I was reading a book Three Blind Mice about ABC, NBC, and CBS.
One thing it said was that all the networks were worth a lot more if sold off in pieces than a whole. For instance it said ABC stock was valued at around $30 a share but if it was sold in pieces it would bring about $100-$110 per share.
(This was in the 1980s)
I don’t get this. I am not an economic type of person, can someone explain how this stock can be worth so much more if a company is sold off piece by piece?
Modern corporations often include numbers of divisions or whole companies under a single corporate banner.
Some of these companies may be very valuable while others are losing money hand over fist. The losing companies obviously are a drag on the earnings and the stock price of the company as whole. Selling them together is like saying that you can only buy a Porsche if you agree to spend the money to tow away the broken-down bus that sits in the same garage. That makes the Porsche less valuable.
Even if that’s not the case - a rare event, since most mega-corporations contain some dogs - the problem that the main companies commonly have is that the pieces don’t fit together well into a single whole. Somebody might have thought that buying, say, a record company and a cable company and a billboard firm and a magazine and a limo service all made sense at the time because they’re all connected to “entertainment” in one form or another. In reality the skills to run each of these firms and the understanding of the culture of each of these industries may be impossible to put together under one roof. Potential buyers will understand this and not want to fall into that trap themselves.
But if you sell the record company to another record company and limo firm to another limo firm, etc., they may be willing to pay much more for a winning piece that fits for them than it would go for as a tiny chunk of an overall loser.
Another factor is that by dividing up a megacorporation you open up the market to more potential buyers. Suppose I’m selling off the Time Warner corporation. There’s probably only a couple of other corporations in the world big enough to buy it whole and even for them it would be a huge cost. So I’d have to discount the actual value. But if I break it up, I can find dozens of buyers for AOL, New Line Cinema, Time Inc., Time Warner Cable, HBO, Turner Broadcasting System, The CW Television Network, Warner Bros. Entertainment, Cartoon Network, CNN, and DC Comics.
Interesting fact - if you trace Time Warner back through its mergers and acquisitions back to its original parent company, you arrive at a New Jersey chain of funeral homes.