Divesting For Growth - Think Chevron And GE, Not Coke

Feb 19 2014, 6:28pm CST | by

Divesting For Growth - Think Chevron And GE, Not Coke
Photo Credit: Forbes Business

The Wall Street Journal today (2/19) noted that the Wall Street divestiture cycle is in full swing, spurred on by activist shareholders (“New Push to Throw Assets Overboard”).

Companies ranging from chemical giants to restaurant chains have come under fire from shareholders wanting to break them apart, arguing that businesses perform better when they aren’t part of a sprawling conglomerate.

But activism is only part of the story. More fundamentally is the push from Wall Street.

Personal disclosure: Portfolio holdings include Caterpillar, Chevron and General Electric, given as examples below.

The Wall Street acquisition-divestiture cycle’s basis and results

Wall Street’s investment bankers are smart, hard working individuals who play an integral role in meshing businesses’ desire for success with the opportunities afforded through financial dealings. However, beneath the activity, there is a self-perpetuating cycle of acquisition and divestiture.

Previously, the cycle was in acquisition mode, with many companies buying for synergistic benefits – i.e., gaining an added payoff from the combination. Nowadays, with many corporations holding what is clearly a non-synergistic portfolio of businesses, the cycle has shifted once again to divestiture. Those hard-working investment bankers now focus on divestiture and growth-through-attrition.

Note: In the “go-go” market of 1967-1968, “synergy” (basically, 1 + 1 = 3) was the key belief that drove the creation of conglomerates whose stock prices rose and rose. Helped by financial reporting strategies (since banned), lower-valued acquisition targets would, in essence, be revalued by a higher-valued acquirer. Hence, the view was borne that synergy was a real creation, unleashed by the wise leadership at the leading conglomerates. Later, the stocks fell, the truth emerged and the view of conglomerates turned negative. The word, “synergy,” became associated with financial trickery more than skilled management. Since then, with time passing, the synergy argument returns during an acquisition phase, only to be tossed out anew during the divestiture phase.

Synergy isn’t false, just overhyped

Before the late 1960’s synergy-fad, acquisitions and mergers were often based on business strategies designed for growth and expansion through “integration.” Vertical integration seeks to gain better control over the process, from raw materials to final sale (think Exxon-Mobil, with its reserves, operating fields, refineries, service stations and integral transportation systems). Horizontal integration seeks to gain broader reach through the assimilation of businesses along the same line (think Caterpillar’s 2011 acquisition of Bucyrus-Erie). Managed well, these integrations can be synergistic, producing added benefits/gains and reduced risks/costs.

Divestiture: Corporate strategy vs. financial engineering

Now that we’re into the divestiture phase of the cycle, there is silence about synergy. That’s because the undoing of a company is typically viewed as being a positive step forward, not the removal of a synergistic element. In evaluating divestitures from a long-term investment standpoint, it’s best to think about corporate strategy. Is the move a step forward strategically, or is it something else? That “something else” is typically financial engineering or “growth through attrition.”

Two examples of strategic divestitures are:

(1) Chevron’s 2011 announced sale of its coal assets The purpose was to remove coal from their mix and to focus on the more promising energy areas.

(2) General Electric’s “shrinkage” of its finance arm, a long-time success component of GE. This action meshes with GE’s growth strategy that includes leadership in the new 3D printing industry along with other, chosen industrial fields (those recent ads highlight GE’s strategic focus and strengths well).

An example of financial engineering is Coca-Cola, as described in a recent Barron’s article, “Why Coke Could Regain Its Fizz.”

Coke increased its exposure in 2010 with the purchase of the North American operations of bottler Coca-Cola Enterprises.

… Earlier this month, Coke announced that it will fold its North American bottling operations into its international bottling group. That gives it the opportunity to ultimately spin off the whole group, which would raise profit margins and unlock a higher valuation for the stock.

The 2010 acquisition appeared to be strengthening of vertical integration and, perhaps, a way to gain added benefits. Now, however, it looks like financial engineering meant to “unlock a higher valuation for the stock.” This purpose is exactly what the activists are attempting to do: Produce higher stock returns, not from long-term corporate strategies, but from getting a stock price bump and/or a shareholder payment, often from the divestiture of corporate assets. Hence, growth (of shareholder benefits) through attrition (of corporate assets).

