Sat. Nov 27th, 2021


When General Electric announced this week that it had planned to break itself up, it seemed to conclude a chapter on the industrial conglomerate. Yet the obituary of the all-encompassing corporate structure has been written many times and somehow it still survives.

Once America’s most valuable companies, GE’s offerings ranged from plastic and jet engines to credit cards and television commercials. Now it has joined a wave of corporate rejections emphasizing simplicity, with plans to become three separate public companies focusing on healthcare, energy and aviation.

Since 2017, there have been 178 exchanges worth nearly $ 800 billion, GE does not count, according to Dealogic statistics. Siemens separate its healthcare and energy divisions. United Technologies did the same with Otis elevators and Carrier heating and air conditioning. DuPont is polymer spinning, and Toshiba thinks about its own threefold split – though it’s not yet a sure thing.

Conglomerates are often criticized by investors, who say the component companies perform worse than competitors and share prices do not reflect the value of the various parts. That argument is compelling: giant companies often move too slowly, spend too much on bureaucracy, and are obsessed with their best and worst business lines, while neglecting those who just tap together.

GE CEO Larry Culp argued that the breakup “increases focus and accountability” and Trian Partners, the activist investor who was a thorn in GE’s side, agreed.

The history of conglomerates is a tug of war, not a straight line. Observers have announced the “decline and fall of the conglomerate“in 1994 and declared”conglomerates are dead”In 2007. The 1980s wave of corporate breakdowns cut the share of large U.S. groups operating in three or more sectors from half to 30 percent. ITT broke up in 1995 and Tyco broke up after a scandal in 2006. Yet by 2011, everyone had grown big enough to divide themselves again.

“It is becoming the conventional wisdom that conglomerates are not good and need to be broken up. Then we end up with companies that are so specialized that someone decides that there is merit in vertical and horizontal integration, ”says Alexander Pepper, a London School of Economics professor in management. “Ten years later you end up with a conglomerate.”

The conglomerate’s resurgent appeal lies in the normal ambition to improve, coupled with a hubristic assumption that good managers can manage anything. Entering new business lines seems tempting when competition rules prevent dominance in a single sector. Cynics note that the CEO’s reward and influence expand along with the size of the company.

Western industrial conglomerates have been forced to develop over the past 50 years. Intensified global competition has reduced the ability of a single multinational to supply emerging markets with everything from train compartments to telecommunication towers. And GE’s initially successful but ultimately disastrous attempt at finance has deterred many groups from doing something similar.

Extensive multisectoral companies still have advantages in parts of the developing world where capital markets are less mature. And even in the west, some very large companies still have fingers in many different pies. The large private equity houses that made their first fortune by breaking up U.S. conglomerates in the 1980s have vast empires of their own building. KKR’s portfolio companies alone employ more than 800 000 people and its lending arm is larger than many regional banks.

Supporters of the private equity model argue that it avoids some common conglomerate failures. The center focuses on capital allocation, which gives expert CEOs the freedom to run their businesses. PE funds also return capital to investors after set periods, which reduces some of their freedom to expand. Yet one has to wonder how long the rapid growth can continue.

Today’s technology giants are also essentially conglomerates, although they mostly, but not completely, trade in digital goods. Amazon, Apple and Google claim that their businesses have synergies because everything fits under the “technology” category. And their rapid growth so far has more than compensated investors for any inefficiencies arising from their size.

It might not hold either. Two previous technology conglomerates, IBM and Microsoft, have sparked regulatory fire for trying to expand their reach too far. While fighting in the courts, smaller, more focused competitors seized the opportunity and eventually grew into giants themselves. The cycle continues.

brooke.masters@ft.com

Follow Brooke Masters with myFT and so on Twitter





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