Companies seek spin-offs to raise competitiveness

Famous restaurants have something in common: they specialize in only one cuisine. This is because taste is not guaranteed if a chef makes different kinds of cuisines at the same time.

Business management is showing a similar trend. Gone are the days when companies solely sought to get bigger. Instead, they are dividing themselves to concentrate on certain areas that are their strengths.

In March, SK Telecom announced it will focus on mobile communications through a spin-off to earn more profits by dividing the telecommunication business, which has grown sufficiently enough to show a conservative tendency and the platform business that needs creativity.

The platform business refers to areas having high potential for growth, such as “T Map,” a navigation service for cars, and “T Store,” an application store for smartphones. The company said the move seeks to enhance the competitiveness of future growth engines.

Prior to this, SK Innovation (formerly SK Energy) also conducted a spin-off. SK Energy specialized in petroleum, SK Global Chemical chemicals, and SK Lubricant lubricating oil. People can easily see what they handle with their company names.

SK Group said, “We split the company to bolster each business’s specialty and accelerate the speed of decision-making.

This means companies are splitting up to enhance competitiveness. Kim Jang-hwan, an analyst at Yoojin Securities, said, “If a company deals with diverse businesses, it’s an uphill battle to make separate decisions on where to invest with limited financial resources. This is why companies actively conduct spin-offs.”

Shinsegae also revamped itself into the department store and large-scale discount store businesses. Department and large-scale discount stores look the same as both are distribution businesses, but the former targets high-end customers and the latter focuses on low-priced goods. After the division, the two business lines have had more clear goals.

Many companies have reaped good performances with the strategy of choice and concentration. A case in point is LG Chem, which was split into LG Chem, LG Household & Healthcare and LG Life Science in 2001. LG Hausys was again spun off in 2009.

The spin-off resulted in an eight-fold increase in combined net profits and six-fold leap in operating profit as well as a 500-percent rise in sales. Before the spin-off, LG Chem`s market capitalization was 1.24 trillion won (1.14 billion U.S. dollars) but soared to 43.17 trillion won (39.83 billion dollars) in May.

LG Chem said, “Choice and concentration through the spin-off were the critical factors to the increase in company value.”

When turning into a holding company, LS Group was also divided into LS Cables & System from LS Mtron specializing in machinery. Through this, responsible management and more effective decisions were made possible.

Lee In-jae, an analyst at KB Investment and Securities, said, “After the division, CEOs grew more responsible in management. They focus more on cost management and finding future growth engines.”

Corporate spin-offs are not a magic bullet, however, say certain experts. Kim Jong-nyeon, a senior researcher at Samsung Economics Research Institute, said, “Corporate spin-offs don’t guarantee growth. Intensive investment and continuous innovation in spun-off companies will create desired results.”

sun10@donga.com