Why Toshiba and Johnson & Johnson are the latest corporate behemoths doing the splits
Three is a trend, so the saying goes.
So news of two more big company demergers today, hot on the heels of the three-way break-up of 129-year-old US industrial giant General Electric announced on Wednesday, suggests that “doing the splits” is being looked at anew by company boards.
Toshiba, one of the best known companies in Japan, announced that it is breaking itself up – also splitting itself into three separate businesses.
One division will be focused on Toshiba’s electronics devices
The 146-year old company said one of the them would be focused on infrastructure, including products and services such as water treatment, trains, power turbines and nuclear-plant maintenance.
A second will be focused on electronic devices such as power semiconductors.
The third business, which will retain the Toshiba name, will manage the company’s stake in the flash-memory company Kioxia Holdings and other assets.
The move follows an accounting scandal six years ago – after which activist shareholders urged the company to break itself up.
The measure, however, may not go far enough with those investors that had wanted Toshiba to go private.
It received – and rejected – a takeover proposal in April from CVC, the private equity group, valuing it at $20bn.
General Electric announced a break-up earlier this week
Toshiba’s move attracted a good deal of interest since it has echoes of the GE announcement which, in turn, was at least partly inspired by similar moves two years ago by the German industrial stalwart Siemens.
Hot on the heels of that news came the announcement that Johnson & Johnson, the $429bn healthcare and consumer goods giant that is America’s 12th largest public company, is to split itself in two.
J&J, the world’s biggest healthcare company by both sales and market value, will hive off its consumer health business, the owner of brands such as Band-Aid, Listerine, Tylenol, Neutrogena and the eponymous Johnson’s baby oil, into a separate company.
The core J&J business will retain the company’s existing pharmaceuticals and medical devices businesses.
The consumer health business will be the smaller of the two but will still be a substantial company, with annual sales of $15bn a year, in its own right.
Like Toshiba, J&J has had a difficult few years, becoming embroiled in a costly legal battle with the US state of Oklahoma over its past sale of painkillers.
More recently it has been dogged by allegations – furiously denied – that its talcum powder caused cancer.
But Alex Gorsky, J&J’s chief executive, insisted that the demerger – due to take place during the next 18 to 24 months – was nothing to do with that.
Johnson & Johnson denies allegations about its talcum powder Pic: AP
He told the Wall Street Journal, which broke the story: “The best path forward to ensure sustainable growth over the long term and better meet patient and consumer demands is to have our consumer business operate as a separate healthcare company.”
As with Toshiba and GE, J&J is a stalwart of its country’s business scene.
It dates back some 135 years to when three brothers, Robert Wood Johnson, James Wood Johnson and Edward Mead Johnson, launched a business selling surgical dressings, supposedly after hearing a speech by the British surgeon and pathology and antisceptic pioneer Joseph Lister.
J&J sold the world’s first commercial first aid kits and the world’s first women’s sanitary products.
It moved into pharmaceuticals in 1959 and the more predictable cash flow from its consumer goods businesses helped finance research and development into the more up-and-down, but potentially more lucrative, drugs and medical devices businesses.
More recently, though, some investors have become unhappy at the relatively sluggish performance of the consumer goods arm.
Its sales rose by 1.1% last year while the pharmaceuticals arm grew by 8%.
Shareholders these days prefer to focus on specific sectors.
J&J boss Alex Gorsky said the demerger was the “best path forward to ensure sustainable growth”
An investor in J&J seeking exposure to its pharmaceuticals business will not, necessarily, want exposure to its consumer goods arm.
Activist investors such as Elliott, ThirdPoint, ValueAct and Starboard are now mighty beasts in the investment world, unafraid to take on some of the world’s largest companies.
No chairman or chief executive wants to see them popping up on their shareholder register.
Taking pre-emptive action, for example a demerger, is one way of avoiding costly, draw-out and debilitating battles with such investors.
J&J’s move is also in keeping with those of other big pharmaceuticals companies.
The German drugs giant Merck sold its consumer healthcare business, which owned brands including the hay fever remedy Claritin and the sun tan lotion maker Coppertone, to Bayer seven years ago.
Pfizer announced at the end of 2018 that it was merging its consumer healthcare business, the maker of Chapstick lip balm, Centrum multi-vitamins and Advil painkillers, with the consumer healthcare arm of Britain’s GlaxoSmithKline.
GSK emerged in effective control of the business and, in February last year, said it would demerge it.
J&J is going down a path previously trodden by GSK
That move effectively is the road that J&J now plans to go down.
But, as with GSK, it is not without risk.
Without the predictable cash flows of consumer healthcare products, the research and development arms of the stand-alone pharmaceuticals businesses will have to be more disciplined, channelling their resources only into work where a positive outcome can be guaranteed.
It was why Sir Andrew Witty, GSK’s former chief executive, always refused to break up the company.
His successor, Dame Emma Walmsley, decided something more radical was required.
