Big Companies Are Splitting: 1 Investor Weighs In

Is the age of giant, almost monopolistic, companies drawing to a close? In this segment of Backstage Pass, recorded on Nov. 12, Fool contributors Toby Bordelon and Rachel Warren share their thoughts on the breakup trend, including on the planned split recently announced by pharmaceutical giant Johnson & Johnson (JNJ 0.82%). 

Toby Bordelon: One bit of news we did have this week is there have been a lot of breakups, it seems like, that were announced this week. In the recent past, we've had discussions about whether or not Big Tech is too big, and there have been some lawmakers, some regulators, some commentators saying maybe we should break up these big companies using antitrust laws.

But it turns out this week, we learned there are a lot of companies who are taking an approach of "Oh yeah, that's cool, we'll just break ourselves up without any government interference at all. Let's do this!"

GE -- the big one -- announced earlier this week they're splitting into three companies. We talked about that earlier today on the M&A show. Toshiba said "Yes, sure, split into three, sounds like a good idea. Let's do that." Johnson & Johnson -- splitting only into two, so not quite the same. We have a lot going on. There are a lot of other breakups.

What do you guys think? Is this a new trend? Are we entering a new era of "smaller is better" here? What's one company you might think about that might be better off as two or more companies instead of one big combined entity. Rachel, let's start with you: What do you think about this?

Rachel Warren: Yeah, I think it's very interesting. I'm not really thinking this is the beginning of a new trend, per se. I think when you have some of these companies that are on the verge of, or already perhaps are entering, monopoly territory, it's presumably a good way to keep regulators off their backs a little bit. And, I think that apart from a regulatory perspective, sometimes companies have a lot of reasons to split into multiple entities. I think one really common reason is as a means of promoting faster growth.

Maybe you have a variety of business segments, and perhaps one or more is potentially held back by the others, and splitting into these various companies could promote the most optimal growth for all. You can focus on accelerating revenue and profits perhaps on a different scale than when these entities are all wrapped up into one.

And going back to what you were mentioning, I think this was one of the reasons behind J&J's announced split. You look at a company like this, one of the largest pharmaceutical companies in the world, one of the oldest pharmaceutical companies in existence: Why would they split up after being in the same business structure for so long? One of the things that management said was, the separation of their consumer health business is "the best way to accelerate our efforts to serve consumers, healthcare professionals, create opportunities for our talented global team, drive profitable growth, and improve healthcare outcomes for people around the world."

They also said that the split addresses segments that have essentially grown into these different businesses. So from a business perspective, this can be a great way to drive future growth. Johnson & Johnson has said, for example, that it's not anything related to this other recent move they made, which was to essentially form a subsidiary and consolidate all their talc lawsuits into that subsidiary, and then it files bankruptcy.

Presumably, this isn't to address some legal shielding, but it is interesting that you're seeing these major companies make these splits. I think you could say maybe they're anticipating regulators' moves. But at the same time, there are also some really clear business advantages to be had from that.