3M Announces a Split. How Does This Impact Investors

3M is the latest conglomerate to split itself up in order to create more value for its shareholders. How will this impact investors?
July 26, 2022
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3M (NYSE: MMM) today announced that it plans to spin off its health care business to create two public companies. This will allow both companies to achieve their planned objectives simultaneously. New 3M will continue to operate its traditional business, such as office supplies meanwhile, Health Care will focus on oral care, biopharma filtration, and healthcare IT. Chairman and CEO Mike Roman said that the plan was to create value for both customers and shareholders. He then declared:

"Disciplined portfolio management is a hallmark of our growth strategy. Our management team and board continually evaluate the strategic options that will best drive long-term sustainable growth and value."

What are the details of the transaction?

Health Care is forecast to be spun off with a net leverage ratio of 3.0-3.5 times EBITDA while being positioned for rapid deleveraging. New 3M will also retain a 19.90% holding in Health Care, continuing shareholders' exposure to the fast-growing health sector. 

The company expects the transaction to be finalized by the end of 2023 and for the spin-off to be tax-free for U.S. federal income tax purposes. The deal is still subject to the approval of the Internal Revenue Service, the board of directors, and the U.S. Securities and Exchange Commission. 

What does this mean for investors?

This break up of the over 100-year-old company will have several implications for current shareholders and those who were debating on investing in the company.

Firstly, 3M's healthcare business reported sales of $8.6 billion last year, representing roughly 24% of the company's total revenue. Once it goes public, it will be a smaller, more agile company without the additional slow-moving baggage of 3M's other businesses. The new company will be able to focus entirely on its niche without fears of being overruled by its parent company. Therefore allowing it more freedom to pursue its full growth potential. It may also be more attractive to investors who liked the segment but didn't want to invest in a conglomerate like 3M.

Secondly, while shareholders lose the majority of their holding in Health Care, they still own about 20% of the company. Its new independence should allow it to trade at a higher earnings multiple and generate better growth rates, increasing the value of New 3M's holding. It will also allow New 3M to focus on the business segments it is an expert in. This will improve its capital allocation strategies and reduce the complicated management structure that plagues conglomerates. 

Thirdly, the separate profiles of each business will make them more attractive to different investor bases rather than trying to please all investors. This should result in less disappointing announcements as the types of investors in each company will be clear, allowing each to tailor to their specific clientele's needs better.


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