Corporate Splits Become Trendy At&T; Joins Procession Of Businesses Breaking Up

Breaking up may be hard to do, but in corporate America they are doing it anyway.

AT&T Wednesday said it would split itself into three separate companies, each focusing on a different business. In June, ITT Corp. did almost the exact same thing. And over the past two years, blue-chip firms such as General Motors Corp., Ford Motor Co., Xerox Corp., Sears, Roebuck & Co. and Eastman Kodak have shed major parts of their operations or announced their intention to do so.

In an age of mega-mergers, when companies seem bent on getting bigger, corporations that are splitting up would seem to be hopelessly out of sync. But business strategists say otherwise. They view the couplings and uncouplings as part of the same process - an attempt by American business to prosper in an increasingly difficult world.

“The marketplace today is very competitive and it is very intolerant of any underperformance,” said Israel Shaked, a professor at Boston University’s School of Management.

Just as merging can make a company a more formidable competitor, so can splitting into pieces or spinning off certain operations. AT&T Chairman Robert Allen said as much Wednesday.

“It’s become clear to me that for AT&T’s business to take advantage of the incredible growth opportunities in every part of the information industry, it has to separate into smaller and more focused businesses,” he said.

ITT Chairman Rand Araskog said practically the same thing when his company decided to split up earlier this year. “This will allow the management of each company to focus more intensively on their respective businesses,” he said. ITT’s three offspring will focus on industrial products, insurance and entertainment.

In both cases, the stock market responded positively to the breakups. AT&T stock climbed roughly 10 percent Wednesday. ITT’s stock is up about 14 percent since the June announcement.

As a general rule, the stock market likes companies that do one thing well and frowns upon companies that try to do a number of different things. “The market just doesn’t believe management is that smart,” said Charles Clough, chief investment strategist at Merrill Lynch.

Not that long ago, the investment world felt differently. In the 1960s and 1970s conglomerates were all the rage. The thinking went something like this: Smart executives could manage a wide range of businesses at the same time, much like a skilled juggler could keep a series of balls in the air. Different businesses would complement one another, the argument went, and would help smooth out a company’s earnings.

A few big companies still successfully manage conglomerates. General Electric Co. is the best known of the group. The company is a world leader in fields as diverse as medical equipment, appliances, financial services and jet engines. Allied-Signal, Textron and Raytheon Co. are other examples of companies that have clung to the belief that diversification is the way to go.

Such companies, say analysts, suffer “a conglomerate discount,” a penalty in the form of a lower stock price. “Conglomerates confuse the market,” said Shaked. “It’s a case where two plus two equals less than four.” In nearly all cases, the companies that have shed businesses have been rewarded with a bounce in their stock price. Though still a very diversified company, Raytheon recently announced its intention to sell its textbook division, DC Heath. Since then, its stock has risen more than $2 per share.

But the move to slim down is not strictly a response to stock market pressure. Corporate executives are finding it increasingly difficult to manage diverse businesses. The businesses compete for money and they compete for management’s attention.

In many cases, the different businesses have nothing to do with one another. Xerox sold a financial services business. Sears spun off both Allstate Corp., an insurance company, and Dean Witter, a brokerage firm. Kodak sold a drug company. General Motors wants to spin off EDS Corp., a computer services operation. Ford is talking about selling a financial services firm. All five companies have decided to focus their energy on their core business.

AT&T would seem to be in a different situation. The company’s three businesses - telephone service, telecommunications equipment and computers - have some connection to one another. But given the changes in the information industry, the links are not as strong as they once were, said John Haigh, a consultant with Mercer Management Consulting.

“The synergies they thought they had don’t exist anymore,” he said.

Chairman Robert Allen concluded that the differences among the pieces had become greater than the similarities. “We’ve reached the point where the advantages of our size and scope will be offset by the time and cost of coordination and integrating sometimes conflicting businesses strategies,” he said.