T HE P ENNSYLVANIA S TATE U NIVERSITY E CONOMICS A SSOCIATION P RESENTS :

T HE O PTIMAL B UNDLE
F ALL S EMESTER 2014: V OLUME N INE
N OVEMBER 11, 2014

E DITOR : J OE K EARNS P RINT E DUCATION C OORDINATOR

C ONTRIBUTORS : M IKE B ARNES , W AHHAJ I QBAL , J OE
K EARNS , C OLE L ENNON , C AMILLE M ENDOZA

Special Report on Corporate Spinoffs

eBay to PayPal: Its not you, its me
Corporate spin offs or split ups hardly signify doom and gloom. PayPal and eBay are planning to split up because they are more profitable as separate entities. In general, splitting a
firm can help focus management and maximize shareholder value. In the case of eBay and
PayPal, the costs of maintaining a unified business model dwarfed their benefits. A large portion of PayPal's payment volume comes through third parties, which are often merchants
that compete with eBay and are reluctant to indirectly benefit a competitor. Additionally,
PayPal no longer needs eBay to pay for its accessories. PayPal depended on eBay for 50% of
its payments in 2009, but it now obtains just 30% of its payments from eBay. If anything,
eBay is holding PayPal back, considering that PayPals revenue figure is growing at 19% compared to eBays 10%. The breakup will finally happen next year and make both parties better
off. In agreeing to the breakup, eBay is telling PayPal, Its not you. Its me. - WI

John Donahoe is the CEO of

eBay amidst the breakup.

http://onforb.es/1mLJm5E http://econ.st/1tWIKuf http://

read.bi/1uYr98Q http://read.bi/1pIRwHK
READ MORE:

Motorola: Goodbye, Moto

Gregory Brown is the CEO

of Motorola.

Hello, Moto! Motorola, the multinational telecommunications company that was known
as a pioneer for flip phones (remember the notorious Razr?) split up into Motorola Mobility and Motorola Solutions in 2011 after a dismal economic outlook. Motorola Mobility is
regarded as the direct successor of Motorola, but lost profitability after it underwent a
split up. The spinoff, which occurred on January 4, 2011 after consistent net losses, exacerbated Motorolas economic problems because competition within the cell phone market
was facing difficult circumstances. The primary source of these problems was the rise of
competitors such as the iPhone, which had made its debut around 2007. The clearest evidence for this is the fact that Google sold Motorola Mobility to Lenovo for $2.91 billion in
2014, after a 76% fall in value since 2012. Is it time to say, Goodbye Moto? - CM
READ MORE: http://read.bi/10Tx55b http://onforb.es/1aJELLB http://
cnet.co/1sxR2G3

An HP Divided Should Stand

Breaking up companies is not just something more prevalent in recent news. In the
particular case of HP, it is actually celebrated. Part of it concerns short-term financial
indicators: HP CEO Meg Whitman announced the split to great fanfare, as HPs shares
rose 4.7% on the dawn of the announcement. The news also clarified that the two new
companies, Hewlett-Packard Enterprise and HP Inc., would focus on two separate
lines of business. Hewlett-Packard Enterprise would work with business technology,
software, and related services while HP Inc. would remain in the business of selling
PCs and printers. An unfortunate consequence is the layoff of 55,000 employees, decreasing HPs near-300,000 staff members by a staggering 18.3%. The split has lessened questions about HPs competitiveness and bought the newly-formed companies
some time to readjust to their respective markets. These long overdue changes are an
excellent choice for the future of this 75 year old behemoth. CL
READ MORE: http://nyti.ms/ZNLJeg http://nym.ag/1pLdIae

HP CEO Meg Whitman

has reversed her stance
on allowing different
parts of the company to
spin off since 2011.

Are corporate spinoffs rational?

Less is More

Breaking Up is Too Hard

In the business world, is it truly better to be bigger?

