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A Split at Philips Could Bring It All Together

The Dutch electronics firm denies it will split up, but the rumors remain and analysts say it makes sense.

If personnel management is anything to go by, Royal Philips (PHG) - Get Koninklijke Philips N.V. Sponsored ADR Report is having a particularly lousy year. First, Floris Maljers, a member of the company's supervisory board, retired after a "difference of opinion" with his colleagues. Within a month, his former protege and the No. 2 man on the board, Roel Pieper, resigned after less than a year of active duty, saying he wanted to dedicate his time to venture capital activities.

Though this is probably more than just an excuse -- people close to Pieper say he is on to something big -- it is also true the flamboyant former basketball pro had a bad relationship with his fellow directors. To make matters worse, the Dutch stock exchange is investigating another board member who is suspected of insider trading on the day before Pieper's announcement.

The controversy overshadows the fact that as far as its business goes, Philips is clearly on the way up. It could even be positioning itself for a massive overhaul, splitting into three or more divisions, some say. Such a move would enable Philips to shed its bureaucratic chains, creating more competitive, more dynamic enterprises.

Many investors regard Philips not as one company but as a devilish conglomerate of loosely connected electronics firms that lacks both cohesion and a common strategy. But under President Cor Boonstra, the outlines of a real overall strategy are becoming visible. He has sold most loss-making and noncore parts of the company over the past two years and restructured the surviving divisions, and the company is in the process of shedding its reputation for being impenetrable.

Strong first-quarter earnings of 469 million euros vs. 321 million euros a year earlier are a signal that his therapy is working. This prompted many analysts to upgrade Philips to a buy or even a strong buy for the next quarter.

Warburg Dillon Read

is an example of the latter, stating that "earnings momentum has always been the catalyst for share price performance at Philips." Warburg Dillon Read currently has no investment banking relationship with Philips, although it did arrange loans for the firm in the early '90s.

Personnel chaos hasn't hurt Philips stock price. Since the beginning of the year, shares traded in the U.S. are up a healthy 40%, at about 95. The

S&P 500

and the

Amsterdam Exchange Index

, by contrast, are up just around 5%-6% over the same period, according to

TheStreet Recommends


, a financial data provider.

Going Digital

For those with a longer-term view, Philips looks even better. Three major factors seem to be working in favor of the company. First, the worst part of the Asian crisis, which hit Philips particularly hard, seems to be over. Sales of consumer electronics in the Far East will likely pick up once consumer confidence rises. Many inhabitants of newly developed Asian countries bought their first modern home appliances in the early '90s and will want to replace those aging pieces as soon as they have the financial means.

Asian consumers will not be the only ones in the market for new electronic gadgetry. Philips is busy digitizing its consumer product range. Digital television, digital video disc players and even digital coffeemakers are bringing better-quality products to the market. This could give new impetus to sales of consumer electronics, which were slow in the past few years because no hot new technology was on the market.

But maybe the most important development of all is that Philips will probably cease to exist. For many years now, rumors have circulated that the company will split itself into three or four major parts: semiconductors, consumer electronics, light and possibly software under the


brand name. Philips has denied again and again that there are plans for a split. CEO Boonstra has stated

ad nauseam

that rather than dividing up the company, he wants to improve Philips' infamously poor marketing efforts, bolster efficiency and slash costs.

Yet instead of withering, rumors in the Dutch financial community of a possible split have resumed lately. According to some well-informed sources, plans for a split have already been drawn up, and Boonstra is just waiting for the right moment. These people point out that last year's move of the board of directors from rural Eindhoven (where the rest of the company remains) to Amsterdam was made to facilitate a smoother division.

The numbers also appear to add up: Analysts have calculated that a split could increase Philips' market capitalization, now about 23 billion euros, by as much as 60%. A split would create three leaner, meaner companies, much to the benefit of the highly bureaucratic Philips organization.

In this age of Internet and e-commerce, that might be the final push the company -- or rather its parts -- needs to become more competitive. So even though Philips keeps denying it, the end of the company as we know it seems in sight. What better time to announce it than Y2K?