GE division raises doubts about future of conglomerates

The division of the US multinational General Electric Co. raises the question of how many of the remaining conglomerates will be able to avoid the same fate.

General Electric, an iconic business built over decades by executives like Jack Welch, will be dismantled with the most dramatic maneuver of the CEO, Larry Culp. The debate on the conglomerate structure highlights companies such as Berkshire Hathaway Inc. from Warren Buffett, who has spent years defending how his particular conglomerate brand works.

Conglomerates, once seen as a way to bring multiple companies together to reap the benefits of synergies, size and breadth, have fallen out of favor. Own Buffett he has admitted that over the years, the conglomerates have “earned their terrible reputations.” Today, the days of the traditional industrial conglomerate could be numbered even as tech giants increasingly adopt a somewhat similar complex model.

“I do not know how many mainly industrial companies will continue to use this type of structure in particular”, Indicated Kathryn Rudie Harrigan, Professor of Business Leadership at Henry R. Kravis of Columbia Business School. “Because it somehow raises the question of what, if anything, contributes by placing them all within the same corporate family.”.

Over the past five years, investors have been less enthusiastic about some conglomerates than about the market as a whole. GIVE, in particular, has lost 51% in that period of time, while Berkshire has increased by 90%, financial holding Loews Corp. has gained 34% and the industrial and consumer goods giant 3M Co. it has risen only 6.4%. Meanwhile, the S&P 500 has soared 117%.

Some divisions have benefited the remaining companies. For example, Culp’s well-known alma mater, Danaher Corp., divided its businesses in recent years. Its shares have outperformed the general market for the past five years, up 273%.

“We believe that the pendulum is still swinging towards the trend of ‘breaking away’”, He said in a note to customers Deane Dray from RBC Capital Markets. “Today’s GE announcement could spur the boards of several other multi-industry companies, including Emerson, Roper Technologies and 3M, to advance more aggressive portfolio simplification moves.”

Some conglomerate leaders have strongly defended the complex setups of their companies. At the beginning of this year, Buffett wrote in an annual letter that conglomerates have a bad reputation because they have sometimes overpaid for mediocre businesses, and some businesses even use accounting maneuvers. “imaginative”.

Still, the CEO of Berkshire, 91, argued that his business based in Omaha, Nebraska, differs from the conglomerate “prototype”, In part because it controls some businesses and owns non-controlling interests in others.

Berkshire, for its part, has remained somewhat insulated from activists’ calls for a break, in part because Buffett stay in command.

However, earlier this year Buffett disclosed that his successor could be Greg Abel, which was a reminder to investors that one day he will have to give up the reins. Part of the key to Berkshire’s ability to remain a conglomerate has been its decentralized management style, he said. David Kass from the University of Maryland.

“Berkshire managers have almost complete independence in running their businesses. They don’t have to go through the bureaucracy of corporate headquarters like GE and most other companies have done.“, he pointed Kass, Professor of Finance at the Robert H. Smith School of Business at the University of Maryland. “As long as Buffett is there, the structure will remain the same. And after Warren Buffett is gone, Greg Abel will likely run the company, and he’s committed to maintaining the culture.”.

Many companies have naturally leaned toward the desire to integrate operations as they seek to gain scale and efficiency, he said. Omar Aguilar placeholder image, Senior Managing Director and Co-Director of the Business Transformation Practice at FTI Consulting Inc. But one of the keys to a conglomerate’s survival is that it can keep increasing its profits, he said.

”They’ll be fine as long as they keep growing”Aguilar said.

Even if some industrial conglomerates continue to divide, there is also a tendency for tech giants to expand into diverse industries, thus developing a conglomerate-like model, said Harrigan of the Columbia University.

For example, Amazon.com Inc. has moved from e-commerce to health care and grocery stores. The company benefits because it often targets the same customer with its variety of businesses, he noted.

“For companies with internet access, those that are successful will likely end up becoming very complex from diversification.“, said. “They can get excellent synergies based on customer experience”.