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Is The Conglomerate Dead?

News that General Electric (GE) is to split itself into three separate businesses marks the demise of yet another conglomerate. Following in the footseps of sixties icons such as ITT, and Textron and more recent examples such as Siemans and United Technologies it appears that synergy and diversification within a single corporation is no longer in favour.

No longer will GE sell you a jet engine or gas turbine together with a maintenance contract while also lending you the money to make the purchase.

This is the continuation of a long trend of investors seeking to unlock value of individual businesses that maybe buried in a cumbersome and bureaucratic corporate structure. During my career I worked on a number of similar such transactions: AT&T divesting NCR and Lucent and Hewlett Packard spinning out Agilent.

The rationale for conglomerates tended to centre around economies of scale, access to capital and synergies between businesses. It appears that many of the benefits have eroded over time and technology has been at the root of this change. Three such examples are that technology:

  • Is dramatically reducing friction between different businesses which reduces the need for direct ownership and control of all elements of a business's ecosystem

  • Increasing capital liquidity by connecting providers and users of capital globally

  • Increasing productivity, reducing costs and increasing cost variability thereby reducing the benefits of scale, tsynergies conglomerates could realise and the burden of fixed overheads

Today even relatviely small companies can access capital, scale quickly, and deploy world class technology economically. So is the conglemerate dead forever?

Perhaps not. The irony is that the new conglomerates that are emerging are primarily technology companies. Amazon (retail, media, web services), Alphabet (parent of Google) and Meta (formerly Facebook), Microsoft and even Tesla all share some of the characteristics of conglomerates of days gone by. The argument is that they can either acquire and scale other businesses (e.g. Instagram, Whole Foods) or incubate new businesses (e.g. Waymo, Oculus) using their core capabilities be it talent or technology. This will sound familiar to any follower of conglomerates in the days of yore.

So what can we expect? As the saying goes the more things change the more they stay the same. These new conglomerates are aleady facing regulatory scrutiny in much the same way as Standard Oil and AT&T which could lead to forced break-ups. And as soon as their stock prices start to stagnate or even fall, as they surely will (remember GE was stock market darling for close to 30 years until quite recently), the demands will emerge for them to 'unlock' value through diverstitures.

Watch this space its gong to be a wild ride!


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