Shareholders should welcome the announcement that General Electric GE,
At GE, Culp is addressing a problem common to large corporations: a centralized command structure over multiple divisions. Such cultures offer limited incentives for creativity, adaptability and versatility. Spinning off a company liberates it from that culture, enabling managers to be more focused on their individual business and setting them up for increased chance of success.
One practitioner of multiple spin-offs is William Stiritz of Ralston Purina . When Stirtiz arrived at Ralston, the sprawling food products company famous for pet food, it had grown to include a variety of businesses, collectively called Ralcorp . They operated in many unrelated niche areas — infant formula, cereal, cookies, and ski resorts. Stiritz observed that such a wide array of business could not be managed efficiently and devised a plan to reorganize the company.
Stiritz embarked on a series of spinoffs, after which he saw a transformation in corporate leadership. Many Ralcorp managers who showed modest abilities beforehand became “incredible managers” when leading their own stand-alone businesses. Stiritz calls the spin “the ultimate form of reorganization for better results.” Those results were so strong at Ralston that Stiritz earned a chapter in Will Thorndike’s masterpiece, “The Outsiders,” and was awarded the Singleton Prize for capital allocation in 2019.
Perhaps the best-known practitioner of the corporate spinoff is John Malone of Liberty Media LSXMA,
By constantly divesting, Malone avoids the problems of corporate suffocation that Stiritz referred to. It is as if the king parcels out earldoms, dukedoms, and other fiefdoms and locates them where their value will be best nurtured, to grow into new kingdoms.
The only other way to do that is to maintain an autonomous and highly decentralized business model, most famously done by Warren Buffett at Berkshire Hathaway BRK.A,
That’s why the conglomerate diminished in popularity in the 1990s, often dismantled by spinoffs. It was through spinoffs that ITT, for example, split into three in 1995, how AT&T T,
Others have used spins as part of a recurring process that involves both regular business expansion — whether acquired or organic—and later divestitures of some of them. An example is Sears Holdings SHLDQ,
Such results explain why activist shareholders often prescribe spinoffs of excessively diversified businesses. In recent years prominent spins instigated by activist investors include eBay EBAY,
Spinoffs also promote accountability to shareholders. Business divisions become opaque inside large organizations, making it difficult for investors to understand and evaluate a company. Spinoffs correct this problem — useful whether or not the business performs well.
Spins have become increasingly common in recent years as a way to increase focus and related capital allocation, whether at conglomerates or otherwise. As such, a strategy that includes spinoffs as a regular element can be a strong general deterrent to activists, as well as a source of shareholder value. Applying that strategy at an old conglomerate like GE is another reason shareholders will be listening closely to Larry Culp.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of “The Essays of Warren Buffett: Lessons for Corporate America.” Cunningham owns shares of Berkshire Hathaway, and Constellation Software. He is a director and vice-chairman of Constellation Software. For updates on Cunningham’s research about quality shareholders, sign up here.
More: GE is splitting up. The pieces are worth more than Wall Street thinks.
