General Electric Co. GE -0.80% ’s decision to break apart reignites the question of the best structure for business: fit and focused, or diversified. GE, GE -0.80% in its announcement Tuesday to separate into three public companies, follows German engineering giant Siemens AG , chemical conglomerate DowDuPont Inc. and others in shrinking by spinning off divisions or forming separate entities. Other large industrial companies, including Emerson Electric Co. , have made moves of their own to focus parts of their businesses.
For years, investors have pushed some industrial companies to break up or sell off unrelated businesses in an attempt to simplify and focus their operations and to make their value proposition clearer to Wall Street. At the same time, technology giants such as Google parent Alphabet Inc. and Amazon. com Inc. have amassed a collection of businesses that some see as new iterations of the conglomerate.
For most of its existence, GE was one of the nation’s industrial giants. The more than century-old company’s holdings have included insurance, finance, broadcast television and consumer electronics, with its bulwark manufacturing. GE executives long argued that the company’s sprawling businesses were bound together by a set of common management practices and leadership training. “I think there will be a continued push for companies to deconglomeratize,” said David Giroux, chief investment officer for equity and multiasset at mutual-fund manager T. Rowe Price. Not all will break up into multiple parts, he said. Some are selling off slower-growth businesses instead. Companies embraced the conglomerate in the 20th century on the belief that organizations could share costs and expertise across many different units, cross-sell products to customers and diversify to deliver even if some sectors soured. In his more than 20 years as CEO at GE, the late Jack Welch took a “fix it, close it or sell it” approach to GE’s businesses, conducting hundreds of deals and exiting sectors where the company wasn’t a market leader. It operated as a sprawling conglomerate throughout his tenure and at its peak in 2000, GE was America’s most valuable company, worth $600 billion. Conglomerates began to lose favor in the 1980s. Many large companies began to unwind after being targeted in hostile takeovers or finding themselves undervalued by investors, said Jerry Davis, a professor of business administration at the University of Michigan’s Ross School of Business, who has studied corporate structures and conglomerates.
“Companies just ran away from the conglomerate model,” Mr. Davis said. After the 2008 financial crisis, activist investors led a push to break up industrial conglomerates when the individual units seemed to be underperforming independent rivals. The stocks were often languishing, tending to trade based on the worst part of the group, which investors believed took resources away from the best parts. Siemens, a GE competitor, spun off its healthcare business in 2018 and later did the same to its energy business in 2020. United Technologies Corp. , amid pressure from several activist investors, announced in 2018 it would split into three separate entities, resulting in the creation and separate listings of Otis Worldwide Corp. and Carrier Global Corp. United Technologies later merged its aerospace business with Raytheon in 2020. Honeywell International Inc. has spun off some of its smaller operations, but has remained a diversified manufacturer.
Investors have rewarded some of those moves, with shares of Siemens outperforming GE in recent years. Over the past five to six years, there has been strong evidence that large conglomerates do better as separate, more targeted, entities, T. Rowe Price’s Mr. Giroux said.
“I think every company has to ask the question: What value does corporate add?” said Bill George, a former chairman and CEO of Medtronic PLC and now a senior fellow at Harvard Business School.
While many industrial giants have worked to break apart their businesses, the tech sector is among those where conglomerates have been embraced and nurtured. Google co-founder and former chief executive Larry Page announced in 2015 that Alphabet would house the collection of businesses that included YouTube and Android as well as its investment arms and research endeavors under entities such as Calico. Meta Platforms Inc. last month became the new corporate entity encompassing operations such as Facebook and Instagram. At Amazon, the company’s businesses stretch from a giant cloud computing operation to the grocery chain Whole Foods Market.
In those instances, and many others across the U.S. tech landscape, the companies spent years building up disparate businesses. And despite mounting criticism from regulators and users world-wide, they have defended their operating models. Mr. Davis, the University of Michigan professor, said he considers some of the large technology companies neo-conglomerates, and said they may be able to successfully reach into multiple businesses since the internet and technology now underpin so many different businesses. “The technology has so many applications that a giant company with lots of cash might be able to operate in a lot of different industries more effectively,” he said. “We might be at a stage of evolution where conglomerates may still make sense for IT in a way that they would not for, say, manufacturing.”
This content was originally published on WSJ.com on 11/9/2021.