A SIMPLE HISTORY LESSON
Very large so-called “conglomerates” emerged in the 1960s. Companies like Ling-Temco-Vought (LTV) with its dozen different lines of business (aircraft, steel, consumer electronics, tennis rackets, packaged meat, etc.), and its peers ITT Corp., Rockwell, Litton and more came about because mergers and acquisitions of unrelated businesses were not as closely scrutinized by regulators as similar industry deals.
For most of the original conglomerates, the purported synergies and benefits proved to be an empty suit of promises. These conglomerates didn’t create any efficiencies, were very hard to manage and were, in many instances, excuses for empire building at the expense of unsuspecting investors.
A second generation of multi-line of business organizations turned up in the 1980s and 1990s exemplified by General Electric, UTC and Emerson. This generation of organizations avoided the term conglomerate in favor of “diversified industrials.” With changes in antitrust laws and politics, these organizations developed and evolved their portfolios into groupings of related businesses that shared similar characteristics, organization structures, product development protocols and sales and marketing practices.
While this new “recipe” may have made it easier to manage these large-scale organizations, academic and business researchers who have closely studied these organizations identified a substantial “diversification discount” (loss of value) of almost 10% when they compared the market value of diversified industrials with that of similarly focused (single industry) enterprises.
Charles Knight, the legendary CEO of Emerson, might argue this point if he were still alive. Knight led St. Louis-based Emerson from $1 billion to over $15 billion during his 27 years and achieved an unprecedented record of 43 consecutive years of earnings. However, even with superior leadership, many observers have continued to question the underlying logic of diversified enterprises, which brings us back to General Electric (GE).
Perhaps the only large diversified that defied this economic logic has been GE, which under the leadership of Jack Welch kept rising in value during the 1980s and 1990s (largely fueled by its financial services business). But after Welch, GE’s value plateaued, then gradually decreased and in recent years, has suffered the same inevitable fate, becoming a shadow of its former glory.
With the news of GE’s break up, they join a group of peer organizations that have all reached the same fate, including Westinghouse, Honeywell, United Technologies, Hewlett Packard, DowDupont, Toshiba and more. For most of these diversified enterprises, spotting the isolated trends that have informed their demise is like watching waves break on the shore, one after the other, while remaining unaware of the deep currents and invisible undertows that cause this surface-reality.