Starbursting: Breaking up companies is back in fashion

Have you ever heard of the economic term"Starbursting? It is likely you have not. Before you flip to the glossary of your textbook, I must assure you its definition is not listed. In fact, starbursting is an anomaly our textbook fails to mention. Furthermore, recent firm behavior suggests starbursting is back in fashion. Starbursting is a restructuring tactic firms use to break themselves up into smaller pieces. This seems counterintuitive to what we have been learning about in class. We suspect most firms strive to become a natural monopoly or at least a member of an oligopoly. So why would a firm choose to divide itself into pieces? The answer is simple. Firms are becoming so large and difficult to manage that they feel a need to reduce themselves to their “innovative cores.” This has caused some firms to have numerous spin offs. Our textbook mentions how firms produce a range of different products to limit the competition. Starbursting is an entirely different concept. For example, a spin off from one firm will operate independently and be valued as such. This year, Motorola separated from its headset making business, which was valued at 10 billion. In addition, Fiat axed off its lorries and tractors business that had a calculated value of 18 billion. Some firms separate with the hope someone else will buy the spin off. However, the global economy is so dismal that few have attempted to do so.Another factor that influences firms to separate is the conglomerate discount. The conglomerate discount occurs when the stock market values a firm to be worth less than the sum of its parts. According to Carsten Stendevad of Citigroup, starbursting is actually good for the market. In most cases, both spin offs and parent firms will trade better after separation. Due to the recession, it is likely more firms will engage in this practice.The starbursting trend is certainly on the rise in North America and in Western Europe, but is not as prevalent in other countries. One reason for this occurrence could be political connections and market expertise transcend across industries in both North America and Western Europe. Possession of both of these qualities gives spin off firms a stable footing in the marketplace. It is also the reason why firms are becoming more diversified. For instance, Hewlett-Packard has made inroads into the software and energy market. Ultimately, starbursting is the next stage of firm evolution. www.economist.com/node/18440915