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The East African : Oct 13th 2014
42 BUSINESS MANAGEMENT Spin-o≠s and divestitu≥es: Suddenly, b≥eaking up is the thing to do I n the aftermath of the financial crisis, investors bet on companies that seemed too big to fail. Even if a business were not growing at breakneck speed, there was safety in large numbers; the more sales the better, it seemed. So in 2011, when Hewlett- Packard hastily announced a plan to break in two, investors balked. Separating HP’s personal computers unit from its enterprise products and services seemed a risky bet that could leave both halves vulnerable. That plan was shelved, and the chief executive who proposed the split was summarily dismissed. But today, stockmarket in- vestors are betting on companies with tightly focused visions. Too many divisions are seen as a distraction for management. And activist investors are eager to take small stakes in big companies and call for break-ups, betting that profit will follow. No one questioned So, when HP recently an- nounced that it would split in two, essentially reviving the 2011 plan, shareholders rejoiced. HP’s stock jumped nearly 5 per cent, and virtually no one questioned the decision. In announcing a plan to break itself apart, HP is following a trail blazed by other technology companies, including eBay and IBM. And in bowing to investors’ appetite for simplicity, HP is signalling that the wave of spin-offs and divestitures shaking up Silicon Valley may just be getting started. “During the financial crisis, shareholders rewarded size, sales and diversity,” said Chris Ventresca, co-head of global mergers and acquisitions at JPMorgan Chase. “Now they don’t feel like they need the safety net of larger scale. Companies are healthier and stronger. That gives boards the confidence to take a harder look at their portfolio.” Activist investor Just last week, eBay an- nounced that it would spin off its PayPal unit into a separate publicly traded company, giving in to the wishes of the activist investor Carl C. Icahn. That move follows eBay’s sale of its Skype Internet phone service a few years ago. IBM, for its part, routinely sheds big units that no longer fit with its strategy. It recently sold its low-end server business to Lenovo, the Chinese company that acquired IBM’s COMMENTARY DAVID GELLES “A flurry of spin-offs and divestitures has reshaped the media industry in recent years, thanks in part to a seller’s market.” personal computer business nearly a decade ago. EMC, a big data storage company, is under pressure from activist hedge funds to divest itself of its stake in VMware, a valuable virtualisation company. Some analysts even want Microsoft to break into different companies focusing on software, video games and search. The shift in investor senti- Companies have lots of choices right now. They can sell because buyers are hungry.” Chris Ventresca ment is leading to upheavals well beyond the technology industry. A flurry of spin-offs and divestitures has reshaped the media industry in recent years, thanks in part to a seller’s market. Other companies and private equity firms are eager to acquire good businesses, and investors are willing to buy stock in new companies. “Companies have lots of choices right now,” Ventresca said. “They can sell because buyers are hungry. And they have the opportunity to do something like an initial public offering because the markets are healthy.” Time Warner has whittled itself down to the core, creating a streamlined television and movie studio group. In re- cent years, it has spun off AOL, Time Warner Cable and Time Inc, its magazine businesses. Rupert Murdoch split News Corp in two, spinning off its movie and television assets into a new company called 21st Century Fox. Gannett, the publisher of USA Today, announced in August that it was shedding its newspaper assets to focus on its television operations. Three of the biggest industri- al companies are also slimming down. DuPont, under pressure from the activist investor Nelson Peltz, said last year that it would split in two. And while Dow Chemical has resisted calls from another activist investor, Daniel S. Loeb, to split itself in half, it continues to divest itself of smaller business lines. General Electric spun off its retail finance arm in July and sold its appliance business in September. Consumer goods and phar- maceuticals companies have joined the fray. Procter & Gamble is selling more than half its brands. Drug maker Abbott Laboratories spun off AbbVie in 2013, creating two enormous health care companies. Attention-getting splits Still, the cleaving in half of HP is among the most attention-getting splits to date. HP was founded 75 years ago, when two friends from Stanford University, William Hewlett and David Packard, began making audio equipment in a garage. The company grew to become the largest maker of personal computers in the world, a major supplier of printers and ink and a big provider of servers, software and supplies for other businesses. When Meg Whitman took over HP in 2011 after the failed tenure of Léo Apotheker, she inherited a troubled company that lacked focus and had lost some of its financial muscle. Balance sheet degraded “HP was under acute pres- sure,” said Peter Burris, an analyst at Forrester Research. “They had a hugely complex portfolio. The balance sheet had degraded a bit over the past 10 years.” Whitman announced job cuts, refocused the business units and cleaned up the balance sheet. Those moves allowed her to revive the idea of a split with a measure of confidence that shareholders would cheer the idea. “A move like this a few years ago might have looked like a fire sale,” Burris said. “Now, this move improves its focus, simplifying some of the complexity.” Ralph V. Whitworth, the activ- ist investor who gained a seat on HP’s board, hailed the split Monday as a victory for shareholders, a reminder of the degree to which the decision was motivated by financial concerns. The separation is “a brilliant value-enhancing move at the perfect time in the turnaround,” Whitworth said. “Shareholders will now be able to invest in the respective asset groups without the fear of cross-subsidies and inefficiencies that invariably plague large business conglomerates.” NYT Service The EastAfrican BUSINESS OCTOBER 11-17,2014 Dubai fi≥m to supply Tanzania’s oil ≥ese≥ve By HELLEN NACHILONGO Special Correspondent TANZANIAN HAS entered into talks with a Dubai-based firm to import oil for its strategic petroleum reserve (SPR) in a bid to stabilise fuel prices. According to the Tanzania Pe- troleum Development Corporation’s acting managing director James Andilile, the government is negotiating a multimillion-dollar oil suppy deal with Oman Trading International (OTI), which won the tender. “TPDC floated the tender in July last year for the SPR in a bid to curb distortion of fuel prices in the local market by importers and also to ensure the country has adequate stocks of fuel at all times,” he said. Mr Andilile said 25 compa- nies participated in the tendering process and OTI fulfilled all the requirements. “Tanzania is expected to re- ceive the first shipment of petroleum products in December or January,” he said. He added that when in place, the SPR would ensure a two-week supply of petroleum products in times of crisis. “Two weeks is enough to pur- chase 51,000 metric tonnes of petroleum products from the Middle East or West Africa,” he said. Tanzania imports fuel from the Mediterranean and Gulf regions and sometimes from South Africa. The country is currently esti- mated to consume 350,000 metric tonnes of fuel per month, out of which 65 per cent is diesel, 25 per cent petrol and 10 per cent kerosene and jet fuel. The transport sector is the main consumer of petroleum products. Only 70 per cent of the demand for petroleum is met. When the deal is concluded, OTI will be required to supply fuel to Petro Tan, a subsidiary of the state-owned TPDC. Last year, Tanzania experi- enced an oil shortage that forced the country’s energy regulator, the Energy and Water Regulatory Authority (Ewura), to allow the sale of transit fuel in the country. Last year, Tanzania experienced an oil shortage that forced Ewura to allow the sale of transit fuel.
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