Big corporations are changing their business model and focusing on productive core business functions by splitting off and making profits. In some ways, splitting a company into two leads to a substantial higher valuation of the asset. Pradeep Agarwal informs why breaking up is the newest craze for ginormous global companies. He further explains the benefits and future possibilities it brings for the newly generated companies, despite the risks involved in the process.
Proficient business leaders and divestiture teams can have trouble determining when and how to deploy limited resources in high-pressure deals. Pradeep Agarwal after learning about big splits by companies including Toshiba, IBM, General Electric (GE), and Johnson & Johnson noticed that the organisations encountered several risks as they led the split of the company into two.
“Business environment uncertainty, operating model definition, employee impacts, and technology target state were the major risks they noted,” informs Agarwal. “While spitting is a speculative process, giants like Toshiba, IBM, GE, etc., are still going at it because large companies around the world, in a variety of sectors are finding advantage in getting smaller,” he adds.
Toshiba announced its split into three standalone companies – Infrastructure Service Co, Device Co, and Toshiba, hoping to deliver sustainable profit growth as well as enhanced shareholder value. Separation of the leadership structures for these businesses will facilitate more agile decision-making, with greater focus and knowledge of the company’s customers and employees, and create optionality for both new companies to make their own separate and informed decisions regarding potential strategic partners.
Likewise, General Electric (GE) announced its splitting to form three units focused on healthcare, aviation, and energy. Johnson & Johnson also split into two companies, separating consumer products and pharmaceutical businesses.
After closely examining these cases, Pradeep Agarwal explains, “From my standpoint, the deadlines and outcomes are clear in the case of splitting a public company. It requires cross-functional collaboration and visibility at the strategic planning and executive manner. By establishing a separate management office and steering committee, it serves as the ultimate escalation point and decision maker to break ties, even if it means a compromise.”
Splitting a company is often referred to as a ‘demerger’. To identify which route works best for your company, it is recommended to take both legal and tax advice before embarking on a separation. In case of non-structured separation from both tax and legal perspective, a company may suffer from hefty tax bills or other unintended liabilities down the line.
Separation involves dedicated and proficient resources that understand the cross-functional challenges involved. The team must consist of people who acknowledge the interconnectedness of technology, architecture, data, and processes. It is crucial that team orientations for the common objective to create unity.
In line with that, a cross-functional team must build the necessary lead time, when financial regulations or audits are involved. As a part of project planning, a risk management project must be created with highest risks and impacts. When time is of the essence, contingency plans need to be in place to adapt quickly.
Pradeep Agarwal believes in prioritising speed over perfection. “The key is to not wait for a miracle. You can miss out on the opportunities transformation brings. Make a plan and iteratively build, test, and improve in an agile-delivery process. This way, you will be able to identify isolated mistakes early and tackle them,” he suggests.
Every employee, supplier, customer, and all others involved with the company are impacted in case of a split. Mr. Pradeep Agarwal’s advice is to create a communication plan for different sets of people. The lack of communication might create a sense of fear and pessimism among the people working with or for the company. The best way is to form a weekly or monthly newsletter on the separation progress. It will bring helpful insights and feedback to keep the organisation aligned with its common goal.
It is understandable that splitting is a big change, but it is undeniable that along with uncertainty, change brings opportunities. If done correctly, the stock prices for split companies tend to increase and the whole profit is not greater than the sum of its parts. For survival and keeping up with market trends, companies have to look at their most profitable lines of business, and splitting can be counted as one of them.