Better off alone?


Wednesday 19 November 2014 by Drew Heatley

Ferrari

Fiat Chrysler Automobiles (FCA) recently announced it plans to spin off the Ferrari brand. It’s the latest in a series of similar moves by brands that are choosing to separate their key assets as independent companies. The idea is that the newly-detached company has a better chance of success as a brand in its own right, while, for example, the parent company retains a minority interest through shareholder equity or by acting as a client of the new business.

FCA’s decision makes sense, as the company – created earlier this year when Fiat purchased Chrysler – needs funds to fuel its expansion, and offloading Ferrari means it can cash in on one of its most high-profile assets. The move gives Ferrari more autonomy to maximise its brand value through merchandise and commercial opportunities. As Ferrari enthusiast and Shark Tank investor Robert Herjavec points out: “Ferrari’s an iconic and venerable brand that can – and should – exist on its own”.

Businesses like FCA looking to spin off parts of their company do so with tangible financial and strategic benefits in mind. The impact on the newly-independent brands involved is also intriguing.

Splitting the bill

Perhaps the most high profile of these spin-offs is eBay’s decision to set PayPal free. The move, announced in September, caps a 12-year period following eBay’s $1.5 billion purchase of the payment firm. PayPal’s certainly been driving eBay’s financial performance in recent years, accounting for $1.95 billion of eBay’s revenue during its latest quarter. The question, therefore, is not how PayPal will fare on its own, but how eBay will cope without it.

The announcement of the split came days after Apple revealed its own mobile payment service, Apple Pay – so PayPal going it alone is perhaps a move designed to help it fend off the competition in a rapidly changing market.

PayPal’s global reputation as a mobile payment brand is key to its potential success as an independent company. I’ve made my feelings about Apple Pay quite clear: I don’t think it’s ready to revolutionise retail payments in the US. But PayPal, on the other hand, has more than a decade’s traction worldwide – and it’s set to process $1 billion in mobile payments globally this year. PayPal knows what it’s good at; it isn’t trying to be all things to all people – it’s a safe and secure way to pay for goods online (and using your smartphone), but it’s not trying to replace your wallet. Trust goes a long way in payments – and PayPal’s reputation stands it in good stead as it prepares to take on its toughest challenge to date.

Cashing in chips

Moving now to a story of corporate citizenship...

IBM’s microchip business has been hemorrhaging about $700 million annually for the last few years and Big Blue is actually paying fellow semiconductor firm Globalfoundries $1.5 billion to take it off its hands.

On the face of it, this split couldn’t be simpler – entrenched tech giant sheds loss-making chip division. But if you dig a little deeper, it’s an intriguing situation as IBM tries to protect a core element of its past.

IBM is taking the hit because it knows the chip division still has potential. Globalfoundries will repurpose the chip plants in New York and Vermont to focus on making semiconductors for mobile devices – a huge growth area. I think Globalfoundries will turn it into a profit-making business quite quickly. And IBM is ensuring that its former employees remain in their jobs under their new owner. IBM isn’t divesting its interest entirely, either: it will continue to own a research facility, and will become Globalfoundries’s first customer, supplying chips to its various businesses.

Semiconductor manufacturing is a historic business area for IBM, so placing the chip-making division in a safe pair of hands and ensuring it continues to prosper is naturally important to the tech giant.

A problem halved

The pace of change in the tech industry is rapid, so keeping a business fresh and innovative is a tough challenge. A decade ago, companies like BlackBerry, AOL and Hewlett Packard (HP) were juggernauts in their respective industries. Now they’re perceived as dinosaurs. The response? HP is planning to split its company in two – one focusing on enterprise solutions, the other on PCs and printing – in an attempt to carve out long-term success for both.

But when you look at both sides of the company, neither is growing. The company is a decade behind IBM, which split its business in a similar way in 2004, selling its PC division to Lenovo and focusing on enterprise solutions. In tech, 10 years is light years behind. To go head-to-head with IBM, Dell and Cisco in the enterprise space will be a huge challenge.

The other obstacle is brand perception. The outside view of HP as a brand is confused. While it remains strong in PCs and printers, those devices aren’t the way forward – and that will have an impact on its enterprise business. Clients no longer worry about the printer in the corner of the room; they worry about managing data, security and global workforce management via the cloud. HP will need to play catch-up – and I believe there’s a long road ahead for the firm, from both a brand and a business perspective.

It’s clear that the reasons behind these strategic moves vary greatly. Some brands are fighting for survival… some are trying to regain former glories… and some are heading down the path to reinvention. But in all cases, brands need to stay true to themselves. They need to continually challenge their vision, evaluate their position and be brave in their decision-making. Because those decisions are now theirs to make – and theirs alone.

Drew no longer works at The Frameworks

Categories

  • Business
  • Strategy
  • Branding