Here we go again. Activist investor Bill Ackman is calling for another company breakup as a means of “unlocking value.” The target this time? Government contractor United Technologies Corporation (NYSE:UTX). Owners of UTX stock have a right to be worried, not so much because Ackman is wrong (he may well be right), but because the activist investor and hedge fund manager can cause more than a little chaos when he gets involved.
The 2010 split-up of Fortune Brands is one example. Though it eventually paid off, creating Fortune Brands Home & Security Inc (NYSE:FBHS) among other stand-alone companies, like Jim Beam and Titleist, it was a rough road to traverse. In the meantime, his involvement with Valeant Pharmaceuticals Intl Inc (NYSE:VRX) took a disastrous turn in 2015. The company is still digging itself out of a hole Ackman helped dig.
Point being, current and prospective owners of UTX stock have no idea what they’re going to get with Ackman’s involvement.
If you can look past the Bill Ackman reputation, though, and judge the idea solely on its merits, you may find an idea that wouldn’t have mattered just a few years ago is spot-on today.
United Technologies Does That?
If the premise rings a bell, it may be because Daniel Loeb, chief of hedge fund Third Point, has been singing a similar song for several days now. Loeb’s fund took on a sizeable stake in UTX stock several weeks ago and, earlier this month, in a letter (mostly) to Third Point investors, he explained United Technologies would be better served by splitting up.
Loeb’s call echoed something Ackman has intimated for weeks, but explicitly said during a conference call on Tuesday: “The management here has put together three outstanding businesses and built them to significant scale. We think each business would trade at a very attractive valuation and, more importantly, operate more effectively as independent companies.”
United Technologies currently operates three distinct and oddly disparate divisions. Most investors are familiar with its government contracting work. Most investors may not realize, however, that the company is also the name behind Otis elevators and the maker of climate control equipment. The impending deal to purchase Rockwell Collins, Inc. (NYSE:COL) will fold in nicely with United Technologies’ aerospace and defense division, but it’s a complicated melding nonetheless.
More important, it’s now clear what Ackman’s got in mind for the 1.9 million shares of UTX stock his fund, Pershing Square, acquired during the first quarter.
He’s Got a Point
It was a self-serving comment to be sure, but Ackman’s observation that “other than Berkshire Hathaway, conglomerates have not had a great track record” wasn’t an incorrect one. It only takes a quick glance at General Electric Company (NYSE:GE) to see how this is true, and only a slightly longer thought to realize why this is true.
There was a point in time when size and scale meant different kinds of business under the same umbrella could share expenses and cross-market products to one division’s customers. The old PepsiCo, Inc. (NASDAQ:PEP), when it still owned the three restaurant chains that became Yum! Brands, Inc. (NYSE:YUM), comes to mind. They were largely aiming at the same set of consumers in the same way.
There’s a reason PepsiCo and Yum! Brands decided to split, though, just like there’s a reason General Electric is at least mulling the sale of some of its divisions.
That reason? Those different divisions can now use the speed of the internet and the power of real-time information to achieve maximum efficiency. The presence of unrelated business within and outside of the boardroom really is a distraction.
Bottom Line on UTX Stock
So, is an impending split-up a reason to buy into UTX stock? No, and the growing interest of Bill Ackman isn’t a reason to sell it either. A break-up is inevitable sooner or later — and likely sooner rather than later. If not pressed by Ackman and Loeb, someone else would have. There’s just not a good enough reason to be under the same umbrella anymore — in a world without information or time constraints and in a world without any significant geographical constraints.
Rather, the time to make any buy/sell decisions on United Technologies is if-and-when it splits into three parts. It’ll be much easier to judge the merits of each arm then when we can at least see their books. Until then, it’s all just speculation.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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