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Can someone explain why do business like to create new company? What are the benefits for the financial return other than having a book reporting individual rev

by yeukhon 11y ago

Can someone explain why do business like to create new company? What are the benefits for the financial return other than having a book reporting individual revenue? In the end, aren't they going to be under the same parent company, which, if one wishes, can actually challenge and even overrule the child company CEO's decision behind the scene? HP, Google, now Yahoo.

bastijn 11y ago
Usually it is because of stock and stakeholders that a company splits, not because a CEO likes to split his or her company. Stakeholders might demand a split so problems with one company might not influence stock price of the second.
smeyer 11y ago
If they're fully spinning it out, it isn't just "under the same parent company". They can make two companies each with their own stock, initially distributed to shareholders of the initial company. After that, some stockholders might buy/sell shares of company A and some might buy/sell shares of company B, so that they're truly separate companies with different management and owners and such.
swingbridge 11y ago
Sometimes companies have one business that's doing quite well and another that's a real stinker. Shareholders may want to own the good business separately and let the market value that without the drag and risk of having the stinker weighing down on it. In the end the stinker is either dismantled, taken into bankruptcy or sold off. In Yahoo's case it's a bit unique in that the only thing they really have that the market likes is their holdings in other companies. Essentially Yahoo is like a mutual fund that made some good investments but the fund managers are blowing it by running a poorly performing lemonade stand on the side. A lot of the investors just want the holdings and then are happy to let the stinker, Yahoo's original business, just go away. At the moment the market assigns the core business a negative valuation so it's beyond a stinker, it's an anti-company offsetting the value of investment holdings elsewhere under the corporation. It's a real mess.
- bby 11y ago
  It has positive value if you assume full taxation on alibaba.
dagw 11y ago
It makes things easier for investors. Imagine a company with two divisions. One is a solid boring industry with a long history of stable growth and of turning small but consistent profits. The other is in a smaller niche industry, showing impressive growth numbers, but yet to make a profit. As in investor it is hard to value such a company. Will the large old slow growing part hold back the new fast growing part? Will the losses in the smaller division lower the potential dividends of the solid part of the company? By splitting out the parts you can appeal both to investors who like low volatility and reliable dividend payments and to investors whom are willing to accept huge risk in exchange for the chance of 10x returns.
lmm 11y ago
In the general case, a basket of options is worth more than an option on a basket, and an equity share can be understood as a volatile asset and an option. Usually there would not be a parent company but two separate companies (Google is a special case). Yahoo's case is again very different; it's about avoiding tax rather than anyone else. The Alibaba stock that Yahoo currently holds is worth about $20 more per-share to Alibaba than to anyone else (provided it can make it into Alibaba's hands without getting taxed along the way, because Alibaba can take the shares off the market, whereas anyone else would (ultimately, one way or the other) have to pay the $20 of tax liability that they come with). So the puzzle is to find a way to allow Alibaba to buy those shares without having to buy the rest of Yahoo (which it evidently doesn't want to) and without doing anything that will constitute a taxable event for those shares.
morgante 11y ago
By themselves, "businesses" don't like to create new companies. But businesses aren't sentient, so it's actually two different groups we're talking about: 1. Executives generally don't want to have separate companies. Having it all under their purview gives them more power and control. 2. Shareholders often want separate companies, especially when they perceive one division as being much more valuable than the rest. With separate companies, they can own the profitable division but not the others. The balance of power between these two groups is why ends up dictating what happens. This is why Google was able to turn into Alphabet (a single company) instead of spinning off their non-core assets (as some shareholders desired). Unfortunately, Yahoo executives just don't have the clout to hold together any longer. The market thinks Yahoo's assets have negative value: the only thing propping up their stock is their investments, and shareholders want to hold those investments by themselves.
scholia 11y ago
It's usually about "shareholder value". In other words, the two new companies will be worth more (on Wall Street) than the old company. In HP's case, the idea was that the shares in the enterprise company were depressed by worries about the viability of the PC/printer company. In Yahoo's case, the problem is that Yahoo's core business has little or no value (ie it's not reflected in the price of the shares) compared with the value of its shareholdings in Alibaba and Yahoo Japan. In Google's case, it's currently just re-arranging deckchairs. However, the underlying problem is that Google's share price reflects Google Search, and does not reflect all the other businesses that now come under the Alphabet umbrella.
peter303 11y ago
They may be going private equity then. PE often does more drastic reorganizations than public companies, not having the burden of shareholders and boards. The danger of PE is that sometimes they just use companies as a vehicle to create large debt and convert it into dividends. The remaining company is too broke to continue then.

