Just as we were trying to digest the HP announcement that it would cleave amoeba-like into two distinct entities, Symantec has announced the same intent. This also follows eBay’s announcement that it would spin off PayPal, so says the New York Times. And what do eBay and HP have in common? Meg Whitman. What’s going on here? Healthy capitalism I say.
Look, lots of companies acquire other businesses as they seek faster growth and greater synergies in their markets. Often times the acquisitions don’t work out exactly as the acquirers had hoped. The worst-case scenario is when the acquired company fizzles either because it could not be assimilated or because it was a dud to begin with and of course, there are numerous permutations on the theme. But often enough to be interesting the merged entity continues along two separate paths with both companies continuing to be successful but in their own ways.
So every now an again it makes sense to take inventory and ask if all of the acquisitions or self-generated businesses provide the kind of overall synergy needed. If not, it’s time for spinoffs and we’re beginning to see several as the foregoing paras indicate.
Yesterday I wrote that Oracle might be another candidate for splitting up and old friend Josh Greenbaum heartily agrees so I’ve got that going on. If you read that article from the Times, you might get the idea that spinoffs might be the next big thing in Silicon Valley and beyond. If so, and if the idea gains enough steam, this trend might depress the regular IPO market. What would you rather buy, a start up doing an IPO or a division of a seasoned company with a track record and a culture accustomed to hitting its marks? There are good reasons for both.
I don’t think we’ve ever seen anything like this in the tech sector. Last time there was an opportunity was the end of the mini-computer era and instead of spinning off units, those companies imploded. There was wreckage everywhere and truth be told, the networked PC and server world envisioned to replace it was a little late in coming — recall the year of the network that only took a decade to reach fruition. That resulted in a nuclear winter where no one wanted to buy much because it was all either obsolete or not up to snuff.
That’s not happening this time in part because the legacy products are so embedded in our businesses today and because much of it is paid for already so what’s the cost of keeping it?
Spinning off non-core businesses to concentrate on the knitting is smart for both parties and should result in significant new innovation and entrepreneurship as newly liberated companies take off their blinkers and design and build products for new opportunities in the whole market, even for companies that were once competitors.
Companies as big as Oracle and even Microsoft might benefit from a spinoff strategy and I suspect there are new business models to be tried too. Although the flavor right now is to spinoff an entity to be completely free-standing, I can see situations where more interlocking arrangements can be developed. The Japanese might call these keiretsus though we might think of them as monopolies or trusts as in the Sherman Anti-trust Act.
In the long history of capitalism, this seems to be a phase that recurs when conditions are right — it happened with Oil and Steel and automobiles though it was sometimes called vertical integration. Whatever it turns into I think this week might have seen an inflection point.
(Cross-posted @ Beagle Research, LLC)