The End of the Conglomerate Era

By Johanna Fernandes, Staff Writer

This has been a long week of conglomerate breakups, causing markets to question the future of a ‘jack-of-all-trades’ business model. General Motors, Toshiba, and Johnson and Johnson are the latest this week to announce spinoffs. Once advantageous synergies of diversified companies now bring in higher costs to businesses across industries. A movement of over $600 billion in market capitalization signals a potential shift in the market – is this an end of an era for empires?

General Electric split into three separate companies with aims to deleverage, unwinding a debt burden of over $75 billion in three years. In doing so, the company will boost cash flows and improve profit margins, boosting their performance against competitors. The manufacturing company is set to divide the aviation, healthcare, and energy divisions. GE shares rose overall 0.55% this week after the buzz of the announcement faded.  The outlook for GE is boosted with a new strategic focus to innovate and remain competitive in the market.

The healthcare-wide trend towards pharmaceutical investments spurred Johnson & Johnson to finally carry through a split of its consumer division from the lucrative pharma division. While the consumer and household products bring in consistent cash flows for the company, the pharmas business now has the freedom to push the risk-reward ratio for investors by pursuing a next big pharma product and matching competitors as a growth stock. For example, J&J rose ~3.6% this year while competitors Pfizer Inc. rose 36% and Merck & Co. 7.7%.

The trend extends beyond the US as well – Toshiba announced a split into three separate companies to improve shareholder value. Under pressure from shareholders after countless scandals and mismanagement errors, the firm’s new strategy seeks to clean up the business to drive returns within specific lines of business. The company will separate the technology devices business from the infrastructure services group. 

This transaction highlights a shift in Japan markets – typically known for a conglomerate management style with companies holding a vast range of businesses. Some investors criticize this approach and attribute it as a cause of a general decline in innovation seen within Japan. In a more distressed position, China’s Evergrande company is a latest example to markets of the downfalls of huge holding companies.

While the value proposition for each of the above companies differ, all are being pushed by investors to simplify and innovate their lines of business. What once drew industrial companies to diversify now seems to slow down the innovation train. This of course seems to be the golden rule for all but the technology sector. While conglomerate industrials struggled through the 2008 crisis, a new wave of technology companies took off over the past decade and have dived into a variety of sectors. The synergies within FAANG stocks are so powerful that it’s brought a wave of antitrust and regulation to the sector. Perhaps the integration of tech in each division is the innovative glue that broader industries failed to adapt. The access to cash and high growth venture opportunities vastly differs from the strategic benefits of say manufacturing conglomerates.  

This week marked a key disenchantment for the future of conglomerates. Whether it’s a need for simplified value propositions, innovation or regulation, both industrial and tech giants face a rocky future.

Photo by Anthony DELANOIX on Unsplash

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