03/12/2021 - 14:00

Investors seek rebound after break-up

03/12/2021 - 14:00


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Some major companies have decided the sum of their parts is greater than the whole.

Investors seek rebound after break-up
Royal Dutch Shell plans to quit its homeland in Holland. Photo: Stockphoto

Right ideas conceived by international management consultancies have a habit of washing up in the most remote corners of the world.

So don’t be surprised if ripples of the break-up of three century-old industrial conglomerates have an interesting effect on businesses in Western Australia.

Over the past month, some of the best-known names in world business with diverse interests have unveiled plans to tear themselves apart in the name of maximising value for shareholders.

Two giants of the US economy – General Electric and Johnson & Johnson – are being dismembered because of a theory that millions of investors will be richer for the experience.

Japan’s Toshiba is following with its own break-up plan, while in Europe there’s another momentous shake-up affecting one of the world’s biggest companies, as Royal Dutch Shell pushes ahead with plans to end a dual domicile structure by quitting its homeland in Holland (dropping Royal Dutch from its name) and making London its sole head office.

Those moves follow a decision by mining giant BHP to end a contentious 20-year dual-listed structure with some of its shares listed in London and some listed in Australia. At some point in the future, BHP will only call Australia home.

Cleaning up historic corporate structures in the name of simplicity and potentially to boost shareholder returns is an idea that resonates loudly with investors hungry for a reasonable yield on their funds at a time of ultra-low interest rates.

What’s not understood yet, however, is what sparked the break-up moves. The smart money points to the influence of a big-name management firm such as McKinsey or Bain telling clients that the sum of their parts is greater than the whole.

General Electric, for example, will spin off its energy and healthcare business units while retaining aviation. Johnson & Johnson will quit consumer health, keeping prescription drugs and medical devices, while Toshiba will split into three separate electronics businesses.

Most big Australian industrial conglomerates were broken into their component parts more than 20 years ago with one major exception, Wesfarmers, where management argues that a unified structure generates better returns over a full business cycle.

Wesfarmers’ success in operating as a single business probably ensures that it its directors will not subscribe to the break-up theory, although it’s a fair bet that investment banks will be doing sum-of-the-parts calculations to see if a series of smaller businesses would be better for Wesfarmers shareholders (and for the fee-earning banks).

More likely targets for the management consultancies promoting break-up theory are Australia’s big two resources companies: BHP and Rio Tinto.

Past speculation that BHP would be more valuable to its owners if reduced to a series of smaller companies focused on specific commodities such as iron ore, copper, and metallurgical coal, led to BHP spinning off surplus assets into South32.

But what’s happening at the top end of the corporate world with companies as prominent as GE, J&J and Toshiba will kick the break-up ball back into play, with potentially significant implications for WA.

A standalone iron ore business carved off BHP would be the easiest move, although more interesting would be the creation of a future metals division built around BHP’s nickel and copper operations, perhaps incorporating a position in lithium.

A business called ‘BHP future metals’ could even consider a move into the fast-growing west coast palladium and platinum industry by acquiring a local player such as Chalice Mining, or by throwing its weight behind an expanded exploration effort in the hills to Perth’s east.

The key point for shareholders in conglomerate stocks such as Wesfarmers and BHP, is the break-up theory that comes around every 20 years or so has returned, and it will appeal to some investors.

A matter of time

FOMO and FOI, the ‘fear of missing out’ and the ‘fear of inflation’, are shaping as the twin causes of the next stock market correction (or crash), as investors are driven out of bank deposits into anything with a better yield, as well as trying to stave off a possible sharp increase in inflation.

Armed with abundant cash created by government stimulus programs, the rush into dividend-paying equities has bid share prices up to record levels, followed by the supercharging effect of retail speculators using the stock market as a casino.

When will it end? Nobody can give you a date, but end it will, potentially spectacularly.


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