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Could GE and J&J Breakups Spark Similar Move by Berkshire?

Recent moves could set pattern for other big and old conglomerates, Real Money's Kevin Curran notes.

The news that GE  (GE) - Get Free Report  and Johnson & Johnson  (JNJ) - Get Free Report  are splitting up shouldn’t be viewed in a negative light. Instead, investors should want to see more of the same.

That’s the outlook from TheStreet’s Kevin Curran, who said GE and JNJ aren't the only aging companies that could benefit from a breakup.

“After years of turmoil and a valiant effort by its latest CEO Larry Culp, General Electric finally gave up in its efforts to salvage its broad-reaching business as a singular unit,” Curran wrote recently in Real Money.

The company has consistently spun off numerous assets across the sprawling conglomerate in recent years to lessen its debt load. Perhaps most important was a $20 billion deal to ship its biopharmaceutical business to Danaher  (DHR) - Get Free Report in 2020. “Yet, it appears the moves were not enough to satisfy Culp's ambitious recovery goals for the once-great industrial giant,” Curran added.

Similarly, the lawsuit-besieged Johnson & Johnson JNJ announced it would spin off its consumer health division from its higher growth pharmaceutical and medical devices divisions in the coming two years.

“Judging by the jump in GE stock after the announcement and the early jolt to Johnson & Johnson stock after its announcement ... the market certainly looks as though it was offering its initial approval for the streamlining of separate companies,” Curran noted. “Still, a few questions quickly come to mind.”

“First, is this indeed a deft move by management in both cases and therefore deserving of the share-price reaction?,” he added. “And if so, are there more companies that could benefit from following the example set by both of these storied companies?”

Assuming things do go well post-breakup, these moves could serve as a benchmark for other bigger, older, and perhaps bloated companies. “At the very least, this is the logic adopted not only by aging and perhaps overcomplicated American conglomerates like GE and Johnson & Johnson, but also the nearly 150-year-old Japanese giant Toshiba  (TOSBF) . “In short, it looks as though a trend is taking hold.”

"Companies that have very diversified portfolios continue to dilute the value to the shareholders," David Braun, CEO of M&A advisory firm Capstone Strategic, told Real Money. "We are in an era where technology and access to capital are different things. A conglomerate is going to have trouble competing."

He suggested that Emerson Electric  (EMR) - Get Free Report and Berkshire Hathaway  (BRK.A) - Get Free Report  (BRK.B) - Get Free Report are two companies that could likely benefit from a similar breakup.

"They continue to stockpile excess cash they cannot deploy," Braun added, voicing the drawbacks of the behemoth business. "I'm not sure they benefit from that model any longer."

In the end, if the pursuit of separate businesses proves successful in each of the current experiments under way, the lesson may be that bigger is not always better.

“For investors, it might also open a number of pure-play options that provide a better investment than their parent companies do at present,” Curran added.

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