The Investor's Shelf — one book
Breakup!

Breakup!

David Sadtler
1997
T3 257 pages · about 4h 17m to read OL2688263Wgoodreads

The case for demerger argued from the parent company's side.

Summary

The reference has not verified this book in detail; the summary states only what the title, author and subject establish.

Sadtler, Campbell and Koch, associated with Ashridge Strategic Management Centre, argued that many multi-business companies destroy value by holding businesses together and should break themselves up.

The reference has not verified the book's detailed contents. The argument as the Ashridge group developed it rests on the concept of parenting advantage. A corporate parent adds value to a business only if it can do something for that business that other potential owners cannot do as well: supplying capital on better terms, providing capabilities the business lacks, imposing better governance, or creating linkages with other businesses in the portfolio. If the parent cannot do this, its overhead and its constraints subtract value, and the business would be worth more owned by someone else or standing alone.

The practical test they propose is to ask, for each business in a portfolio, whether the parent is the best owner. The answer is frequently no, and the authors argue that conglomerates persist because breaking up destroys the corporate centre's own position rather than because the structure creates value.

The evidence in this literature includes the diversification discount, meaning that multi-business firms trade at lower valuations than the sum of comparable standalone businesses, and the returns to announced demergers and spin-offs, which have generally been positive.

The argument was made during a period of active corporate restructuring in the 1990s. The conclusion is contested: the diversification discount may reflect selection, since firms that diversify may be those with poor prospects in their core, and internal capital markets have advantages in settings where external financing is expensive. The subsequent decades produced both continued breakups and the growth of technology conglomerates that appear to contradict the argument. Readers should verify the book's specific evidence.

Key takeaways 7

  1. A corporate parent adds value only if it can do something for a business that other potential owners cannot do as well.
  2. Where a parent has no such advantage, its overhead and constraints subtract value from the business it owns.
  3. The practical test for every business in a portfolio is whether the current parent is the best available owner.
  4. Multi-business firms have generally traded at a discount to the sum of comparable standalone businesses.
  5. Announced demergers and spin-offs have generally produced positive returns, which supports the breakup argument empirically.
  6. Conglomerates persist because breaking up eliminates the corporate centre's own position rather than because the structure creates value.
  7. Internal capital markets have advantages where external financing is expensive, which is the strongest argument against general breakup.

Who should read it

Directors and investors assessing whether a multi-business company should be broken up, who should verify the book's specific evidence.

Where it sits in the reference 2

Business themes
Styles

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