Many Big Companies Are Splitting. Conglomerates Are Here to Stay

Published in December 2021
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Size is an asset until it’s not. Within the space of one week, J&J, GE, and Toshiba were all disassembling themselves. Companies over 100 years old suddenly found their current form unfashionable. General Electric will separate into three listed groups, each focusing respectively on aviation, healthcare, and energy. Johnson & Johnson will spin off its consumer products. Even the Japanese conglomerate Toshiba can’t withstand the relentless pressure and will split into three firms.

Simply put, investors view these companies as less valuable should they continue with their previous business models. They want them to work as independent entities.

It’s easy to declare that giant conglomerates are falling out of fashion. But they’re not. The world has come to embrace a new type of conglomerate. We must ask ourselves, “What is Amazon?” Its e-commerce retailing bears little resemblance to its cloud computing services. Microsoft no longer focuses only on office productivity – Xbox is a major player in the gaming industry. And Tesla is not just a car company; its buildup in solar panels and superchargers belongs not to the automotive industry, but to the energy sector.

Tellingly, Amazon, Microsoft, and Tesla are among the world’s most valuable companies. They don’t suffer from being conglomerates. There is no discount on their share prices. Compared to their industry peer groups, they enjoy a premium.

The right question to ask is this: Why do some companies suffer a conglomerate discount, while others enjoy a premium? Conglomerates are here to stay. But what will they look like in the second half of the 21st century?

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