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. Last Updated: 07/27/2016

Breaking Up Becoming Big in Britain

LONDON -- It may seem a contradiction to see a flood of corporate splits in Britain coinciding with a wave of takeovers, but demergers and mergers actually go hand in hand -- and investors welcome both.


The close link between the two was illustrated earlier this week when speculation arose that mini-conglomerate Christian Salvesen may break itself up to defend against a hostile bid.


A Salvesen demerger would be the latest in a string of breakups, which have become a remarkably fashionable move among British companies.


Against a background of linkups in about every industry sector, a growing number of British companies have said since the beginning of the year that they wanted to become smaller instead of bigger.


Rather than seeking economies of scale, firms demerge to give the new, smaller entities the specialist management they need as competition worldwide increases.


"A demerger means that management can focus on the task at hand," said George Hodgson, a strategist at bank SBC Warburg.


A more direct advantage to shareholders is the bid speculation usually triggered by a demerger announcement.


When British Gas announced its demerger plans in February, shares in the privatized utility rose on hopes of an offer in due course from an oil company for the gas trading arm.


Similarly, shares in conglomerate Lonrho have been underpinned by buying from Anglo American. The South African giant is seen as preparing itself to swallow up Lonrho's mining assets once ties are cut with the group's hotels and trading divisions.


A similar story is true for Thorn EMI, whose shareholders voted Friday to separate the company's EMI music business from its electronics rentals and rent-to-own activities, and Anglo-U.S. giant Hanson, which is splitting itself in four entities.


Shares in Hanson have recently had a rough ride, but this was attributed mainly to difficult market conditions for its chemicals operations rather than sudden skepticism over the breakup.


With a few exceptions, the demerging process so far has been mostly an Anglo-Saxon phenomenon.


All the recent demerger activity has taken place while other firms around the world have sought instead to strengthen their muscle through linkups in all forms and sizes.


British Petroleum and Mobil of the United States, for example, said they will merge their European fuels operations, while Britain's RTZ and Australia's CRA have combined to form the world's biggest mining company.


In the drugs industry, meanwhile, Swiss groups Ciba-Geigy and Sandoz joined forces to create Novartis, which -- as if to illustrate the point -- immediately announced it intends to spin off its chemicals business.


Apart from Britain, significant demergers on a substantial scale have taken place only in the United States, where ITT and General Motors have embarked on major breakups.


Continental Europe is cautiously following, though, with German chemicals group Hoechst considering a plan to form an independent pharmaceutical arm. France saw its first demerger two months ago, when Chargeurs split into separate textiles and communications firms.


In London it is clear that investors no longer like diversified groups, but appreciate giants that concentrate their resources on one particular business.


"Streamlining activities" and "focusing businesses" are the catch phrases of the 1990s as companies that are specialists in their own field want to grow and compete in new markets worldwide.


There is no place for the conglomerates that thrived in the early 1980s when a new, aggressive breed of entrepreneurs bought whatever under-performing company they saw, no matter which sector it operated in. These dealers, such as Lord Hanson or Lonrho's founder, Tiny Rowland, were driven by an unsentimental search for efficiency.


To an extent, they have fallen victim to their own success as companies have woken up to the threat from predators.


It has consequently become increasingly hard to find laggards of sufficient size that can be bought on the cheap and turned around quickly to propel conglomerates' dividend growth.


"Occasionally there are still opportunities, but they are pretty limited these days," said Hodgson.


The quick-and-dirty deal making to boost payouts fits the Anglo-American corporate culture.


It contrasts sharply with the long-term focus that is commonplace among conglomerates on the European continent, where an aggressive merger and acquisition tradition is largely absent.


It is this different perspective which explains why demergers are more popular in the U.S. and Britain, analysts say.


But they add that commercial pressures are quickly building up for continental European firms move fully onto the demerger path.