Breakups usher in a new era of business conglomerates | Economy
The conglomerates are dead. Long live the conglomerates.
The breakups of General Electric, Johnson & Johnson and Japanese company Toshiba last week may have signaled to many the last breath of a philosophy of the greatest, it’s better, which has been losing favor for decades. Corporate governance activists and advocates applauded what seemed to have marked the end of an era placing blind faith in an almighty CEO overseeing an opaque network of independent companies.
But focus may not really be back in fashion, according to Baruch Lev. The New York University professor has analyzed more than 36,000 mergers and acquisitions over the past decades and found – to his surprise – that so-called conglomerate and unrelated acquisitions over the past five years amounted to nearly half of all transactions. This is between 35 and 40% over the previous two decades.
“Dinosaurs are back, but they’re different,” Lev said. “These are now trendy, high-growth technology and media companies venturing away from their core businesses to acquire independent businesses. “
The tech arena was the source of these deals and created what University of Michigan business professor Jerry Davis calls “neo-conglomerates.” Among them are Meta Platforms, parent of Facebook, Tesla, Amazon, and parent Alphabet of Google.
On Friday, J&J, the maker of cancer treatments, mouthwash and Tylenol, announced it would split into two public companies, one focused on drugs and medical devices, and the other on consumer products. It came a day after Toshiba announced its split into three companies, responding to pressure from activists. Earlier in the week, GE also unveiled plans to split into three companies, parting ways with the iconic manufacturer founded by Thomas Edison.
The new generation of conglomerates, fueled by coders and cheap capital, now command the same fear and respect in management and investor circles as Jack Welch’s GE in the 1980s or Harold Geneen’s ITT in the era of the Mad Men.
In its heyday, GE made everything from toasters to turbines, while ITT invented the idea of the international conglomerate, with disparate assets that rented cars, baked bread, and wrote insurance policies. Today, Amazon sells groceries and cloud services, manages a freight fleet, and creates streaming TV programs. In addition to its cars, Tesla manufactures electric batteries and sells insurance.
What Amazon and its ilk do much better than the conglomerates of yesteryear is skate fast where the profit is, be it automation, social commerce, sustainability, or even high-profile metaverse, which will likely influence the future of work and the role of traditional offices. .
“It’s not that combining companies is not important to today’s conglomerates,” said Ron Adner, professor of strategy at the Tuck School of Business in Dartmouth, citing the Amazon company as example. “What makes them different is that they don’t compete along traditional industrial lines. So you can interpret the current ruptures as a concession that the old models don’t work.
As GE, J&J and Toshiba have been devastated by pressure from activists, lawsuits and changing industry dynamics, tech companies could be upset by government regulators in the US and Europe, who are increasingly concerned about their growing influence. Last week, the U.S. Federal Trade Commission hired a former Google executive as an advisor, bringing in a tech activist to help with its regulatory push. They also face resistance from within, as core staff members now openly voice their concerns about the dangers of their employers’ AI-powered decision-making.
Meanwhile, this week’s breakup announcements could spark imitation moves, exemplifying a phenomenon sociologists call “organizational isomorphism” – which essentially means keeping pace with the Joneses. “We look over our shoulders and do what the other is doing,” said Michael Useem, professor of management at the Wharton School at the University of Pennsylvania.
Analysts have cited post-it maker 3M as a prime candidate for a possible reshuffle as its stocks lag behind those of other manufacturers amid struggles against intense inflationary pressures. The stock’s 5.1% gain this year was only a quarter of the advance in the S&P 500 industrial sector index. 3M declined to comment.“They just have such a sprawling company that it needs to be simplified, and frankly, they’ve been underperforming,” said Deane Dray, analyst at RBC Capital Markets.