From HP to Symantec: Why tech companies are breaking up

Imagine that you are the head of a large technology company, but your company's development has stagnated. You originally hoped to turn the tide and inject new vitality into this large company with your own revival plan, but in the end it seems to have little effect. So what would you do at this time? If you are eBay CEO John Donahoe, HP CEO Meg Whitman, or Symantec CEO Michael Brown, then the popular answer recently is "split."

eBay announced at the end of last month that it would split its online marketplace service and payment service PayPal into two companies by the end of next year. This week, HP announced that its PC and printer businesses, as well as its enterprise hardware and services businesses, would be established separately. And on Wednesday, there were rumors that Symantec would soon be split into two companies, security software and data storage. So, what is the logic behind these company splits?

Significance to the Company’s Business Operations

In many companies, especially listed companies, the management always has the internal motivation to make the company "bigger and stronger", and diversified operations are often a major way for the management to expand the company's scale. However, according to the theory of management efficiency, when diversified development reaches a certain stage, the returns brought by scale advantages will decrease, and negative synergies will appear between different businesses. In this case, spin-offs will help different businesses to reposition, and the spin-off companies can focus more on their own areas of strength and enhance the profitability of their respective main businesses.

Take Hewlett-Packard as an example. Hewlett-Packard was once a giant with extremely diversified business operations and had achieved success through spin-offs. As early as 1999, Hewlett-Packard spun off its highly profitable medical and measurement instrument division to form Agilent, which has become a giant in the current measurement industry. There are few engineers engaged in various hardware testing who have not used Agilent instruments. In 2005, Agilent's semiconductor business was further spun off to form Avago Technologies. The company subsequently became one of the main chip suppliers for Apple's iPhone and other products. After achieving previous success, Agilent did not suppress the urge to continue to spin off. In 2013, the company announced that it would split into two companies, one focusing on life sciences, diagnostics and applications, and the other focusing on electronic measurement business.

For HP's management team, the PC business and enterprise service business are currently facing different development prospects. The global PC market is declining, and under the squeeze of Chinese manufacturers such as Lenovo, the profit margin of the PC business is getting lower and lower. Therefore, for HP, the PC business, which was once the trump card, has become a drag. Starting from the former CEO Leo Apotheker, the HP management team has tried to get rid of the PC business and transform the company into a software and service business, and the enterprise market will become the focus of HP's future. In other words, HP's two major businesses should make different choices at present, so it is difficult to be incorporated into a unified strategic system for development.

Symantec may be the "HP of the software industry". As a former leader in the antivirus software industry, Symantec is also trapped by the decline of the PC market. To this end, the company has recently begun to vigorously develop cloud computing and data storage services in an attempt to find new growth points. However, in this process, the traditional software business continues to impose a heavy burden on the company's performance. Similar to HP, Symantec's two businesses are also facing different strategic choices.

Time Warner's spin-off of AOL, its online business, and News Corp's spin-off of its newspaper business and film and television business are both for similar purposes. In short, if a company's two main businesses cannot bring about synergy or even drag each other down, or if one business is already in deep trouble and has no hope of recovery, or if the company's management has completely different development strategies for the two businesses, then the spin-off may be a great way to get rid of the burden, avoid internal friction, and survive.

Significance to shareholders and capital operations

From the perspective of shareholders and investors, in some cases, splitting a company in two can also bring real monetary returns.

Generally speaking, high-growth businesses can obtain higher valuations in the capital market. However, for many large companies, the newly developed high-growth businesses are not the main businesses. Although they develop rapidly, their contribution to the overall performance is still limited. According to the traditional valuation method, investors tend to focus on the main business when valuing listed companies, while ignoring other businesses, or there is a lack of reasonable valuation methods for other businesses. Although valuation methods such as the sum of segment valuations can solve this problem to a certain extent, the actual value of the business after the spin-off cannot be accurately determined. Many investors tend to believe that the business after the spin-off can obtain a higher valuation.

As early as 2007, when the smartphone boom first emerged, investment tycoon Carl Icahn worked hard to push for the splitting of Motorola, separating its mobile phone business from other businesses. According to his calculations at the time, Motorola's mobile phone business was seriously undervalued, and the split would significantly increase its value. By 2011, due to the patent war in the mobile industry, Icahn further pointed out that the patents held by Motorola had huge unrealized value, and the sum of the value of all Motorola's businesses far exceeded Motorola's market value at the time.

Many investors were convinced by Icahn, which eventually led to the split of Motorola into Motorola Mobility and Motorola Solutions. The two companies did not disappoint investors: Motorola Mobility was acquired by Google at a high price, while the stock price of Motorola Solutions has been rising ever since.

If the management of a company seeks mergers and acquisitions, then a spin-off can also pave the way for mergers and acquisitions. Regarding eBay's spin-off of PayPal, there were rumors that PayPal might be acquired by giants such as Google, but this could not become a reality due to the complex relationship between eBay and PayPal. Therefore, as the leading payment service provider in the United States, with the competition in payment technology in full swing, PayPal, after independence, is likely to become a popular acquisition target in the eyes of technology giants again.

As for HP, there are reports that the company recently wanted to acquire data storage giant EMC to obtain VMware, a cloud computing software provider controlled by EMC. Under such circumstances, the existence and shrinkage of HP's PC business and the complex accounting statements made EMC uneasy and worried, leading to the failure of the transaction. Some industry insiders believe that after the spin-off of the PC business, another company composed of HP's remaining businesses is likely to restart acquisition negotiations with EMC.

Symantec's situation is very similar. It is reported that EMC and HP are interested in acquiring independent security product providers and storage service providers. Therefore, Symantec's split may also be a preparation for mergers and acquisitions.

From the perspective of capital operation, the separation of different businesses of a company helps to clarify the operation and financial status of each of these businesses, so as to facilitate the evaluation of potential acquirers or acquirees. This is also a manifestation of investors' right of choice. After the separation, there will be no joint and several liability relationship between the two new companies, and the risk of investment such as mergers and acquisitions will be reduced. The two companies after the separation will bring different investment opportunities, thus attracting investors with different purposes.

eBay, HP and Symantec are all long-established companies in the technology industry. The youngest of them, eBay, was founded in 1995, before the ".com bubble" appeared. Under the impact of waves of innovation, these large technology companies are facing common problems such as increasingly large businesses and weak growth. Internal spontaneous growth is no longer sufficient to support the development of the company and the expectations of investors. For this reason, some companies have obtained fresh blood through continuous acquisitions, while others have adopted painful treatments and tried to be reborn through the spin-off and divestiture of their businesses. However, what kind of results the spin-offs of different companies can ultimately bring is still closely related to the goals, strategies and execution capabilities of the company's management and major shareholders.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.