Breaking up is good to do
Tyco's success is a great example of why more corporations need to split up in order to boost shareholder value.
NEW YORK (CNNMoney.com) -- Remember Tyco, the poster child for an overzealous acquisition strategy run amok?
Tyco used to own a disparate group of companies, including the ADT security brand, an electronics components and undersea cable division, and a medical devices and pharmaceuticals business.
Well, Tyco is now a much leaner and meaner firm, having split up into three companies last year: Tyco International (TYC), Tyco Electronics (TEL) and Covidien (COV). (The company's widely respected CEO Ed Breen also isn't raiding the corporate coffers to pay for bacchanalian birthday parties for his wife on the island of Sardinia.)
Tyco International, which held onto the security and fire business, reported a fiscal first-quarter profit Tuesday morning that blew away analysts' expectations and the company reaffirmed its outlook for fiscal 2008.
The success of Tyco should serve as a clarion call to many other companies. There are plenty of bloated conglomerates that would be better off focusing on just one or two core businesses.
The argument in favor of conglomerates is that a diverse group of assets offers protection in downturns - even as one business is underperforming, another may be doing well.
In addition, many of these companies are way too complicated to properly value. So breaking up would make them more attractive to investors.
"You do have more and more companies that are open to breaking up. A lot of people used to think one plus one plus one equals four. Now people think one plus one plus one is one two and a half," said Jim Denney, president of Mohawk Asset Management, which owns all three of the post-split Tyco companies as well as GE.
Expect a lot more breakups this year.
It's undeniable that many companies went on acquisition binges during the 1990s and earlier part of the decade and are now paying the price for moves that did not pan out.
But Tyco is showing that breaking up, unlike what Neil Sedaka sang, is not just easy to do. It's often the right thing to do.