Demerger isn't always the answer to the evils of gigantism, says Robert Heller. What's needed is a reduction of the unmanageable to manageable proportions so that the performance of the separate parts can be optimised performance of the separate parts.
The purchase of Grow Group, for which ICI is paying a modest $350 million, has a certain piquancy. The buy is in speciality chemicals (architectural paints and coatings) and is American - and such purchases in ICI's recent past have 'only created new management problems'.
Those problems were invited by an acquisitions policy which 'increased the complexity of an already complicated and hard-to-manage portfolio of businesses'. The words are those of Geoffrey Owen and Trevor Harrison, explaining in the Harvard Business Review why demerger was adopted to lift these self-created burdens off management's shoulders.
The consequent bifurcation into ICI and Zeneca has been an evident stock-market success, which raises some fascinating questions about mighty corporations. Sir Denys Henderson is stepping down as chairman laden with deserved plaudits for what, however, looks tantamount to capitulation. Demerger, to quote the HBR article, results in (relatively speaking) 'simpler organisation, narrower focus and more homogeneity'. But that's precisely what today's guru-blessed management is supposed to accomplish within an undivided mammoth.
Owen and Harrison praise the much better 'parenting' that component businesses now receive from the split command: ie Henderson & Co were previously adding less value than shareholders were entitled to expect. ICI's celebrated near-revolution of the 1980s, led by Sir John Harvey-Jones, was an exemplar of the leaner and fitter movement. Were its multitudinous small buys, designed to strengthen the portfolio, bound to weaken its management?
If so, why is the demerged ICI at it again with Grow? Plus ca change, plus c'est la meme chose. The world's great companies aggrandise themselves by acquisition and diversification. If they are harder to manage in consequence, that is because managers haven't solved the problems they and their predecessors have created. ICI was hardly alone. Many boards have presided over complex, wasteful, counter-productive and top-heavy establishments - and some still do.
Rather than cheer Royal Dutch-Shell and Mobil for the vast central cutbacks now under way, commentators should question why their contraction follows so long after Exxon's (1986) - and, better still, why bloating occurred at all. The explanation is always the same. Numbers increase with efforts to manage the unmanageable. What is really needed is reduction of the unmanageable to manageable proportions, which should be feasible without demerger.
The issue isn't only the heavy cost of a centralising head office, but the heavy hand it lays on the too many layers below. The apparent inverse correlation between size and performance is thus unsurprising. In nearly all US manufacturing sectors in the Fortune 500, the largest company doesn't lead on any financial criterion. In chemicals, with 46 companies, the leader for return on sales and 10-year growth in earnings per share is 22nd: the winning earner on both assets and stockholders' equity is 40th.
Looking at a decade's total return to shareholders, the last shall be first - number 46. Maybe the chemical industry is uniquely prone to the evils of gigantism. After a tainted IG Farben was forcibly chopped in three by the Allies post-war, each amputee (BASF, Bayer and Hoechst) grew to an individual size greater than ICI - and to collective mass that Farben would never have achieved. Much the same tale followed the enforced break-up of Rockefeller's Standard Oil Trust: Exxon, Mobil, Socal, sprang from the trust-bust loins.
More recently, the figuring is that the trust-busting of AT&T enormously enriched the shareholders - not only via the Baby Bells so created, but through the growth of AT&T itself. Over the period 1982-92, the combined telephone wealth rose threefold: six times the equivalent figure for the unbroken IBM, saved from trust-busting by the Reaganites.
That seems to place the onus on they who are not divided. In fact, directors commonly complain that the market's overall pricing undervalues their wonderful separate businesses. This discrepancy, highlighted by the Hanson threat, is cited as prime mover of the ICI demerger. But why stop the process with division by two? Why not three (Farben)? Or four, five, six (viz, AT&T)? Even that highly profitable 22nd company, Great Lakes Chemical, is only a 17th of Du Pont's vastness.
The burning issue is not whether the parts add up to less than the whole in the stock market, it's whether the components are optimising their performance. The rough rule that Bigness is Bad for You has plenty of exceptions. Giants with giant, sector-leading financial ratios include Coca-Cola, Walt Disney, Pepsico and Gillette - of which only Coke can be called a homogeneous business.
The assorted technologies of a chemical colossus undoubtedly present a greater challenge. For all that, the above champs have proved more adept at pressing the right control buttons of the right management processes at the right times. Demerger of itself does not achieve this fundamental triple necessity.
Robert Heller was founding editor of Management Today.