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GE may be breaking up but conglomerates will survive

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When General Electric announced this week that it planned to break itself up, it seemed to be closing 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 company, GE’s offerings spanned everything from plastics and jet engines to credit cards and television advertising. Now it has joined a wave of corporate divestitures that emphasise simplicity, with plans to become three separate public companies focused on healthcare, energy and aviation.

Since 2017, there have been 178 spinout deals worth nearly $800bn, not counting GE, according to Dealogic statistics. Siemens split off its healthcare and energy divisions. United Technologies did the same with Otis elevators and Carrier heating and air conditioning. DuPont is spinning out polymers, and Toshiba is mulling its own three-way split — although this is not yet a sure thing.

Conglomerates are often criticised by investors, who say the component businesses underperform rivals and share prices fail to reflect the value of the various parts. That argument is compelling: giant companies often move too slowly, spend too much on bureaucracy and obsess about their best and worst business lines while neglecting those that just tick along.

GE chief executive Larry Culp argued that breaking up “heightens focus and accountability” and Trian Partners, the activist investor that has been a thorn in GE’s side, agreed.

The history of conglomerates is a tug of war, not a straight line. Observers announced the “decline and fall of the conglomerate” in 1994 and declared “conglomerates are dead” in 2007. The 1980s wave of corporate break-ups cut the share of large US groups operating in three or more sectors from half to 30 per cent. ITT split in 1995 and Tyco broke up after a scandal in 2006. Yet each had become big enough by 2011 to split themselves up again.

“It becomes the conventional wisdom that conglomerates are no good and need to be broken up. Then we end up with companies that are so specialised that somebody decides that there is merit in vertical and horizontal integration,” says Alexander Pepper, a London School of Economics professor of 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 attractive when competition rules prevent dominance in a single sector. Cynics note that chief executive pay and influence expands along with company size.

Western industrial conglomerates have been forced to evolve in the past 50 years. Heightened global competition 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 foray into finance put many groups off doing something similar.

Sprawling multi-sectoral companies do 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 big private equity houses that made their first fortunes by breaking up US conglomerates in the 1980s have built sprawling empires of their own. KKR’s portfolio companies alone employ more than 800,000 people and its lending arm is larger than many regional banks.

Backers of the private equity model argue that it avoids some common conglomerate failings. The centre focuses on capital allocation, allowing expert CEOs the freedom to run their businesses. PE funds also return capital to investors after fixed periods, reducing some of their freedom to expand. Still, one has to wonder how long the rapid growth can continue.

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

This too may not last. Two prior technology conglomerates, IBM and Microsoft, drew regulatory fire for trying to extend their reach too broadly. While they were busy fighting in the courts, smaller, more focused competitors made the most of the opportunity, eventually growing into giants themselves. The cycle continues.

brooke.masters@ft.com

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