Question

In February, Cap Inc. announced that it would split into two independent publicly traded companies: one comprised of its Old Navy brand, and the second a yet-to-be-named company that includes its other brands like Banana Republic and Athleta. The planned breakup is an acknowledgment of the two chains' diverging fortunes and how much Gap has lost its once-powerful grip on American consumers. For several years, Old Navy has outperformed its sister brands Gap and Banana Republic with its lower price-points and catchy marketing. Old Navy now exceeds the original brand in sales, making up nearly half of Gap Inc.'s $16.6 billion of sales in 2018.

In your opinion, what are the benefits and downsides to splitting Gap into two firms? How did Gap's stock react to the news in after-market trading? How would you explain this reaction? Will the separation save the company in the long run? Please elaborate on your answers.

Answer 1

1. Focused management:

When organizations become large and diversified, it becomes extremely complicated to manage them as a single unit. Also, some business which are relatively new and are in growth phase in a company would need more focus while mature business need to be just managed to ensure continuity of business and profits. Hence approach to management will be different.

2. Better investment appraisal by investors leading to creating shareholders value based on risk profile

It also helps investors in the business to take an informed decision and they can invest based on their risk appetite. In a conglomerate, investors are confused as to whether they are investing in a growth company or a mature company with sustainable profits

3. It also ensures that a business that is not performing well is not fed by the business doing well and thus dragging the performance of overall companies. If business are split, the management will shift focus to the business which is not performing and it continually does not do well, a decision can be taken to sell or close the business

The reaction of the stock market about the stock is expected to be positive as this will send a clear message to the investors about management approach and intention. Investors will get a message that management wants to give due focus to all business and do not want to carry the burden of non performing business and also does not want to hide the non performing business in the umbrella of performing and established business.

The separation will surely save the company in the long run. Company will be able focus attention on the new business which are not contributing enough currently and if they do not perform despite its efforts and attention, it can take appropriate decision which could be to sell it to a third party or to close it altogether