Breaking Up Is Profitable To Do

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What's going on?

Shares of German industrial giant ThyssenKrupp jumped 4% on Friday after it agreed to review its overall strategy and structure in the face of investor pressure.

What does this mean?

ThyssenKrupp – which owns businesses that make various things, from submarines to elevators and car parts – is a throwback to the days where large conglomerates ran sprawling industrial empires. But it’s come under increasing pressure from investors of late as profits have continued to fall short of its own targets.

ThyssenKrupp has already implemented some major changes, including separating its steelmaking operations and merging them with India’s Tata Steel (due to be completed later this year). The CEO has now agreed to a strategic review of all its businesses, cheering investors who believe that splitting up the company further will lead to increased profits and a higher overall valuation.

Why should I care?

For markets: The main “activist investor” pushing for change believes a simpler structure could double Thyssenkrupp’s value.

Investment firm Cevian Capital is Thyssenkrupp’s second-largest shareholder and the most vocal, though not sole, critic of Thyssenkrupp’s current setup. It believes that Thyssenkrupp’s stock price could double if the company’s structure were less complex. The stock’s move 4% higher on Friday suggests that others also share the view that breaking up the various businesses would result in greater value for shareholders.

The bigger picture: This could be yet another example of a company simplifying in order to boost its value.

Last week, General Electric’s CEO suggested that the US industrial giant could be broken up into separate businesses in an effort to create more value for shareholders. Various other companies, including Hewlett Packard, have pursued a similar strategy. A more streamlined setup usually offers investors a clearer view of what they’re investing in, making a company more attractive and boosting its value. There’s also an argument that in this age of constant innovation, a slim operation can more quickly develop and profit from new technologies.

Originally posted as part of the Finimize daily email.

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