On the heels of several major conglomerates announcing splits, this begs the question of whether it might be time for other giant companies to consider the same move. In this segment of Backstage Pass, recorded on Nov. 12, Fool contributors Rachel Warren, Jon Quast, and Toby Bordelon discuss.
Rachel Warren: I think in terms of a company that perhaps would be better off as multiple entities. One obvious picture that came to mind is Facebook (NASDAQ:FB). [LAUGHTER] This is a company that it has had its fair share of issues and regulators, I think regulators have been trying for quite a long time to potentially get Facebook to split up.
Facebook has this track record of buying up its competitors rather than trying to beat them, and it is of course the dominant force in social media today. I think it's also unlikely that this is the company that you're going to see regulators succeed at breaking up in the near future.
The FTC, for example, had filed a lawsuit late last year suing Facebook for illegal monopolization. It was later rejected and then they refiled a different suit.
But essentially, what they were saying was the company is illegally maintaining its personal social networking monopolies through a year's long course of anti-competitive conduct. But again, that never resulted in real-world consequences for Facebook in the sense that there's still going strong, they still beat out the competition, and they also have this data.
It will be interesting to see something like that happen with Facebook. I think in a sense it could get regulators to back off. But I would be very surprised to see Facebook do that of its own volition. I guess never say never, but it's not something I see happening in the near future.
Jon Quast: I agree with you, Rachel. I think that I would be very surprised if Facebook voluntarily decided to split itself into its different parts, and here's why. I'm not sure that breakups often make the businesses better.
When you think about what Facebook is, it has its Facebook platform, WhatsApp, Instagram, all these different platforms, and what does it do? It sells ads, it targets individuals, and it provides this really strong return on advertising dollars, and that's why it gets such great rates.
If you start splitting it into different parts, you start losing some of that insight, and I don't think that you are as competitive as a business. From Facebook's perspective, I don't think that you want to do that. In many businesses' cases, I don't think it makes you a better business by splitting up. Now, to Toby's question, is this a new trend? I don't really think so.
Personally, this is my hot take here. My hot take is that everything is just louder these days. Everybody has an opinion. It's all over social media, it's all over the internet. I think that people have always been, there's always been politicians and lawmakers who are anti-big businesses. I think it's just louder now than it's ever been, and this week we just happened to have some really interesting companies that are breaking into different parts. It's not unprecedented, right.
You have eBay (NASDAQ:EBAY) and PayPal (NASDAQ:PYPL) breaking up in their own volition in the past so it does happen. As far as something that might unlock some shareholder value, I wasn't really sure on where to go with this, but one thing that did come to mind with Starbucks (NASDAQ:SBUX).
When you look at Starbucks, this is a huge, huge business. There are parts of the business that are really high growth, but you don't really see it as much because it's just absorbed because it's such a big company.
One opportunity would be perhaps a Starbucks China, and if you look at their store breakout right now, they have 15,350 U.S. locations, only 5,360 in China, despite China being a much larger population.
They added 650 locations in China during the past year, so it would be a high growth opportunity, it would be a profitable growth opportunity. If you missed out on Starbucks 1.0, Starbucks China would give you a second opportunity to invest in that. I don't think it's going to happen, but it was just interesting to think about. Go ahead.
Toby Bordelon: Yes, thanks, Jon. I think you're both right. I'm not sure this is a long-term trend. This goes in cycles, right. Let's acquire and get bigger. Now, let's not divest stuff. I think maybe we're in the divestiture part of that cycle, at least what we're seeing with GE (NYSE:GE). We spoke about that earlier today briefly.
One company I might go with is one I just actually just talked about in the last show, Tucows (NASDAQ:TCX). They're moving toward a model where they want to have these more separation between their business lines, and my way of thinking, we'll just split them all up. Why go halfway with that?
The other one, honestly, Berkshire (NYSE:BRK.B) comes to mind. That's never going to happen. Warren Buffett is never going to do that. I think there are ways that you could split that they make a lot of sense. The obvious one to me is you take out the railroad and the energy businesses and separate that out and leave the insurance and everything else along with that. It would kind of take Berkshire back to what it was before they really started buying these energy companies, before they bought the railroad, making more of an industrial operator.
Again, I don't think that's going to happen as long as Buffett's there, but it's something worth thinking about. I think you might see that at some point.