Alibaba Group Holding Ltd announced its plans to split its business into six independently run and governed units. Nothing surprising from yet another large enterprise splitting into smaller businesses. Remember HP, Toshiba, Kraft, GE, GSK, J&J. But then successful split requires excellent planning, empathetic leadership, and quick decisions.
So, when do companies become too big to be broken?
Capital Is Finite
Enterprise size has both its advantages and painful disadvantages. Breaking up the enterprise into multiple units is about optimising on challenges and opportunities. The capital availability for sustenance and growth is always finite. So, every rupee to be allocated for future of the enterprise must fight with basic survival of some unit within the wider enterprise.
Refining Corporate Maze
The inefficiencies associated with large, diversified businesses can be complicated to solve, and might use up the management bandwidth. In a world where every quarter seems critical for sustaining investors interest, such inefficiencies can pull down financial outcomes of companies.
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To iron out such challenges, it might be useful to split up the enterprise into multiple business lines. This might bring focused management attention, retaining talent, and financing opportunities specific to that business line and valuations basis that industry focus. Such businesses can have efficient operations and specialised talent, and with lesser organisational costs. In industries which need attention and budgets for R&D and innovation, this could be of use.
Problems Of Being Big
Often leaders at large enterprises find it hard to track their diversified and complex businesses. It just needs one business obstacle in one of those units to demand time and attention of the central enterprise’s resources. Often the central leadership is not clued into details of operational issues, and in a distress situation, problems that were around for long are newly found. They could have been solved much earlier, if only the central teams had time and paid attention to the business unit’s issues.
Two Plus Two Can Be 10?
At times, splitting an enterprise into parts might help throwing good money after bad. At times, investors pay premium for focused businesses that can generate profits and can engage consumers for longer haul. This is from the investment principle that it makes sense to split businesses that have no benefits from shared ownership, and being standalone could improve its growth potential.
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From a financing perspective, at times size of an integrated enterprise might offer investor comfort. But often, regulations seek simpler ownership structure and the ability to provide details at a business unit level. Such transparency helps in better cost of financing and lesser regulatory and compliance costs and time.
Globally, governments and regulators are worried about anti-competition. They want to ensure that there is adequate competition that permits equal access to consumers and allow for market pricing.
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’. When does a company become ‘too big’ in an economy, or on a global scale? Should sovereign states be concerned about such ‘big’ companies?
The worry is that large enterprises could influence public policy, regulatory development, and overall political economy of the markets they are present in. Any negativity around such businesses has a direct impact on the image of the governments. Enterprises with disproportionate market share creates a shadow of doubt over the independence of the regulators.
But free markets proponents would argue that governments should not intervene in the growth of enterprises, especially when those firms have invested substantial capital and time in developing a success-moat. They would further make their premise that such firms have been successful in the Industry 4.0, and they employ large diverse set of individuals globally.
Since the advent of this century, global regulators and policy-makers have had this worry, especially about BigTech firms. Some of these firms have been routinely penalised for regulatory breaches, around consumer privacy intrusion, lapses in data governance, restrictive anti-competition, among others.
If one tracks the corporate world, it is understandable that enterprise breakups are routine as it gets. Hence this question of why such an opposition when regulators break up companies, instead of the investors demanding for it? Another question that one would pose from strategy point of view is why can’t regulations prevent enterprises from becoming dominant in the first place? In a world of uncertainties, and emerging risks and newer business models, the question should be: is it too big to fail versus just big to break?
(Srinath Sridharan is an author, policy researcher, and corporate adviser. Twitter: @ssmumbai.)
Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.
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