by yeukhon 11y ago

bastijn 11y ago

Usually it is because of stock and stakeholders that a company splits, not because a CEO likes to split his or her company. Stakeholders might demand a split so problems with one company might not influence stock price of the second.

smeyer 11y ago

If they're fully spinning it out, it isn't just "under the same parent company". They can make two companies each with their own stock, initially distributed to shareholders of the initial company. After that, some stockholders might buy/sell shares of company A and some might buy/sell shares of company B, so that they're truly separate companies with different management and owners and such.

swingbridge 11y ago

Sometimes companies have one business that's doing quite well and another that's a real stinker. Shareholders may want to own the good business separately and let the market value that without the drag and risk of having the stinker weighing down on it. In the end the stinker is either dismantled, taken into bankruptcy or sold off. In Yahoo's case it's a bit unique in that the only thing they really have that the market likes is their holdings in other companies. Essentially Yahoo is like a mutual fund that made some good investments but the fund managers are blowing it by running a poorly performing lemonade stand on the side. A lot of the investors just want the holdings and then are happy to let the stinker, Yahoo's original business, just go away. At the moment the market assigns the core business a negative valuation so it's beyond a stinker, it's an anti-company offsetting the value of investment holdings elsewhere under the corporation. It's a real mess.

bby 11y ago
It has positive value if you assume full taxation on alibaba.

dagw 11y ago

It makes things easier for investors. Imagine a company with two divisions. One is a solid boring industry with a long history of stable growth and of turning small but consistent profits. The other is in a smaller niche industry, showing impressive growth numbers, but yet to make a profit. As in investor it is hard to value such a company. Will the large old slow growing part hold back the new fast growing part? Will the losses in the smaller division lower the potential dividends of the solid part of the company? By splitting out the parts you can appeal both to investors who like low volatility and reliable dividend payments and to investors whom are willing to accept huge risk in exchange for the chance of 10x returns.

lmm 11y ago

In the general case, a basket of options is worth more than an option on a basket, and an equity share can be understood as a volatile asset and an option. Usually there would not be a parent company but two separate companies (Google is a special case). Yahoo's case is again very different; it's about avoiding tax rather than anyone else. The Alibaba stock that Yahoo currently holds is worth about $20 more per-share to Alibaba than to anyone else (provided it can make it into Alibaba's hands without getting taxed along the way, because Alibaba can take the shares off the market, whereas anyone else would (ultimately, one way or the other) have to pay the $20 of tax liability that they come with). So the puzzle is to find a way to allow Alibaba to buy those shares without having to buy the rest of Yahoo (which it evidently doesn't want to) and without doing anything that will constitute a taxable event for those shares.

morgante 11y ago

By themselves, "businesses" don't like to create new companies. But businesses aren't sentient, so it's actually two different groups we're talking about: 1. Executives generally don't want to have separate companies. Having it all under their purview gives them more power and control. 2. Shareholders often want separate companies, especially when they perceive one division as being much more valuable than the rest. With separate companies, they can own the profitable division but not the others. The balance of power between these two groups is why ends up dictating what happens. This is why Google was able to turn into Alphabet (a single company) instead of spinning off their non-core assets (as some shareholders desired). Unfortunately, Yahoo executives just don't have the clout to hold together any longer. The market thinks Yahoo's assets have negative value: the only thing propping up their stock is their investments, and shareholders want to hold those investments by themselves.

scholia 11y ago

It's usually about "shareholder value". In other words, the two new companies will be worth more (on Wall Street) than the old company. In HP's case, the idea was that the shares in the enterprise company were depressed by worries about the viability of the PC/printer company. In Yahoo's case, the problem is that Yahoo's core business has little or no value (ie it's not reflected in the price of the shares) compared with the value of its shareholdings in Alibaba and Yahoo Japan. In Google's case, it's currently just re-arranging deckchairs. However, the underlying problem is that Google's share price reflects Google Search, and does not reflect all the other businesses that now come under the Alphabet umbrella.

peter303 11y ago

They may be going private equity then. PE often does more drastic reorganizations than public companies, not having the burden of shareholders and boards. The danger of PE is that sometimes they just use companies as a vehicle to create large debt and convert it into dividends. The remaining company is too broke to continue then.