On Thursday morning, Rupert Murdoch, chairman of News Corporation, the $60 billion media conglomerate, announced that the company would divide its publishing and entertainment divisions into two separate businesses. Whether the former will be able to survive without the latter is up for debate.
"There is much work to be done, but our board and I believe that this new corporate structure we are pursuing would accelerate News Corporation's businesses to grow to new heights, and enable each company and its divisions to recognize their full potential – and unlock even greater long-term shareholder value," Murdoch, who will remain chairman of both companies, as well as chief executive of the entertainment company, said in a statement.
Investors had been gunning for this for a long time. "With the whole phone hacking scandal from last year it became clear that it would make the most sense to split the business off," said Michael Corty, an equity analyst with Morningstar, Inc., in Chicago. "Splitting is a good thing for shareholders."
It also made fiscal sense: News Corp's. publishing arm—which includes books and newspapers including The Wall Street Journal, The Times of London and The New York Post —only generates about 10 percent of the operating profits.
The other 90 percent comes from the entertainment holdings, which counts Fox Broadcasting, Twentieth Century Fox Film, and STAR TV on its roster. Though Corty believes the publishing arm will survive, "We think less of the publishing assets given the headwinds facing the newspaper operation in the U.S., the U.K., and Australia."
Consequently, "It's not splitting off into equals, like CBS and Viacom did," said Corty. "It's a little more similar to Time Warner and AOL splitting up. AOL was the unloved business and didn't fit into the rest of Time Warner."
Since 1990, businesses have been spinning off at a rate of about 50 per year.
The reasons vary. Some, like AOL and Time Warner, are fairly disparate entities and had little in common in the first place. Splitting them lets management focus exclusively on the new company.
Sara Lee, Corp. is a case in point. In January, 2011, Sara Lee decided to split its company into North American meats division and an International beverage and bakery business. On Thursday, the company—once a $20 billion, multinational holding company that made everything from Coach handbags to Playtex bras---completed the spinoff of its remaining international coffee and tea business into a $3.3 billion company now called DE Master Blenders 1753, based in Amsterdam.
"They are selling different products to different consumers, so the decision to split was really because there weren't synergies," said Erin Lash, a senior equity analyst for Morningstar. "We believe they could benefit from increased focus, in just being able to invest behind their individual brands. We think Sara Lee's individual parts could become acquisition targets in their own rights.
Another reason companies spin off is because dividing up a company gives investors greater transparency and greater opportunity, said Jody Lurie, corporate credit analyst with Janney Capital Markets in Philadelphia. "Some companies create better value separately than they do when they're together. Or the stronger side of the business is getting pulled down by the weaker."
The hope is that the new company will drive up the stock price.
Here are some other companies that have split, are in the process of splitting—or thought about splitting and then vetoed the idea altogether.
In August, 2011, Kraft Foods—the world's second largest global-food company by sales behind Nestlé SA-- announced that it would spin off into two different publicly traded companies. One company would be a global snacks business hawking things like Oreo cookies, Trident gum and Cadbury chocolates (which had they had bought for $19 billion in Jan. 2010); the other is a North American grocery business that includes brands like Jell-O, Oscar Mayer meats and Kraft macaroni and cheese.
Although they haven't made the full transition yet—Kraft's target is the end of the year—stocks have been trading up, at about $37 a share, said Lash. "We do believe that by splitting this business into its parts they are unlocking higher valuation for the snack business," she said.
On March 26, 2008, the company announced that its mobile phone and home businesses would be turned into a new company called Motorola Mobility. According to Investopedia.com, the present company would change its name to Motorola Solutions, and retain the balance of the company, except for the networks division, which was being sold to Nokia Siemens Networks.
Yesterday, Motorola Solutions closed down 0.89 percent to $46.93. The company's board approved the split on March 26, 2008. About a week before that announcement, the company's shares were trading at $37.88 a share. Google announced on Aug. 15, 2011 that it was acquiring Motorola Mobility for $12.5 billion, or $40 a share.
In September, 2011, Netflix told customers that it would split its DVD-by-mail service and its streaming video service into two separate companies. The new DVD-only company, called "Qwikster," would be completely separate from the streaming business, which would maintain the Netflix name. Customers were not thrilled with the idea of logging onto two separate websites, with two separate accounts and two sets of passwords (and bills). Consumers were enraged—and a month later, CEO Reed Hastings nixed the idea.
"It was so short lived, it was never seriously considered," said Corty. " It was just a bad idea. The reception to the idea was poor." On Thursday, Netflix's stock closed up 1.31 percent to $67.36. Days before the company announced a new streaming business on September 19, 2011, the company's stock had been trading above $150 a share.
In May 2009, Time Warner and AOL divorced after a disastrous eight year union. "We believe that a separation will be the best outcome for both Time Warner and AOL," Time Warner chief executive Jeff Bewkes said in a statement.
Since their original merging, Time Warner's stock had plunged nearly 80 percent. Splitting off the two companies made sense, because "AOL had nothing to do with Time Warner," said Corty. "They were two separate businesses. That was one of the worst mergers of all time." At the time of the announcement, AOL stock was trading at around $25, dipping as low as $10 in mid-2011. It hovers around $27 today. Time Warner, which owns CNN and HBO, as well as the Warner Brothers movie studio and an array of magazines--was at $24 a share when they split and now it's at about $37.
In Jan. 2006, Viacom and CBS, both owned by chairman Sumner Redstone, split. It was a smart move, because "It helped both businesses get the most out of their assets," said Corty. "As stand-alone companies, both CBS and Viacom are big businesses. But it's harder to pay attention to a huge entity than each individual business within the large conglomerate. If you split them in two, though, you can focus on managing the assets."
At the beginning of 2006, CBS was trading at about $25 a share, and had dipped as low as $4 in March of 2009—(less than a cup of coffee from Starbucks!). Today, it's about $31. As for Viacom, it was at $41 a share in 2006, and today is at $46.