Dutch Lights For Sale

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What's going on?

Have you noticed Philips written on the lightbulbs in your home? Its a massive Dutch company that owns lighting, consumer electronics and healthcare businesses (i.e. its a conglomerate). Philips is in the process of selling its lighting business, but it looks like its not going to fetch as much as hoped and that news helped send the stock down 4% on Monday (the most in 8 months).

What does this mean?

Selling its lighting business is part of a strategy to streamline its operations. Philips was hoping to sell it to a private company, but it looks like potential buyers arent all that interested. Instead, it said on Monday that it is more likely to turn the lighting business into a separate company and sell shares in it on the public market (i.e. on a stock exchange). That is expected to generate a lower return for Philips than a private sale to, say, a private equity firm would have.

Why should I care?

For the stock: The plan is for Philips healthcare division to drive future profit growth. For example, its increasingly providing technology and consulting services to hospitals (often on a subscription basis). That should, in theory, develop a stable stream of income for the company and, if healthcare as an industry continues to increase in importance, there should be lots of opportunity for growth.

The bigger picture: Conglomerates tend not to be worth as much as their underlying businesses. Conglomerates are big companies that operate very different businesses: Philips lighting business has little to do with its healthcare business. Its been popular in the past few years for large conglomerates to split themselves up. In theory, that means shareholders can invest in the businesses that they find most compelling and that, in turn, boosts the value of the underlying businesses (General Electric has done something similar in the US and its stock price has increased substantially).

Originally posted as part of the Finimize daily email.

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