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 …