My apologies to the aggressive activists who fight for corporate breakups, but this tumultuous year proved you wrong. Over the long run, sturdy, diversified businesses stand tall.
Around this time last year, such breakups were stealing peoples' hearts. A string of major American companies, including Symantec, Hewlett-Packard and eBay, all proposed splitting up their businesses, hoping to "unlock value." There was such a groundswell that it started to seem as though boards that wanted to keep big, bureaucratic companies intact were hopelessly behind the times.
But 2015 exposed the flaws in this fervour. Single-line businesses are incredibly vulnerable to shocks, and the chaos created by everything from financial technology startups to the energy crash is a reminder that having multiple pillars pays off. It just takes time to see it.
The people who advocate breakups – such as the activist that wanted to rip TransCanada Corp. apart – often argue the same things. Big, diversified companies, they say, are too bloated and bureaucratic. Red tape kills employee morale, and that has an effect on earnings.
Another argument of theirs: Too many companies own divisions that do not complement each other. Symantec broke up largely because the synergies promised from its 2005 acquisition of Veritas never materialized. Data storage and data security seemed to be a perfect marriage, but it turned out they have very different customer bases.
Then there is the evolution argument. The world changes, so businesses should, too. EBay bought PayPal pretty cheaply more than a decade ago. Now that digital payments are booming, the pup has arguably outgrown its parent and must be set free.
Some of these really do make sense. But they must be presented with a full set of facts. Too often, hedge funds and activists omit important truths.
Such as when trouble hits, diversity is the ultimate safety net. The S&P/TSX energy subindex is down 47 per cent since energy prices started plummeting in July, 2014, yet integrated, or diversified, producers have fared much better. Suncor's shares have fallen 19 per cent over the same time frame, less than half the industry average.
Unlike its smaller rivals, which are wholly tied to oil and gas production, Suncor has a massive refining and marketing division that made $613-million in the past quarter, offering some breathing room in this nasty downturn.
This matters to more than just the stock price. The security has given Suncor the strength to go hunting, allowing it to launch its hostile bid for Canadian Oil Sands.
Diversified businesses are also better able to stave off disruption. Newspapers with print editions are often laughed at by younger generations, but the truth is they're in better shape than most digital outlets. Seventy per cent of revenue at The New York Times came from the print business in 2014, and that money can be used to fund the digital business model.
The same is true for Canadian banks, which can use profits from divisions such as capital markets and wealth management to help fund digital innovation in retail banking.
Because the big banks are so diversified – some more than others – they aren't so fussed about loan losses in Alberta. Every three months, they get grilled by analysts about their ties to the energy-dependent province, but bank executives barely blink because these lenders can easily absorb the volatility.
Executives must also think about the future. Even if they have a cash cow now, the odds are it won't be incredibly profitable forever. It's why Google is investing in businesses such as driverless cars and has also acquired the likes of smart thermostat maker Nest – Google's leaders know they can't rely on search advertising forever.
This debate can be a confusing one. Search long enough and you'll find studies supporting and knocking corporate breakups and spinoffs. It can be hard to know which to trust. But I can't shake what Bain & Co. found after studying 40 breakups worth $1-billion or more from 2001 to 2010.
"Our analysis, including extensive interviews with executives, has shown that the results of the long, complex and costly process are mixed," the authors wrote. "While the spun-off entity often generates positive returns, the combined equity returns on average do not outperform the S&P in the first 18 months after separation." The big picture long-term? Only the top one-third of separations generate "significant value."
Some of these deals make sense, especially if they're done at a market peak, like Encana's royalty lands spinoff. But these aren't one-size-fits-all scenarios. I'll take a big, boring company with diversified profits any day.