Monday, May 12, 2008

A market-driven spin-off

EnCana, an oil and gas company, announced this weekend that it plans to split itself into two: "one a natural gas company with an outstanding portfolio of early life, North American, natural gas resource plays and the other a fully integrated oil company with industry-leading in-situ oilsands properties and top-performing refineries, as well as an underlying foundation of reliable oil and gas resource plays."

So it said in a Mothers-Day release/

This presumably means that it has decided that the 'synergies' from those two lines are negative: they're more profitable apart than together.

There has been a good deal of discussion in recent years about the "agency" problem in corporate governance. The boards of directors are formally the agents of the investors, and in a situation where a split-up works best for those investors, should work toward a split up. But do they?

Some economists argue that an empire-building impulse prevents or obstructs such developments. To put it baldly: a typical CEO would rather be at the top of a large company than of one of two smaller ones. This may even be the case when it means he's the boss of an under-performing large company rather of a better-performing small one. That (if true) makes them untrustworthy agents.

In this one case, anyway, it would seem not to be true. So hurrah for the board of EnCana. I hope their mothers are proud.

Though no shareholder-activist campaign seems to have been required to force their hand, I'll observe (if only to tie this entry in clearly with the over-arching themes of this blog) that such campaigns are often directed at producing precisely such a restructuring effect.

1 comment:

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