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 Corporation (ADR) (NYSE:SNE) 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 Corporation (ADR) (NYSE:SNE), 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 Inc. (NASDAQ:AAPL) and Samsung.
Part of the reasons for this lag has been Sony Corporation (ADR) (NYSE:SNE)’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 Inc. (NASDAQ:AAPL) owes its survival in the 2000s to Sony Corporation (ADR) (NYSE:SNE)’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 Corporation (ADR) (NYSE:SNE). 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 Corporation (ADR) (NYSE:SNE) 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 Corporation (ADR) (NYSE:SNE) has, it may be time to consider change. For example, Blackberry has the same problems trying to stay with Apple Inc. (NASDAQ:AAPL)’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.