The Conglomerate Isn’t Dead Yet

It’s been a big week for bust-ups. General Electric announced it is breaking itself into three. Toshiba plans to do the same. Johnson & Johnson says it will separate its consumer health business from its pharmaceutical business. Predictably, the death of the conglomerate is again in the news.

Trouble is, the story isn’t true. On the contrary, the conglomerate seems to be very much in fashion.

Take a look at a few of the world’s largest, and most profitable, corporate giants. Apple is famed for its factory-made devices such as the computer on which I’m writing this, but during the third quarter of its fiscal year, 21% of its sales — and a third of its gross profit — came from fitness programs, music streams, television shows, and other products that aren’t designed by industrial engineers or assembled on a factory floor. Alibaba Group, best known as China’s largest retailer, runs video, cloud computing, mapping, food delivery, and logistics businesses, among other things, as well as a big piece of Ant Group, a financial services company. Far from being an asset-light “new economy” company, Amazon.com sells space on 78 cargo jets, plus trucks, oceangoing ships, and in hundreds of millions of square feet of warehouses, even as it earns nearly half its profits from cloud computing services.

Truth be told, technology-driven changes in costs are forcing many successful firms to become conglomerates if they want to be players on a global scale. Consider the shipping giant Maersk. Claiming to have abandoned the conglomerate model, it has dumped an oil company, a manufacturer of refrigerated containers, and even a stake in a supermarket chain. At the same time, though, it has gone on a buying binge, expanding into air freight, warehouses, and trucking. These acquisitions arguably have little to do with Maersk’s core business of operating container ships, but they have a lot to do with managing logistics for the same customers that may send their freight on Maersk’s vessels — and, Maersk hopes, with reducing its dependence on what until the pandemic had been a low-margin commodity business, carrying metal boxes aboard ships.

All of these firms are conglomerates. They are continually diversifying into new products, new markets, and new customer bases rather than confining their activities to some imagined “core competency.” If anxious investors are attempting to punish them by applying a “conglomerate discount” to their shares, their stock prices seem to show no ill effects.

Investors, I suspect, are less concerned with conglomeration than with the managerial hubris that so often accompanies it. Toshiba was famed for its inbred sense of superiority. General Electric prided itself on having great managers, schooled at its training center in Crotonville, New York, and capable of managing anything. Yet Toshiba’s bosses steered the company into an accounting scandal that nearly sank it, and GE’s, apart from their ill-fated decision to make a massive move into financial businesses, failed to grasp how digital technology would transform manufacturing: recall the advertising campaign the company ran a few years ago, seeking to convince young job-seekers that GE was really a tech company, or the decision to move headquarters from suburban Connecticut to Boston in 2016 just to seem cool. A corporation that is so certain that no one can challenge it is vulnerable to competitors who think otherwise, conglomerate or not.

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