Family splits: ‘Heir-splitting’ or ‘Hair-splitting’?

It is always difficult to imagine a split in any large enterprise or global brand. In the recent years, one regularly hears of enterprises being split up, for varied reasons. Of late, the corporate world is seeing the split of the $29.4 billion Japanese tech-giant Toshiba Corporation, known for their consumer and industrial electronic products. It would split itself into:

•Device Co: consists of Toshiba’s Electronic Devices & Storage Solutions business.

•Infrastructure Service Co: consists of Toshiba’s Infrastructure Systems & Solutions Energy Systems & Solutions, Building Solutions, Battery businesses, and Digital Solution.

•Toshiba : will retain its shareholdings in Kioxia Holdings Corporation (KHC) and Toshiba Tec Corporation.

Genesis of the Toshiba split

The roots of Toshiba’s decision to split may date back to 2015, when the tech-giant was ordered to pay Japan’s largest corporate penalty ever, for falsifying their financial statements. Then, the corporation agreed to sell its assets in Westinghouse Nuclear Unit in an effort to boost capital. In 2017, the company secured a $5.4 billion cash injection from over two dozen overseas investors. While the move helped the company avoid de-listing, it introduced activist-shareholders such as Third Point, Elliot Management, and Farallon. Soon, tensions began to rise between the overseas shareholders and the company’s management.

A shareholder-commissioned investigation discovered that Toshiba was involved in a collusion with Japan's trade ministry. The collusion was intended to block investors' developing influence at the company’s shareholders meeting in 2020. Toshiba then released a separate report that showed their former chief executive and other executives had behaved unethically. The cumulative effect of these scandals likely triggered Toshiba’s decision to split-up. The corporation stated the move was carried out to enhance value for shareholders. There are many other global investors who are uncertain about the company’s future. Toshiba’s decision to split may even have been driven by Japan’s recent tax reform legislation. This legislation encourages spin-offs by introducing tax deferral measures for them.

Splits and the aftermath

The inefficiencies associated with large corporations (including promoter-led ones) are often difficult to even out, as they affect different branches and divisions collectively. By splitting up, each smaller company can set up its own business lines. This includes individual resources, focused management attention, retaining critical talent, regulatory networks, and wider financing choices. These separately managed firms are then able to conduct their operations more efficiently, and with fewer bloated costs following the transformation.

Hewlett Packard demonstrated this. They were able to successfully produce steady profits when they split into HP Inc and Hewlett-Packard Enterprises in 2015.

Kraft’s split into Kraft Foods Group and Mondelez International in October 2012, did not yield the positive results that Hewlett-Packard’s split-up did, and took time to settle down.

Large corporations such as GE and J&J recently announced their decision to break up into smaller entities. The new spin-off companies may find success, if they utilise the contextual business model for their operations.

No Playbook for Splits

There is no playbook for implementing transformation stories. Each enterprise is unique and yet has a lot of commonalities. A successful split requires excellent planning and deft management.

Ambition - of newly split businesses will play a huge role in their growth trajectory.

Branding - of the new entity and how it positions itself and how much it reminds its customers of the older (larger) enterprise will impact its business. For some brands, legacy does not cut ice with the younger consumers.

Culture - When the large entity breaks up into multiple smaller ones, will it’s culture continue in the new entities? It’s a tricky challenge for the boards to debate carefully and then start shaping the culture they want to serve their consumers.

Organisation - Enterprises, after they are split up into smaller parts, need a robust and agile organisation to suit the new role they play; that of a smaller firm and not having the legacy or tag of belonging to a larger brand. Having the right talent and decision making structure can help them scale profitably.

Anti-competition - Many believe that such splits are actually a welcome trend, away from monopolisation. It is seen as a positive move because the existence of monopolies impairs the proper functioning of markets and makes them anti-competitive. Regulators will start tracking “too big to fail” and “too unwieldy to control” enterprises. They want “right size” firms to supervise and offer investors protection. After all, they don’t want something going wrong “on their watch.”

Valuations - The trend of enterprises splitting is inevitable in many cases, given that markets are currently overvalued. This creates conditions where small companies introduce more value to their respective market.

‘Heir-splitting’ - If founder family members are involved in the business on a day-to-day basis or on the boards, it would necessitate drawing boundaries for them to operate in, after the split. Apart from the financial gains for each family member, they also would want ‘symbolism’, ‘role’, ‘influence’, ‘social standing’, etc. One of the toughest yet simple question that fails many enterprise patriarchs and successors is : “What would a young scion do in his/her 10-hours-work-day without an executive role (and without intruding into company activities) ?”

Daughter-Damaad: In the Indian context, splitting an enterprise should ideally have meaningful roles for the daughters. Also, the consequent social-optics of the son-in-law’s positioning and role in the split entity. The challenge would be if the split entity is wealthier and more meaningful than that of the sons-in-law’s businesses.

Son - Daughter-in-law: Similarly, in today’s world, having a daughter-in-law take up a role commensurate with her professional skills and aspirations is a challenge in many a traditional community-based families.

Right for other stakeholders is right for family - These ‘right size’ conversations and “what is right?” thinking could soon be a common agenda in global board rooms, to evaluate what’s right for the stakeholders. But do the boards have members who would raise these questions to the patriarchs in the first place ? Especially in the Indian social setting?

One of the critical aspects in this agenda would be “How big is too big?” and “Are we dependent on a single leader to run a enterprise of this size?” What is the actual succession plan? Will it mean handing over executive charge or shooting over the shoulder of the new CEO? Ain’t it a new dimension to “size and scale do matter” ? After all, no one is immortal yet.