From Florida and a visit to my daughter, son-in-law, and 2nd grand baby in Miami, I moved up the East Coast to Washington DC. I paid a visit to Gannett, a media company that publishes several newspapers including USA Today, provides a lot of digital news content on-line, and has several local TV stations. Altogether they form a pretty diverse group. The day there was in the 50’s F. I will take that temperature any February in Washington DC. I guess we wall call that global warming and, of course, a great day for finance.
Interesting things are happening at Gannett. They recently announced that the business is splitting into two companies both publicly traded. One will contain the newspaper business and the other the digital and TV businesses. It is interesting to see a conglomerate make this move. I have seen it with clients several times in the recent past. Tyco International, a past client, split three ways to simplify their business. GE, a current client, is now selling off their appliance division after recently selling off plastics. Much of these spin out strategies have to do with the different margins these businesses generate. It’s hard for financial analysts to get a good feel for margins when compared to competitors when there are so many diverse businesses linked together. Lately the conventional wisdom is to spin off the lower margin businesses and focus on higher margin businesses. The idea is separately the total equity market value of the business high when split. We had some interesting conversations on whether this strategy works. Keeping the business connected provides stability to the business in tough times but can be a drag on margins.
Another client, GE, is a great example of this issue. In early 2008 GE announced that it was going to sell off its appliance division. The argument was the appliance division was a low margin business compared to other parts of the GE industrial business. Then when the financial crisis hit the company hard in 2009 GE reversed its position making the point the GE appliance generates solid cash flow which is critical in a recession. Now 5 years clear of the financial crisis GE has reversed again and is now selling the appliance division. Interesting how strategy changes with the markets and the economy.