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Breakups

Breakups (sometimes loosely referred to as divestitures) are the exact opposite of M&As. During a breakup process a business is carved into two or more separate companies, each with its own stock symbols and operating independently of each other. Business breakups may have many causes, but two main ones are a mandate by the government and a voluntary decision by the business itself. In the first case, where the government requires the breakup, a business may be deemed monopolistic. Such was the case with AT&T addressed by the Telecom Act of 1934 which broke off AT&T’s chokehold on the local telephone market and gave rise to 22 RBOCs (Regional Bell Operating Companies), such as Pacific Bell and BellSouth.

Government-mandated breakups usually have a negative affect on the stock of the company about to be broken up, as potential future competition could (and usually does) erode the company’s earnings. Microsoft was recently subjected to the same kind of scrutiny by the government, which some suggested may result in its eventual breakup. The other kind of breakup is one that is initiated by the business itself. The board of directors and ultimately the shareholders must approve the breakup before it is carried out. This kind of breakup, however,may give a boost to the company’s stock, as all shareholders in the original company normally receive shares in the newly created companies.Many investors would believe that the breakup will ultimately help all the new companies establish more profitable operations, with better focus on their markets and less bureaucratic interference. Good examples of this are the AT&T’s breakup into three separate businesses — AT&T, Lucent Technologies, and NCR — in 1997, or Hewlett Packard’s breakup into two separate companies — Hewlett Packard and Agilent Technologies — in 1999, or Lucent itself, which broke up into Avaya, Agere Systems, and Lucent in 2000 and 2001. With the proliferation of the Internet …