Conglomerates are big and unwieldy. Wall Street hates them, because it doesn’t know how to value them properly. CEOs and corporate boards are finally getting the message: Nimble is the new big.
Investors are willing to pay a higher price for rapidly growing drug, biotech and medical equipment businesses than generics and brand-name consumer products. Shares of J&J were up nearly 2% in early trading Friday.
“For survival and keeping up with market trends, companies do have to look at what their most profitable lines of business are and where they should spend most of their time and focus,” said Liz Young, head of investment strategy at SoFi, in an interview with CNN Business.
“Competition is fierce. Sometimes you have to break it down to build it back up,” Young added.
Wave of big firms breaking up
Large companies around the world in a variety of sectors are finding religion in getting smaller.
“We have new freedom to go to the market. We can continue to serve IBM customers but can also expand partnerships with other tech providers,” said Kyndryl chief financial officer David Wyshner in an interview with CNN Business earlier this month.
Other companies may find that spinning off divisions will give them greater autonomy to forge business relationships that may have not made as much strategic sense as part of a colossal conglomerate.
But spinoffs and asset sales are also a way for companies to reverse decisions that investors weren’t thrilled with in the first place.
Both stocks have lagged the broader market for the past few years, in part because of sluggish revenue and profit growth but also out of concern that the two companies strayed too far from their core wireless businesses by making splashy media deals.