With Johnson & Johnson, Toshiba, and GE Splitting, Could Other Big Companies Follow Suit?

Most investors will be aware that several giant conglomerates such as GE and Toshiba are making plans to divide themselves into smaller, more focused companies. But are those moves harbingers of a trend? Are other large companies on the verge of splitting up their businesses, whether for profit-based or regulatory reasons? In this segment of Backstage Pass, recorded on Nov. 19, Fool contributors Toby Bordelon, Travis Hoium, Rachel Warren, and John Rosevear discuss the upcoming Johnson & Johnson (JNJ 0.96%) split and the potential of additional conglomerate split-ups.

Toby Bordelon: I want to open it up to Travis and John if you have any comments, but first, let me share this real quick. This is from one of their [Johnson & Johnson's] presentations they did on this. You can see right here -- you see the split between the pharmaceutical. This is the pharmaceutical/medical devices business, not the consumer. This business is going to be that 65%/35%. You can see what's going on here. It's much more pharmaceutical than devices right now.

[Switches slides] And this is the consumer side. You see some of these consumer brands they have here -- as you're probably familiar with, Tylenol being the most probably well-known, but also stuff like Band-Aid, Listerine, Neosporin, that sort of stuff. So it's very much that pharmaceutical/device businesses -- it's going to be very much a pharmaceutical business going forward.

Rachel Warren: Yeah, for sure. 

Bordelon: Trevor, you got any comments? Travis, rather, not Trevor. Sorry for that.

Travis Hoium: Yes. I was just going to say, when I was reading up on this, this seems like a lot of the other conglomerate split-ups that we've seen. In the '80s, '90s, the theory was, put all these uncorrelated assets together and you will get a lower cost of capital and ... more shareholder value. We're just undoing that.

But in this case, it seems like the core competencies of the two businesses and the customer bases are different. If you're dealing with the regulatory environment of pharmaceuticals and medical devices, I wouldn't be surprised to see those two split eventually.

Warren: Yeah. 

Hoium: But that's a completely different ballgame than selling me Tylenol for my kids, or Band-Aids. Like you talked about, one is a consumer business and one is basically an enterprise business. It seems like that makes a lot of sense to me. It would just allow the company to focus more. These are the kind of conglomerates that don't seem like they've done anything really revolutionary in a long time, and so maybe this gives them a little bit more focus to be a little bit more innovative, and drive a little bit more growth long term. [That] was my read on it. I don't know if that's right.

Warren: Yeah, I'm curious to see if we see more big pharmaceutical companies doing this over the next few years. Is this just a one-off thing, or is this going to be Johnson & Johnson being a little bit of a trendsetter? A different situation, but for example, in late 2020, Pfizer spun-off what had been really an unprofitable -- not like Johnson & Johnson's consumer health business -- but what Pfizer did was spin off its generics business, Upjohn. In doing that, it has been able to realize tremendous business growth in addition to that from its COVID vaccine. It can be really beneficial and allow the two companies to grow well, but not maybe one hold the other back.

Bordelon: It's interesting, Travis, you talked about the innovation aspect. J&J did give us a COVID vaccine, but interesting that it was more of a traditional vaccine and not the mRNA that we saw from Pfizer and Moderna. Maybe there's something to that.

Hoium: And maybe this gives them the focus to both invest and acquire companies that are doing... I know that's really common in the pharmaceutical space, specifically, is you fund this moonshot project, and then, your hope is to get acquired by Pfizer or Johnson & Johnson. Maybe this gives them the ability to do that where they're not distracted by the consumer business quite as much. That would at least be my bullish thesis on this.

Warren: I'm excited about this.

Bordelon: I think I like it too. I think I like this. I'm curious to see if we get any other breakups in the near term. So far, we've got GE, we've got Johnson & Johnson, we've got Toshiba.

Hoium: I keep thinking about 3M. Do you break that up into eight businesses?

