3M: prodding a prodigal into the bankruptcy courts

Parents may expel grown-up kids from home because they are ready for independence, or simply because they have become a nuisance. 3M is spinning off its healthcare group for the first reason and ditching an earplugs business for the second.

The demerger of a surgical products division with $9bn of annual revenue is hardly the most controversial parenting decision by the Minnesota-based industrial giant. Kellogg and General Electric also intend to streamline their businesses, making them easier for Wall Street to understand.

3M’s tough love involves putting its Aearo Technologies subsidiary into Chapter 11 bankruptcy. 3M says this will help resolve hundreds of thousands of claims that the company’s “combat arms earplugs” harmed members of the armed services.

The parent does take some responsibility for its subsidiary’s fate. It has put $1bn in Aearo’s pockets to fund the potential payouts on claims. But 3M’s basic message to Aearo is: “You’re on your own kid”. 3M is evidently hoping the cash and a pat on the head will be enough to ease its conscience and limit its exposure.

For better or worse, US bankruptcy courts have become prime venues for resolving “mass torts”. Here, products with alleged defects stand accused of harming thousands of users. The court has the power to push all the disparate claims into a single legal proceeding. This makes life easier for the company.

As for victims, the bankruptcy process puts all of them on equal footing. Otherwise, first-mover advantage could leave each claimant competing to extract compensation before the company runs out of money. Aearo, which itself still has $100mn in revenues, is different from businesses featuring in so-called “Texas two-step cases”. It is an extant business rather than an artificial vehicle created solely as grist to the mill of the bankruptcy courts.

Even so, Americans should question whether 3M is making appropriate use of the bankruptcy process. Big companies are ensuring their own lives are more comfortable by writing a cheque to a wayward, freshly emancipated scion. Judges and creditors committees are then co-opted as social workers to sort out its problems.