The bottom line

Wall Street’s investment banking cycle has shifted to divestiture, helped by the pressure from activists. Are they good for the businesses? Yes, if they align with long-term strategic goals. Otherwise, the answer is usually no – serving a more narrow focus on shareholder benefits, particularly in the short run.

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Chinese unmanned lunar orbiter returns home
Beijing, Nov 1 (IANS) China succeeded Saturday in the world's first mission to the Moon and back, becoming the third nation to do so after the former Soviet Union and the US.
 
 
China pledges $81 mn financial assistance for Afghanistan
Beijing, Oct 31 (IANS) China Friday pledged to provide non-reimbursable assistance of 500 million yuan (about 81 million dollars) to Afghanistan this year at an international meeting on Afghanistan held here.
 
 
EU seeks talks with Russia over goods duties: WTO
Geneva, Oct 31 (IANS) The European Union (EU) has sought a consultation with Russia over the tariffs the latter imposed on certain agricultural and manufactured goods, the World Trade Organisation (WTO) said Friday.
 
 
Virgin Galactic's spaceship crashes during test flight
Los Angeles, Nov 1 (IANS) A passenger rocket plane developed by Virgin Galactic's crashed Friday after suffering an "in-flight anomaly" during a powered test flight over the US state of California, the company said.
 
 
 

Latest from the Network

Sheen keen to return to 'Two and a Half Men'
Los Angeles, Nov 1 (IANS) Actor Charlie Sheen says he is open to a return to popular TV show "Two and a Half Men". Sheen, who was was fired from the sitcom in March 2011 after a series of negative headlines, says he...
Read more on Celebrity Balla
 
14 killed in Honduras bus crash
Tegucigalpa, Nov 1 (IANS) At least 14 people were killed and scores injured when a bus carrying them plunged into a ravine in western Honduras, media reports said Friday. The accident, which occurred early in the day...
Read more on Politics Balla
 
US urges peaceful transition of power in Burkina Faso
Washington, Nov 1 (IANS) The US Friday called for a "peaceful" transition of power in Burkina Faso, but refused to label the military's take-over as a coup. "We underscored our commitment to peaceful transitions of...
Read more on Politics Balla
 
'Interstellar' about bonds of love: Jessica Chastain
Los Angeles, Nov 1 (IANS) Actress Jessica Chastain says that her forthcoming science fiction "Interstellar" is also about fathers and the bonds of love. In the movie, she plays Matthew McConaughey's character's...
Read more on Celebrity Balla
 
Chinese unmanned lunar orbiter returns home
Beijing, Nov 1 (IANS) China succeeded Saturday in the world's first mission to the Moon and back, becoming the third nation to do so after the former Soviet Union and the US. The test lunar orbiter, nicknamed "Xiaofei...
Read more on Business Balla
 
Avril Lavigne feels 'a bit lost'
Avril Lavigne feels ''a bit lost'' amid rumors her marriage to Chad Kroeger is on the rocks. The 'Here's to Never Growing Up' singer, who recently celebrated her 30th birthday without her husband, reportedly thinks her...
Read more on Celebrity Balla
 
Scott Disick is battling severe anxiety
Scott Disick admits his anxiety makes him ''literally want to jump out of my skin.'' The 31-year-old reality TV star - whose longtime girlfriend Kourtney Kardashian is set to give birth to their third child in December...
Read more on Celebrity Balla
 
Demi Lovato wants to be 'sexier' this Halloween
Demi Lovato says working out has boosted her confidence. The 22-year-old singer, who sought treatment for a number of issues, including an eating disorder, in rehab in late 2010, is planning to wear a ''sexier''...
Read more on Celebrity Balla
 
Usher's son is his toughest critic
Usher's son doesn't think he's a great singer. The 'She Came To Give It To You' hitmaker admits his youngest child, Nayvid, five, is very critical of his performances. The 36-year-old star said: ''He doesn't care about...
Read more on Celebrity Balla
 
Rogen may star in Steve Jobs biopic
Los Angeles, Nov 1 (IANS) Actor Seth Rogen is reportedly in talks with Sony studio to star as Apple co-founder Steve Wozniak in their upcoming Steve Jobs biopic. "Zero Dark Thirty" star Jessica Chastain is also being...
Read more on Celebrity Balla