Warren: Wow. [laughs] That would hurt my brain.

Hoium: It's all over the place. I used to work there, and it does so many things that I don't even know how you would do that. They've slowly split off a few businesses over time, but they've been pretty small pieces, like the pharmaceutical business that they had that I'm sure not many people even knew about. That's the one I keep thinking about. Toby, I think I mentioned it last week, but I can't make sense of it in my mind.

Bordelon: I don't know. It's always something when you think about a company like that. When you dig into them, you're like, "Wait a minute, I had no idea of this part." That tells you something. When you find that part of the business like, "I had no idea they did this and I don't know if I care now that I do know."

There are a couple of others, I guess, you could think about that are massive. But I think what we're seeing here -- Johnson & Johnson, the split makes sense to me. It's a clear split. That seems fairly obvious. You talked about the big tech companies. It looks less clear, because there's more synergy between the businesses. You know what I mean? You're talking about -- would Microsoft spin off...? I don't know.

People have made the case before that Microsoft should divest and spin some stuff off. But you look at that business and everything works well together. There is a lot of synergies in that business. Something like that makes sense to me.

Hoium: Amazon would be the natural...

Bordelon: Yeah. I think you're right. I think of the big tech companies, Amazon makes the most sense, because you can say, all right, let's take the AWS, let's take the retail.

Hoium: But if they were going to do that, I would think they would have done it when Bezos left.

Bordelon: Yeah.

Hoium: You talked about this, Rachel, with this deal, you do these big strategic split-ups, strategic shifts. Microsoft did this when Ballmer left. You do that at this transition point of CEOs.

Warren: Sure.

Hoium: There will be an argument against it. Amazon is one of those companies where, unless the stock starts going down, they're not going to do a deal like that, but that's the one that seems natural to me.

Bordelon: I think it's important to make a distinction too. We're talking about -- with GE especially, but also with J&J to some extent -- a conglomerate, which is different than a large company. When we were back in the '80s, you think, ABC/Capital Cities, and a bunch of these. GE in its heyday. When you think about a conglomerate, you think about a company that has business lines that don't necessarily make sense together. They're just these disparate business lines, run on their own. Berkshire's a good modern-day example of that, where you don't necessarily get any benefit of putting this together beyond centralizing operations like HR. That's distinct from these tech companies that actually, you have several businesses, but they do work together.

Yeah. Travis, Comcast, a good example too, that was putting stuff together. Even sometimes, they might seem similar, but they can work on their own. There's no real obvious benefit or connection between the business lines.

Hoium: There's a company that I could argue would be better split up.

Bordelon: Yeah.

Hoium: Let the NBC Universal content business focus on content and compete with the Netflixes and the Disneys. And let the cable business just be a cash generator. It's not a growth business.

Bordelon: Yeah. Be a utility, right?

Hoium: Be a utility and pull as much money out of it as you can, while you can. But those two don't necessarily make sense together. So maybe we'll be talking about that one next week.

Bordelon: Maybe. John, go ahead.

John Rosevear: I was just going to say we have seen similar things with some of the big auto suppliers, where they've split the business into old tech and new tech, because old tech -- internal combustion -- throws off a ton of cash, but it's not high-growth. Then the new business has a lot of growth potential, but maybe not a lot of cash. You could make an argument for keeping them together, but they've decided that you get more shareholder value by splitting them.

We saw this with Delphi, we saw this with a couple of the other big suppliers, where the industry is going through a transition, so the old part splits off from the new part. You could make a case either way with those, but it's an interesting trend -- the growth side versus the cash cow side.

Bordelon: Yeah. You see that, I think, in the energy industry too, in terms of transition. Activists were making a case to Shell: "Look, split up, split your renewables from your legacy business," and then Shell comes down, says, "Yeah we're going to do restructuring, but not that. We're going to do something different." So they've rejected that idea. But it's that same aspect -- an industry in transition, I think, creates opportunities for some things like this. We'll see what happens.