R&D operation! (By now, a spin-off has even spun off minority public interest in one of its subsidiary operations.)
Thermo's approach reverses conventional spinoff wisdom. "Before we arrived on the scene, 'spin-off' might have implied 'How do you get rid of a dog?"' said John Wood, CEO of Thermedics, the first spin-off. "We've used it in quite the opposite way: 'How do you take a jewel and raise money to finance its growth more rapidly than you could afford to if it remained part of a larger corporation—and at the same time offer strong incentives to the management team to make it successful?' "
The market gets it. "We got an added bonus—the price of the parent stock started rising, because analysts can now judge the value of the parent by seeing the value of the spin-offs, multiplied by the percentage of parent ownership," said Chief Financial officer John Hatsopoulos, brother of George. "They added it up and what they thought was value X was really 2X."
John Akers, whose "radical" reorganization falls short of a true spin-off strategy, should take the hint—and start shopping his Baby Blues around. Bob Stempel at General Motors should go the same route: Hey, I'd buy shares in an independent Saturn Corp. in a minute!
I don't suggest we carry out the world's commerce in two-person groups sequestered in garages. But I do say that yesterday's behemoths are out of step with tomorrow's madcap marketplace. The only answer may lie in the divorce court.
(C) 1992 TPG Communications.
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