NEW YORK (BLOOMBERG) - General Electric's break-up raises the question of how many remaining conglomerates will be able to avoid the same fate.
GE, an iconic business built over decades by executives such as Jack Welch, is set to be dismantled in chief executive officer Larry Culp's most dramatic move. The debate over the conglomerate structure casts a spotlight on businesses such as Warren Buffett's Berkshire Hathaway, which has spent years arguing why its particular brand of conglomerate works.
Conglomerates, once considered a way to bring multiple companies together to reap the benefits of synergies, size and breadth, have fallen out of favour. Mr Buffett himself has conceded that conglomerates have "earned their terrible reputation" over the years, and GE's Mr Culp said on Tuesday (Nov 9) that focus is more beneficial than the often "illusory" benefit of synergies. The days of the traditional industrial conglomerate could be numbered even as technology behemoths increasingly adopt a somewhat similar complex model.
"I don't know how many fundamentally industrial companies are going to continue to use this particular kind of structure," said Kathryn Rudie Harrigan, Columbia Business School's Henry R. Kravis professor of business leadership. "Because it sort of begs the question of what, if anything, is added by putting them all in the same corporate family."
Over the past five years, investors have been less enthusiastic about some conglomerates than the broader market. GE, notably, has lost 51 per cent in that timespan, while Berkshire has risen 90 per cent, holding company Loews Corp has gained 34 per cent and industrial and consumer-goods giant 3M has increased just 6.4 per cent. The S&P 500, meanwhile, has soared 117 per cent.
Some break-ups have benefited the remaining businesses. Famously, Mr Culp's alma mater, Danaher Corp, has split off businesses in recent years. Its stock has outperformed the broader market over the past five years, climbing 273 per cent.
"We believe the pendulum is still swinging towards the 'urge to demerge' trend," RBC Capital Markets' Deane Dray said in a note to clients on Tuesday. "GE's announcement today could embolden the boards of several other multi-industry companies to move ahead on more aggressive portfolio simplification moves, including Emerson, Roper Technologies and 3M."
Many companies have naturally drifted toward wanting to integrate operations as they seek to gain scale and efficiency, said Omar Aguilar, a senior managing director and co-leader of the enterprise transformation practice at FTI Consulting. But one of the keys to a conglomerate's survival is whether they can keep increasing their earnings, he said. "If they continue growing," Mr Aguilar said, "I think they're OK."
Even if some industrial conglomerates continue to break up, there's also a trend of tech giants expanding into various but distinct industries, and thus developing a conglomerate-like model, said Ms Harrigan of Columbia University. Amazon.com, for example, has moved beyond e-commerce into health care and grocery stores. The company benefits because it's often targeting the same customer in its variety of businesses, she said.
"For internet-enabled companies, those that are successful will probably end up becoming very complex by diversification," she said. "They can get terrific customer-based synergies."