While a culture of profligacy might predispose American
society to answer this question affirmatively, the realities of maintaining a profitable enterprise show that it is
often best for firms to split up. Diseconomies of scale
illustrates that forces which cause larger firms to produce goods and services at increasing costs make the
firm less profitable. Business Insider writers Drake Baer
and Richard Feloni argue that firms like HewlettPackard and eBay underwent spin-offs to resolve inefficiencies in management and sub-optimal shareholder
value. When two parts of a firm are more profitable as
separate entities, it is irrational to insist they remain
united under the same firm.

Corporate spin-offs are generally seen as a new way to

create profits and new opportunities, but spinning off can
be devastating to a companys ability to create future revenue. When corporations split, their influence over the
markets weakens and competing companies can gain.
Additionally, spin-offs often increase infrastructure costs
and layoffs of workers. For these reasons, corporations
should be cautious in deciding whether to break up because spin-offs limit their potential growth.

Firms need to undergo a spin-off when there is a difference in the needs of its various sub-entities. Within a
large firm, there are often younger businesses which are
modeled to pursue long-term growth and mature businesses which pursue short-run profitability. Mohan
Sawhney, a professor at Northwestern Universitys Kellogg School of Management, argued that HPs split-up
allows management to enhance its focus on both business-to-business and business-to-consumer markets.
Moreover, a spin-off is mutually beneficial for aggressive shareholders who want to invest in high-growth
businesses and conservative shareholders who want
steady cash flow from mature businesses. Joseph M.
Pastore, professor emeritus at Pace Universitys School
of Business, confirms that a spin-off serves to mitigate
whatever organizational and cultural conflict may exist
between the firm's past and future businesses.

When corporations split, their ability to negotiate prices

diminishes. Smaller companies have more difficulty raising capital because they have a higher default risk and are
seen as a riskier investment. Even worse is the fact that
competitors who have not undergone spin offs gain market value and the value of the spin-off companies diminish. An example of this was when Google bought part of
Motorola which was valued at $12.5 billion. Two years
later, Motorolas spin-off companies were revalued at
$2.9 billion. A competitor, Lenovo, stepped in and gladly
purchased a Motorola spin-off company from Google for
76% of its value in 2012. Additionally, spin-offs can cause
an increase in infrastructure cost and layoffs. Magazine
giant TIME underwent a spin-off from Time Warner in
June 2014 which resulted in a loss of 500
jobs. According to The New York Times, 500 jobs represent 6% of the companys worldwide workforce. The
result of this spin-off was a chain effect of increased unemployment, increased investor uncertainty, and a fall in
the share price of the company. The idea that spin-offs
guarantee different parts of a company mutual benefit is
nonsense.

When a firm does not heed the markets warnings about

diseconomies of scale, the consequences can be humiliating. Cisco, a networking equipment company that traditionally operates in the business-to-business market,
made the disastrous decision of purchasing Pure Digital
and entering the consumer electronics market. Two
years later, Cisco had to discontinue its infamous Flip
video camera. Firms like HP and eBay were acting rationally by avoiding this path. These firms realized overextending their business operations is an irrational idea
because it produces inefficiency and fails to maximize
profit. Breaking up is hard to do, but the alternative is
much worse. - JK

Corporations cannot afford to be ignorant of the negative

consequences arising from splitting up. With such negative consequences, it is clear that a corporate split-off
should not be undertaken without reservations. Large
corporations have the ability to compete for prices due to
higher market power and create technology at faster rates
due to the efficiency arising from economies of scale. Furthermore, investors face less uncertainty if big corporations stay united to collect higher profits. In each of the
examples cited above, the markets message to large corporations is clear: united you stand and divided you fall.
MB

READ MORE: http://read.bi/1zItmqb http://

econ.st/1vPVDqF http://read.bi/1pIRwHK
http://read.bi/1EnyopW

READ MORE: http://nyti.ms/1fHx3ks http://

chi.mg/1leUJlT http://bit.ly/1ex9MgE

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