In the span of one week, two of the oldest, most well-known corporations in the history of American business announced plans to divide into smaller, independently-owned companies.
On November 9, General Electric, a company founded in 1892 after Thomas Edison’s Electric Company merged with Elihu Thomson’s Thomson-Houston Electric Company at the behest of JP Morgan, announced it was breaking up into three parts: GE Aviation, GE Healthcare, and the combined GE Renewable Energy, GE Power, and GE Digital businesses.
The company said GE Healthcare would be a “pure-play company at the center of precision health in early 2023.” Peter Arduini will assume the role of president and CEO of GE Healthcare effective Jan. 1, 2022—and it intends to execute the spinoff by early 2023.
One day later, Johnson & Johnson, which dates back to 1886, announced it was splitting into two companies: one focused on consumer health and the other on pharmaceutical and medical device products. The pharma/med device side would generate, according to Johnson & Johnson’s estimates, close to $77 billion in annual revenues, while the consumer health division would bring in $15 billion annually. The company based these estimates on numbers from 2021 revenues.
J&J says that the planned transition will take 18 to 24 months. Incoming CEO Joaquin Duato, who is set to take over for current chief Alex Gorsky in early 2022, will continue to lead Johnson & Johnson’s pharma/med device business after the separation. It’s unclear who will be taking over the role of CEO of the consumer business.
Here are a few takeaways for CEOs to consider when examining these health care-specific corporate spinoffs:
A larger trend. These moves represent a trend that’s happening in the larger world of business. In fact, a major pharma company—GlaxoSmithKline—already took a similar route to J&J earlier this year when it announced plans to break out its consumer health care products division into its own company by mid-2022. At the time, GlaxoSmithKline CEO Emma Walmsley said the move was partly made in response to under-performing GSK shares. In the provider world, Tenet Healthcare completed a spinoff of its Conifer business earlier this year.
According to Seeking Alpha, the idea behind these moves is to have the “market price each independent company differently than when the two are merged and to give each entity a management team that can be competent and focused on creating value for that particular enterprise.” There is a potential windfall that can come from these moves. In the past decade, spinoffs have resulted in $654 billion in new companies, according to data cited in a CNBC article. A recent McKinsey analysis shows how spinoffs can typically result in a win-win outcome when executed correctly. Some are even predicting that these moves are an indicator that the ”conglomerate is dead,” although others are saying that it’s still alive and in various different forms.
On an investor call, GE CEO Larry Culp said the three companies would have the “strategic and financial flexibility to invest more in existing and adjacent growth markets.” In his own call with investors, J&J CEO Alex Gorsky said that in the past, a broader approach has served the company well, but “addressing the complexity of today’s global health care and consumer environments now demanded unprecedented focus, innovation, and agility.”
A more focused future. While both Culp and Gorsky used corporate verbiage in their reasoning for the spinoffs, it’s a fairly straightforward response when read between the lines: Bigger isn’t necessarily better. Both companies want to be more flexible and nimbler in response to a changing market. Along with GE, J&J, GlaxoSmithKline and Tenet, HCA Healthcare spun off assets this year to have a more focused strategy.
Gorsky said that COVID-19 accelerated the company’s desire to spin off its consumer business, but the move had been developing for years as the two sides’ customers have diverged. The pharma and med device side has grown faster and has bigger margins than the consumer health business, which is why companies like Merck and Pfizer have made similar moves in the past and kept both sides to offset the risk of the pharma and med device’s reliance on regulatory approvals, but that’s no longer needed, experts say. AbbVie split off from Abbott Laboratories, Nasdaq reports, and the companies’ combined market cap has seen a fivefold increase since it happened in 2011.
GE, meanwhile, has been linked to spinoffs for a long time. In fact, one analyst told Bloomberg this is “the longest anticipated breakup in the multi-industry sector.” The company had previously explored spinning out the health care business in 2019 but decided to sell the biopharma unit within the larger GE Healthcare. GE is now targeting 20 percent profit margins for the health care business, which has invested in driving precision health through AI-enabled imaging products. Mark Armstrong, shareholder at the consultancy LBMC, said to Modern Healthcare that the separate GE Healthcare will enable the company to lure investors who are solely interested in health care technology.
Recent troubles. Neither company has been free from controversy and challenges in the past few years. Johnson & Johnson has faced its fair share of legal troubles, including lawsuits by multiple states for their role in the opioid crisis. Moreover, the company is in the middle of a legal battle, which contains more than 40,000 lawsuits, over whether or not its baby powder product contained talc which could cause cancer. J&J created a subsidiary called LTL Management, moving $2 billion in baby powder settlement money to LTL and then submitting LTL for bankruptcy. It also recently faced lawsuits over its sunscreen brand, pelvic mesh products, hip-replacement systems and the anti-psychotic drug Risperdal.
While GE has not faced as many legal issues as J&J in recent times, there were plenty of people speculating that it might break itself up because it amassed more than $100 billion in debt at the end of 2020, an amount it brought down to $70 billion by selling assets before announcing the breakup.
Going forward. Will other large health care organizations continue with this trend? It may depend on the success of J&J, GSK and GE Healthcare. J&J was undoubtedly buoyed in this move by the triumphs of its rivals in selling off their consumer health units. GE probably looked towards Siemens as a model in effectively deconstructing a conglomerate, including the creation of the successful Siemens Healthineers company. McKinsey’s analysis of one spinoff story found that one pharma company spent “considerable time developing a new narrative and equity story.” For any potential or current spinoff, this is what they’ll need to do in order to be another winning spinoff story.
“The team knew it would need to build credibility with a new group of investors and educate them about the unique characteristics of the business and the market. This exercise, which involved leaders from both the parent company and the consumer-health spin-off, helped the spin-off’s managers to build a compelling story for investors, analysts, and other key stakeholders,” McKinsey writes in its analysis.
Hero image credit: Johnson & Johnson
