3M: Scotching a break-up

In an era of focus, 3M is a prime example of a conglomerate. The $100bn US company has four huge, unrelated divisions. Products range from Post-it notes to air filters and headlights. Generous payouts to investors have kept activist pressure for a break-up at bay. But disappointing profits — including a 28 per cent plunge in fourth-quarter earnings — could change that.

The shares are down nearly a third from their January 2018 peak. 3M’s meek 2020 guidance pushed the stock another 5 per cent lower on Tuesday. An immediate catalyst for a rally is needed.

That could embolden activists to push for a split. It is an easy prescription to make in the wake of disposals by GE, Honeywell and Dupont. Break-ups have become a cookie cutter solution for languishing traditional businesses.

Like other US manufacturers, 3M has been struggling with a slowdown in China and flagging demand from the auto and electronics sectors. Meanwhile, a rash of water contamination lawsuits has intensified concerns that 3M could face massive legal and clean-up costs.

In theory, any one of 3M’s four main divisions — safety and industrial; transportation and electronics; healthcare; and consumer — is big enough to go it alone. Revenues for these units range from $5bn to nearly $12bn last year. The group sold its drug delivery business for $650m in December.

In practice, further spinouts would be more trouble than they would be worth. The problem missed by fans of focus is that many worthwhile product markets are naturally limited. Standalone businesses servicing them would lack critical mass.

One strength of 3M’s business model is that its mature businesses can spawn new ones through heavy R&D spending. This came to the tune of $1.9bn last year. Size has also given 3M visibility and allowed it to finance generous shareholder returns. The company has spent nearly $32bn over the past five years on dividends and share buybacks. 

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Calls for break-ups are inevitable when a diversified business is floundering. Here is another certainty: if management can cut costs and improve earnings, 3M shares can lose their discount without major surgery.

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