It is tempting to believe that breaking up a company is the way to restore its fortunes. It worked for ICI, says Robert Heller, but will it work for WH Smith?
Spectacular success in business normally results from outstanding feats. But not, one might think, if one is splitting up a company. A look at share valuations for the former ICI, for example, shows that a £9 billion company in mid-1993 is now worth £26 billion. On the face of it, it is the mere division that pays handsome dividends - bifurcation has accomplished far more for the shareholder than unity could ever have achieved. Small wonder, then, that disgruntled shareholders, such as those at WH Smith, reach for the break-up of their company as the answer to their prayers.
The argument gains more force if you look at AT&T. The phone giant is still much larger in terms of revenue than the spun-off regional Baby Bells. But the four largest infants alone have double AT&T's market value.
And look at British Gas. Reassembled and renamed, the least popular company in Britain has mutated into stardom: BG and Centrica shares have both doubled. Whether performance will follow suit is debatable - but the evidence suggests that it will.
The conclusion seems to be that all groups that can sub-divide should be instantly split. However, the skill of break-up bonanzas has more to it than pleasing focus-hungry stock markets. WH Smith's shell-shocked management does not have a drug company like ICI's Zeneca, a growth star to separate from a duller, slower empire. And even if it did, the liberated performance of Zeneca's management is the real reason why it is valued at 150% more than its erstwhile parent.
Within ICI, Zeneca came under the control of men who were not immersed in the pharmaceutical business. Without this responsibility, management initiative is weakened and dynamism halted. This is the problem that WH Smith's management needs to address. I have heard senior managers discussing various initiatives only to reject viable ideas at an early stage because they would be unacceptable to their 'management' - the boss upstairs.
This debilitating process is then repeated within the subsidiaries. On their management's own admission, for instance, Zeneca's speciality chemicals business, pre-split, was allowed through collective inertia to become deeply uncompetitive on costs - until the sales stopped rolling in.
The management logic of breaking companies up is well known. Best performance follows from matching structures to clearly identified businesses or segments.
Liberate a dedicated management team, and its concentrated focus will complete the transformation. The more limited the span of top-down control, the more effective the strategy and the tactics. The catch is that some conglomerates work triumphantly too, and WH Smith would do well to learn lessons here as well. General Electric in the US has added super-colossal value - $156 billion or 1,155% - in 15 (largely) undivided years. As for span of control, fast-growing Illinois Tool Works (21.5% per annum total return) earns $5 billion from 365 operations: according to CEO W James Farrell, 'Our division managers say don't screw around with it.' Business Week explains that 'Intense decentralisation ... gives managers the freedom usually reserved for entrepreneurs'. At ABB, Percy Barnevik expertly used a decentralised structure for the same purpose - to make the whole stronger than its parts.
WH Smith is a candidate for break-up because, say the critics, a board that has trouble finding a chief executive can hardly be expected to unearth a winning strategy. But is that the board's job anyway? At GE or ABB, strategy is left to clearly delineated businesses. The senior group confines itself to ensuring that strong business managers have both powerful strategies and effective means to carry them forward. True, central management sternly insists that sub-managers deliver on their promises but at least the centre does not pretend to manage the periphery. The board may lay down broad strategic principles, such as CEO Jack Welch's insistence on GE being first or second in the market - 'or get out'. Management philosophy thus provides the way for the centre to add value - and this is the only justification for its existence.
If break-up of a company commands a financial premium over continuance, value has plainly been subtracted through the centre's activity (or inactivity).
'The bigger the premium, the worse the central management' sounds like a solid generalisation. But in the case of WH Smith, even a modest 20% premium may overvalue some of the businesses without doing anything to remove the problems of a high-street chain seemingly stuck with poor margins.
There are so many alternatives for WH Smith that involve good management, rather than just a good sales pitch for its various businesses. Eradicate palpable nonsenses, energise staff and move in the right merchandise, and profitability will sharply improve. That can rarely be done if a bunch of superiors is breathing down the entrepreneurial neck. The real issue isn't break-up, but good management: it is time to substitute the invigorating touch for the discouragement of the deadening hand.