Unbundling

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DEFINITION of 'Unbundling'

A process by which a large company with several different lines of business retains one or more core businesses and sells off the remaining assets, product/service lines, divisions or subsidiaries. Unbundling is done for a variety of reasons, but the goal is always to create a better performing company or companies (except in the case of government-forced unbundling).

INVESTOPEDIA EXPLAINS 'Unbundling'

A company’s board of directors, its managers or regulators may call for unbundling. The board of directors may call for it if the company’s stock is performing poorly and/or the company needs to raise capital or wants to distribute cash to shareholders. Management might call for unbundling if it thinks the result would be a new company that would perform better on its own. Regulators may force unbundling when they perceive a company to have become anticompetitive. When the board or managers calls for unbundling, it often improves the company’s stock price; the opposite tends to happen when regulators call for it.

Unbundling might occur when one company purchases another for its most valuable divisions but has little desire for the other aspects of the business. When this happens, it is called a sell-off, and is usually done to unload poorly performing divisions. Unbundling might also occur when a company wants to sharpen its focus or recover from a bad acquisition, or when economic conditions force a company to re-examine its structure. Unbundling is a common method of creating a new company.

When a company unbundles, it may send its employees to the unbundled firm(s) and maintain a significant percentage of ownership in the new firm(s) if it thinks it will benefit from this relationship. This happened in 2001 when Cisco unbundled a division that became Andiamo but wanted to be involved in the development of a new product line that might give Cisco a competitive advantage.

To learn more about unbundling, check out Why do companies decide to unbundle their lines of business?

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