Should We Split Into Homogeneous Parts Or Stay Diversified?

The answer for most companies is to split, because investors are increasingly rewarding homogeneity. A version of divestiture occurs when a corporation splits itself into two or more parts, such as Hewlett-Packard (H-P) recently separating its personal computer and printer businesses from its corporate hardware and services operations. Generally the divested segments become separate, publically traded companies. Increasingly large conglomerate firms are employing this strategy, such as eBay spinning off its PayPal operations into a separate company. Sometimes this strategy is a prelude to the firm merging the separated part(s) with a rival firm, such as H-P’s corporate hardware and services business perhaps merging with EMC Corporation. PepsiCo is under pressure to split its soft drinks division away from its snacks operations. Even General Electric is facing pressure from investors to spin off some of its diverse operations ranging from power plants to locomotives. Dupont is splitting off a segment that generates 20 percent of its revenue. Gannet Company that owns USA Today and News Corp, publisher of the Wall Street Journal, recently split their print-publishing businesses from their television or film businesses.
In 2014 alone, corporations globally split off about $2 trillion worth of subsidiaries. Part of the reason for splitting diversified firms is that the homogenous parts are generally much more attractive for potential buyers. Acquiring firms most times want homogeneity to complement their own operations, rather than heterogeneity, and are willing to pay for homogeneity.
Source: Based on David Benoit and Theo Francis, “Corporations Call It Splits,” Wall Street Journal, October 7, 2014, p. A1 and A12.