Companies that became behemoths through wide-scale mergers and acquisitions, look to become lean by dividing their businesses. The US entertainment behemoth Time Warner's recent decision to sell its books division to the French company Lagardere SCA for $537.5 mn has not come as a surprise. It only confirmed what several s believed would happen after Carl Icahn, whose investment firm owns 3% stake in the firm, stepped up pressure on the management to restructure the media giant into four distinct businesses. Icahn's call for break-up comes in the wake of a poor run of performances by Time Warner after its acquisition by America Online (AOL) in 2001. The hard-charging billionaire investor's split has, however, added some spark to the media conglomerate's stock price, which barely budged over the last few years since its high of over $90 touched during the tech bubble days. Dick Parsons, the CEO of Time Warner, charged up by the firm's good fourth quarter numbers, reacted to the pressure tactics by the dissident investor by retorting, "If I can be allowed one moment of immodesty, no one can run these businesses better than the current management is running them." Icahn seems unperturbed as he got back at Parsons by saying that Time Warner's latest quarterly results don't `get his heart pumping', in an interview with a leading cable-news channel. "With its size the company should be doing better," he reasoned. The problem with Time Warner isn't CEO Parsons, he reckoned, it's the `concept that's bad.' "The solution," he suggests, "is to break up the company, which could make its shares worth 30 to 40% more than their current value." Parsons, however, dismissed these apprehensions by saying that `secular' concerns that have weighed on the shares of Time Warner and other traditional media companies are `overblown'.
Time Warner's announcement comes just over a month after the $61 bn global manufacturing and services major, Tyco, announced its plans to split its business following a year of below par profits. In July, 2005, Viacom, another entertainment conglomerate, hived off its businesses into two separate entities, again, to improve shareholder wealth. This is largely being looked at as a part of the movement of dismantling large conglomerates in the US.
It is indeed an irony that these very companies were on an acquisition binge just a few years ago and believed in the philosophy, `big is beautiful'. However, the new philosophy being hailed is that "sum of the parts is greater than the whole itself". One thing that is common in the current movement is that it's driven by the same shareholders that so actively encouraged acquisitions. Some industry observers believe that splitting up businesses is not the key to shareholder wealth creation, and that in the longer run it is still beneficial to be operating in various areas of business. Parsons of Time Warner has already made it clear that his company "will not experiment with flavor-of-the-day strategies of boosting shareholder value." Nonetheless, the cries for dismantling the conglomerates don't seem to be stopping, for now.
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