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Companies splitting up

  • Last Updated:
  • Aug 7th, 2018 10:44 pm
[OP]
Deal Addict
May 22, 2003
4521 posts
1974 upvotes
Vancouver

Companies splitting up

Was reading how with the CEO change in Pepsico, they may finally split the beverages and snacks into separate companies. I noticed there are other companies looking into splitting as well (e.g. Dowdupont). Can anybody explain why this advantageous? I always thought combining into one company would lead to cost savings due to synergy (e.g. with company mergers).
3 replies
Deal Guru
Jan 27, 2006
13528 posts
6465 upvotes
Vancouver, BC
Synergy only works when there is synergy and that synergy is greater than the drags that may occur.

All too often, companies create products/services as a by-product of their main product/service lines. Those by-products will typically play second fiddle to the main product/service and realistically the only synergy that's there is that they share HR and a few back-office functions. The problem with playing second fiddle is that the by-product typically doesn't receive the resources or attention required to make the by-product shine (ie. the main product/service may get the bulk of the marketing budget or headcount allocation) as such the by-product has poor growth.

Another issue that happens with larger conglomerates is that with so many pieces/products/services, many stock analysis won't know how to best classify a company and as such may mis-categorize the company and compare it with the wrong industry. Or an underperforming division may cause some analysis to downgrade the prospects for the whole company.
Banned
Aug 19, 2016
1903 posts
757 upvotes
As Charlie Munger would put it, they relied too much on management consultants.
Sr. Member
Jun 28, 2018
752 posts
495 upvotes
Toronto
There's a time and place...

Way I see it when things are running well then all segments contribute greatly... if the overall market demand turns and one segment's products are no longer in favour it drags down the whole entity.

Another possible split up that has been spoken of is UTX.

Or look at GE. They've been shedding units like crazy over the years.
The Distracted Investor

Dividends through quality companies 😃 Though I usually lose money with trades :facepalm:

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