Mr Gorsky, at J&J, has clearly reached the same conclusion.
One thing is clear: with three gigantic and storied companies – GE, Toshiba and J&J – all announcing break-ups within days of each other, demergers are very much back on the business agenda.
It is a trade deal that will “rebalance, but enable trade on both sides,” said Ursula von der Leyen after the EU and US struck a trade deal in Scotland.
It was not the most emphatic declaration by the president of the European Commission.
The trading partnership between two of the biggest markets in the world is in significantly worse shape than it was before Donald Trump was elected, but this deal is better than nothing.
As part of the agreement, European exports to the US will be hit with a 15% tariff. That’s better than the 30% the bloc was threatened with but it is a world away from the type of open and free trade European leaders would like. The EU had offered tariff free trade to the US just weeks before the deal was announced.
Money latest: What new EU travel rules mean for you
Instead, it has accepted a 15% tariff and agreed to ramp up its energy purchases from the US.
The EU tariff on US imports will remain close to zero but Europe did get some important exemptions – on aviation, critical raw materials, some chemicals and some medical equipment. That being said, the bloc did not achieve a breakthrough on steel, aluminium or copper, which are still facing a 50% tariff. It means the average tariff on EU exports to the US will now rise from 1.2 % last year to 17%.
There is also confusion over the status of pharmaceuticals – an important industry to Europe. Products like Ozempic, which is made in Denmark, have flooded into the US market in recent years and Donald Trump was threatening tariffs as high as 50% on the sector.
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US and EU agree trade deal
It appears that pharmaceuticals will fall under the 15% bracket, even though President Trump contradicted official announcements by suggesting a deal had not yet been made on the industry. The risk is that the implementation of the deal could be beset with differences of interpretation, as has been the case with the Japan deal that Trump struck last week.
It also risks fracturing solidarity between EU states, all of which have different strategic industries that rely on the US to differing degrees. Germany’s BDI federation of industrial groups said: “Even a 15% tariff rate will have immense negative effects on export-oriented German industry.”
The VCI chemical trade association said rates were still “too high”. For German carmakers, including Mercedes and BMW, there was some reprieve from the crippling 27.5% tariff imposed by Trump. The industry is Europe’s top exporter to the US but the German trade body, the VDA, warned that a 15% rate would “cost the German automotive industry billions annually”.
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Who’s the winner in the US-EU trade deal?
Meanwhile, François Bayrou, the French Prime Minister, described the agreement as a “dark day” for the union, “when an alliance of free peoples, gathered to affirm their values and defend their interests, resolves to submission.”
While the deal has divided the bloc, the greater certainty it delivers is not to be snubbed at.
Markets bounced on the news, even though the deal will ultimately harm economic growth.
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‘Millions’ of EU jobs were in firing line
Analysts at Oxford Economics said: “We don’t plan material changes to our eurozone baseline forecast of 1.1% GDP growth this year and 0.8% in 2026 in response to the EU-US trade deal.
“While the effective tariff rate will end up at around 15%, a few percentage points higher than in our baseline, lower uncertainty and no EU retaliation are partial offsets.”
However, economists at Capital Economics said the economic outlook had now deteriorated, with growth in the bloc likely to drop by 0.2%. Germany and Ireland could be the hardest hit.
While the US appears to be the obvious winner in this negotiation, uncertainty still hangs over the US economy.
Trump has not achieved his goal of “90 deals in 90 days” and, in the end, American consumers could still bear the cost through higher prices.
That of course depends on how businesses share the burden of those higher costs, with the latest data suggesting that inflation is yet to rip through the US economy. While Europe determined on Sunday that a bad deal is better than no deal, some fear that the worst is yet to come for the Americans.
The United States and European Union have agreed a trade deal, says Donald Trump.
The announcement was made as the US president met European Commission chief Ursula von der Leyen at one of his golf resorts in Scotland.
Speaking after talks in Turnberry, Mr Trump said the EU deal was the “biggest deal ever made” and it will be “great for cars”.
The US will impose 15% tariffs on EU goods into America, after Mr Trump had threatened a 30% levy.
He said there will be an EU investment of $600bn in the US, the bloc will buy $750bn in US energy and will also purchase US military equipment.
Mr Trump had earlier said the main sticking point was “fairness”, citing barriers to US exports of cars and agriculture.
He went into the talks demanding fairer trade with the 27-member EU and threatening steep tariffs to achieve that, while insisting the US will not go below 15% import taxes.
For months, Mr Trump has threatened most of the world with large tariffs in the hope of shrinking major US trade deficits with many key trading partners, including the EU.
Ms von der Leyen said the agreement would include 15% tariffs across the board, saying it would help rebalance trade between the two large trading partners.
In case there was no deal and the US had imposed 30% tariffs from 1 August, the EU has prepared counter-tariffs on €93bn (£81bn) of US goods.
Ahead of their meeting on Sunday, Ms von der Leyen described Mr Trump as a “tough negotiator and dealmaker”.
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