Breaking up is hard to do. It can be the hardest decision you make in your personal life. Things were once hunky-dory, but have since gone sour. This is the dilemma facing Sony and investment banker Daniel Loeb’s proposal to break up the company.
With his investment firm Third Point LLC already buying a $1.1 billion stake in Sony, Loeb now wants Sony to spin off its entertainment and music business and look at developing the electronics side of the company. This comes off a supposed “$100 billion lost decade,” as described by Bloomberg News, in which the company has been lagging behind similar companies in stock and profit performance, namely Apple and Samsung.
Part of the reasons for this lag has been Sony’s inability to modernize and adapt, which is ironic considering that the company was one of the first to bring Japan out from its World War II destruction and turn the nation into an electronics and technology powerhouse in the 1960’s. This trend continued when Sony created the Walkman a couple decades later, ushering in a new era of listening to music. In fact, it can be argued that Apple owes its survival in the 2000s to Sony’s early development, from which the iPod was a result of a natural progression in music. Sony then expanded into entertainment with the very successful Sony Pictures, creators of the new Skyfall and a host of other movies. Let’s not forget the PlayStation dynasty, still considered the gold standard for serious gamers.
It’s this varied success, however, that is the reason why a break-up may be good for Sony. While its entertainment division is very strong, it’s electronics and gadgets that have always been Sony’s bread and butter, and the difficulty Sony has had in this field is why the company hasn't been performing at the levels that its rivals in the industry have. According to Bloomberg News, the company’s enterprise value sits at only 4.2 times analysts' estimated earnings before deductions at $21.4 billion, which is less than half as strong as competitors, which tend to sit at around 8.9 times estimated earnings. This doesn't paint a good picture for Sony’s future if it continues its less-than-stellar valuation trend.
When a company struggles like the way Sony has, it may be time to consider change. For example, Blackberry has the same problems trying to stay with Apple’s iPhone and Google’s Android, despite being one of the first real smartphone makers that came out. During this year’s Super Bowl, it released a supposedly revolutionary new phone called the z10, and the stock rallied briefly before cooling off in March, although it is still higher than it was before the Super Bowl. Such a decision to stick to its guns and make phones is what will make Blackberry a serious competitor in the tech world and a good addition to investors’ portfolios.
Creating a new phone will keep Blackberry in the game against Apple, whose iPod, and later iPhone, created a renaissance for a company that looked all but defeated just a short decade ago. Similar to Blackberry, and potentially to Sony as well, Apple’s inventors and managers knew that their business was in computers and interconnectivity. This was what got Apple into the computer battles of the 1970’s and 1980’s with Microsoft. By going back to that, after a tough 1990’s and early 2000’s, Apple was able to not only re-establish itself as a tech heavyweight, but also as a cultural icon, a status symbol for the cool and trendy, and a gold mine for investors. Sony needs to get back to being that icon, which it had in the early days of video games with the PlayStation dynasty, and to do that, separating from the movie wing of the company may be the best possible step going forward.
The potential split-up of Sony into an electronics division and an entertainment division has thus far been met with positivity from investors. Selling 20% of the business through an IPO, which is what Mr. Loeb desires, could give Sony the flexibility to innovate and update its electronics division, especially ahead of the much-anticipated release of PlayStation 4. The stock even jumped 10% upon the news of the potential break-up, a good indicator for Mr. Loeb.
Allowing Sony to stick to what it does best will help the company in the long run. It may still struggle a bit against Apple, but an uptick in the stock would make it a nice addition to a portfolio if the deal goes through. Like Blackberry, Sony should do what it does best: electronics and gadgets, for this is the way the company will prove it can still mambo with the cool kids.