Multiple tech companies are in the news lately because they’re splitting off parts of themselves. HP, Symantec, and eBay are all splitting off major sections, and there’s speculation about EMC splitting off VMware, and maybe Cisco doing something similar. There was also a conversation about the topic on this week’s Speaking in Tech podcast, which included some ideas about splitting off AWS.
In the discussion, I got a bit frustrated by how the topic was handled, because no one really addressed the issue through the lens of corporate strategy. Then again, corporate strategy is a real finance and business school thing, so I’ll strap on my MBA hat and play Professor Warren and try to explain what Corporate Strategy is about.
What Is Corporate Strategy?
Corporate Strategy is all about a multi-business corporation. Business Strategy is what you mean when you’re talking about how you run a single business, or business unit, which is how to compete and win in your given industry. Corporate strategy is about how you manage a portfolio of businesses.
There is a continuum of methods, from a simple investment portfolio approach (used by hedge funds and the like) to things that are so tightly integrated that they’re almost a single business, and the line between business strategy and corporate strategy becomes blurred.
The central question at the heart of corporate strategy is this: Is this business better off being owned by us, and why?
If the answer is No, then you sell the business. If it’s worth more to someone else than what you can do with it, why own it? Get them to pay you the premium to own it instead, and then use that money to either invest in something else, or return the money to shareholders. If the answer is Yes, you need to understand why this is the case. If it ever changes, then the main answer might flip to a No, and you should sell it off.
This is the theory, of course. In practice, it can be very difficult to tell if there is value in having the business owned by you or not, and whether or not it’d be worth more being owned by someone else. There are also a bunch of human factors, not least hubris, that encourage people to think “Of course it’s better off with us! We’re awesome!”
Portfolio theory, often referred to as Modern Portfolio Theory, was introduced by various people in the early 1960s, and in essence describes how to diversify risk across multiple assets. By owning different businesses in different industries, you can diversify risk down, and by doing some clever things with the details, you can maximise the amount of money you make for that risk. Less sophisticated investments might have the same risk, but have lower returns (or the same return, but at higher risk, which is also not as good).
This is one of the things that led to a surge in conglomerates in the 1960s and early 1970s, only to have them implode shortly thereafter, giving us the Greed is Good days of the 1980s with Gordon Geckos splitting up the conglomerates and feasting on the rivers of money that spilled out. With the rise of mutual funds and index funds, individual investors could better manage their risk/return themselves, and nowadays you can pretty easily do it all yourself if you’re so inclined. It’s very hard to beat the index for return over a long period of time, so why pay someone a lot of money to not do as well?
Nowadays, conglomerates are much rarer, mostly because of the implosions we’ve mentioned. Managing large and varied corporations is hard to do, and many people failed then, and continue to fail now. There is loads of research evidence that the majority of mergers and acquisitions destroy value (not that this seems to deter anyone).
But it is possible to run a multi-business corporation that benefits each of the child businesses. How and why is an entire MBA course, so I’m not going to write about it now. Some examples include Woolworths, Samsung, Mitsubishi, Sharp, Tata, GE, and, most famously, Berkshire Hathaway.
What About Tech?
Back to the tech company splits. What wasn’t asked on the podcast was what benefit the parent company provides to the subsidiary. In the case of eBay and Paypal, the argument for buying Paypal in the first place was probably partly trying to own a slice of the online payments market when it took off (much as EMC got lucky buying VMware when they did), and partly about ‘synergies’ between an online auctions site and a payments handler. That clearly hasn’t worked out the way eBay expected, so they’re selling Paypal off. There’s not a lot of integration between the companies, and really, what benefits are there to Paypal by being owned by eBay compared to being owned by itself, or someone else?
Same goes for HP. What benefits are there for HP’s PC and printer business being owned by the same company that sells enterprise software and hardware? Or possibly HP just sees the PC and printer business declining and it’s a drag on the rest of the company, so yeah, it may well be worth more being run by someone else, and HP gets a bunch of cash if someone buys it off them. Maybe they could use it to buy another Autonomy, I dunno.
Ditto Symantec. What benefits do the storage sections get from being owned by a company that also does security? I didn’t understand the deal in the first place, and clearly Symantec haven’t managed to get the acquisition to work the way they really wanted to, or they’d keep it. The executives responsible have probably all moved on now, and it’s easier to just say “times have changed, this is the right decision now” than to say “we screwed up”.
While I don’t agree with everything in his article, Trevor Potts makes some excellent points about what tech conglomerates could look like in this converged infrastructure future. The case he makes for EMC/VMware, Cisco, Dell, and HP is quite plausible, and I’d throw in IBM and Oracle as well, though I’d also have a bunch of caveats around them.
But that’s a conversation for another time.