Are the brontosauruses of the corporate world – conglomerates – finally facing extinction?
The news that General Electric is embarking on yet another restructuring, this time a wholesale breakup, has inevitably been reported as the final demise of that fossil of a bygone corporate epoch: the conglomerate. An exemplar of the golden age of corporate empire building in the second half of the 20th century, at its height the General Electric Company produced everything from oil pumps to TV shows. Though conglomerates were increasingly regarded as lumbering, pea-brained behemoths, vulnerable to smaller, more nimble predators, under imperious CEO Jack Welch, GE seemed invulnerable.
However, at the start of the 21st century, with the handover to Jeff Immelt, GE entered a period of sustained decline, even as a frenzied spree of deals continued. An organisation which once prided itself on a management culture that enabled its acquisitions to evolve and grow, instead GE became a veritable La Brea tar pit; sucking in and suffocating previously thriving businesses. Shareholder value – some 75% of it – either sank without a trace; or because $7.2bn can be traced to various Wall Street luminaries, in the gargantuan fees for consistently complex financial structuring and restructuring.
So, will the grand plan of current CEO Lawrence Culp Jr to free the various GE businesses succeed – or is it one final, dying thrash, producing a clutch of still unwieldy, still declining offspring? Apparently the latter, since part of the stated rationale is to make it easier for the newly independent businesses to hack off yet more of their own vestigial limbs. With private equity circling like so many hungry raptors, the dismembered carcass of GE may be in for a rough ride. Opportunistic investors (albeit those with strong stomachs) also lurking in the undergrowth with rat-like cunning, might even be tempted to rush in and snatch a morsel before the big boys descend. With break-up costs already estimated at a further $2bn, beleaguered existing shareholders can console themselves with the thought that investment bankers and advisers, at least, are unlikely to go hungry.
But have we really seen the last of these magnificent beasts? Apparently not in Japan and Korea, where companies like Mitsubishi and LG are still very much at the top of the food chain. While readers might recognise these primarily as automotive or consumer electronics brands, both span sectors including heavy industry, chemicals, and materials technology. For them, the logic of the conglomerate still holds true. By combining apparently disparate businesses linked by some thread (often as vague as ‘big manufacturing plants’ or ‘things to do with oil’) they are able to integrate vertically and horizontally: sharing technologies and skills between businesses which would otherwise be competing, benefiting from cross-financing, accounting and tax efficiencies, and sustaining individual businesses through troubled times. Following this logic, conglomerates should be able to out-muscle and outlast smaller competitors.
But critics remain unconvinced. In addition to a raft of other issues, they might highlight risk management. Recent comment has linked the breakup of Toshiba and the separation of healthcare giant Johnson & Johnson’s consumer health division to the GE story, continuing the narrative of imminent conglomerate demise. In both cases (though vehemently denied by respective CEOs), risk management has clearly been a factor. J&J is separating the legacy risk of its talc/asbestos disaster from the rest of the business, while Toshiba’s separation comes in the wake of an accounting scandal. For conglomerates, skeptics will point out, reputational or financial damage can quickly become contagious and contaminate the entire organisation.
Of course, healthcare is a notoriously risky sector – but then what isn’t nowadays? Covid and climate change have exposed previously-unsuspected levels of potential existential threat across the piste – and let’s not even get into those asteroids. Even without natural disasters, the focus on ESG presents new potential for reputational damage; furthermore, larger (and therefore more visible) businesses face push-back on monopoly and tax avoidance concerns, as the likes of Alphabet have found. The latter, we might note, though seldom referred to as a conglomerate, has interests not only in every sector of online services – itself hardly a negligible spread – but has also made forays into robotics, consumer hardware, self-driving cars, AI – as well as all-purpose ‘blue-sky’ innovation. Perhaps, as Google/Alphabet (and now Facebook/Meta) have decided, a simple name change might help to make them appear less gigantic, deflecting unwelcome attention. After all, even the Brontosaurus got a rebrand – though whether the Apatosaurus found itself better camouflaged afterwards is doubtful.
Just as dinosaurs morphed into birds, conglomerates too have evolved. While the almost self-consciously humongous conglomerates of GE’s generation may be on the way out, their sleeker descendants still walk among us – hiding in plain sight behind the colourful plumage of the latest google doodle.