The Impending Death of the Conglomerate Business Model
- Nov 15, 2021 11:20 pm GMT
In the 1960’s businesses expanded into various markets increasing revenue and opportunity. Over the years, the industry has changed and some companies have found they are stretched too thin. Gone are the days of mastering multiple markets as a conglomerate. Now investors want focused forecasts and constant reassurance based on past and present earnings. According to Michael Useem, professor emeritus of management at the University of Pennsylvania's Wharton School of Business, Wall Street "has a really hard time understanding a company or forecasting its results a year out if it has several different companies under its umbrella.”
The one-size-fits all approach to management has also changed. According to an Investopedia article by Rakesh Sharma, “The emergence of managers trained only in a specific business and industry has also contributed to an impending death for the conglomerate model. Unseem concluded, " … the process of picking and promoting senior managers has become more difficult, and often more specific to industrial and business sectors." General Electric, Johnson & Johnson and Toshiba are the most recent examples for change.
Reaping immediate rewards, General Electric’s shares jumped after announcing its plans to split into 3 companies. GE Renewable Energy, GE Power, and GE Digital Energy will be combined to make GE Energy. "Today is a defining moment for GE, and we are ready. Our teams have done exceptional work strengthening our financial position and operating performance, all while deepening our culture of continuous improvement and lean. And we’re not finished—we remain focused on continuing to reduce debt, improve our operational performance, and strategically deploy capital to drive sustainable, profitable growth" said CEO Larry Culp. The spin-off will go into effect in early 2024. The company struggled financially since the acquisition of Alstom’s Power and Grid business in 2015. Weak earnings prompted a restructure but the company continued to have problems. Some on the board were frustrated with the company’s slow acceptance of change as demand weakened for its power plant equipment. Colin Scarola, an equity analyst at investment firm CFRA Research, added, the spinoff could lead to "value creation" in businesses that "in aggregate have been shrinking and losing money both before and since the pandemic.” Optimistic about the split, GE’s CEO Larry Culp said, “We know looking at spins elsewhere that the focus and the accountability always increase. We think we have an opportunity here as well to have sharper capital allocation and greater strategic flexibility.”
Duke Energy Corporation was confronted, earlier this year, with a proposal to split into 3 companies by top-10 investor, Elliott Management Corp. This came after Duke's long-term underperformance. While the push to spilt Duke into 3 companies has receive the most attention, the Elliot Management Group wants a voice and a seat at the table. The group has asked that 2 members be placed on the 13-member board. Duke Energy, Elliott Management should reach a truce on the proposals to split company or remake the board this week.
Harvard’s Michael Porter studied 33 diversified U.S. companies and their 3,788 acquisitions between 1950 and 1986, declaring more than half of them to have been failures. “Divestments could unlock value from component businesses and be welcomed by investors valuing pure-play companies over conglomerates,” said Dan Pickering, chief investment officer of financial services firm Pickering Energy Partners. The bottom line is let the individual diversify. Dismantling conglomerates or ‘shrinking-the-company’ streamlines operations, improves performance and attracts investors.
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