As GE Separates, Facebook Becomes Meta: Planet Money: NPR


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A monitor displays General Electric Co. signage on the floor of the New York Stock Exchange (NYSE).

Bloomberg / Bloomberg via Getty Images

In the first scene of the first episode of the classic sitcom 30 Rock, TV showrunners Liz Lemon and Pete Hornberger nervously walk into a remodeling office to meet their boss, Gary. They can’t see it anywhere. “Where’s Gary?” Lemon asks. Just then, a man in a suit smashes down a wall and bursts into the room. “Gary is dead,” said the man. “I’m Jack Donaghy, new vice president of development for NBC-GE-Universal-Kmart.”

Donaghy explains that GE promoted him because of “his greatest triumph”: the GE Trivection oven. It combines radiant heat, convection and microwave technology, allowing you to “cook a turkey in 22 minutes”. His role in creating the oven is “why they sent me here to revamp your show,” says Donaghy. “I’m the new vice president of East Coast TV and microwave programming.”

30 Rock perfectly summed up the absurdity of conglomerates, giant corporations operating in a mishmash of independent industries. Despite the downsizing in the years that followed 30 Rock First released (2006), GE has remained the conglomerate par excellence. That is, until the beginning of the month, when GE announced that it was divide into three separate companies, independently focused on aviation, health and energy. Private equity firms are waiting to further tackle the carcass of the dying conglomerate.

You could call it the end of the era of conglomerates. But, the truth is, this age ended decades ago in the United States. GE is just one of the few dinosaurs to survive the asteroid crash.

But as the old American conglomerates die out, a new breed is evolving to take their place at the top of the food chain: the Techglomerates. Companies like Google, Facebook, and Amazon have acquired businesses and ventured into industries in which they were traditionally not involved.

Investors treat old-school conglomerates like they’re radioactive, but they treat Techglomerates like they’re Pete Davidson (who everyone apparently wants to keep these days). Call it the conglomerate paradox. But are Techglomerates really any different? Or will the same forces lead to their demise?

When the conglomerates were groovy

In the late 1960s, conglomerates were all the rage. Take ITT Corporation, which through a frenzy of acquisitions controlled companies like Sheraton Hotels, Avis car rentals, Hartford Insurance and the maker of Wonder Bread. Or the LTV Corporation, which supervised aviation, consumer electronics, missile manufacturing, sporting goods and meat packing companies. Or Litton Industries, which started out as an electronics company and defense contractor, but gobbled up frozen foods from Stouffer, a typewriter company, a home appliance maker and various furniture makers. In 1968, Saturday evening mail magazine declared in one headline, “It is theoretically possible that the whole of the United States will become a vast conglomerate.”

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Back in the days when the conglomerate madness was at its height, in the mid to late 1960s, Baruch Lev was a doctoral student at the University of Chicago. “I remember one of the first questions from the first finance exam I took was: what is the business rationale for conglomerates? Says Lev, who recently retired after many years as a professor at NYU’s Stern School of Business.

For many companies, the answer was simple: it was a way for them to become bigger and more profitable. The federal government, although actively opposed to many types of mergers and acquisitions, was quite lax when it came to developing businesses in unrelated sectors. But, more importantly, companies believed that by diversifying into multiple industries, they could strategically improve each of those businesses and isolate themselves from the vagaries of the markets. If one industry has had a bad year, for example, conglomerates could write off the losses with the profits of other industries.

“The idea was that by investing in multiple industries, you diversified the cash flow of the business,” says Lev. “People have talked about ‘internal capital markets’, allowing you to allocate money from that business to that business.” The buzzword was “synergy” and the idea was that the sum of a business could be worth more than its individual parts. With a conglomerate, the thought is gone, 2 + 2 = 5.

Conglomerate becomes a dirty word

Lev never bought into the conglomerate hype. “It was all a sham,” he says. The main economic argument for a conglomerate was diversification, the ability of a company to stabilize and increase its stock price by diversifying into a wide range of industries. But, says Lev, investors can do the diversification on their own. If you’re worried that the airline industry is having a bad year, for example, you can invest some of your money in a healthcare business. You don’t need an airline CEO to buy and run the healthcare company.

“There is absolutely no business justification for conglomerates, because investors can do – on their own – whatever the conglomerate does,” Lev said. This was especially the case after the rise of mutual funds, exchange traded and index funds, which allow investors to diversify risk and buy stocks of a wide range of companies at very low prices.

Plus, investors can do it without having to deal with all of the problems that conglomerates create. Problems that arise when a bloated corporate bureaucracy struggles to oversee an out of control number of businesses: poor oversight, mismanagement, and fuzzy decisions, like sending the man behind the GE Trivection oven to run a show of TV.

This is why, says Lev, study after study, conglomerates are inevitably hurt by something known as “the diversification discountThis refers to evidence that a conglomerate’s stock price is about 10% lower than it would be if the conglomerate were instead split and sold on the stock market as separate companies. It turns out that the whole is actually worth less than the sum of its parts. With a conglomerate, 2 + 2 = 3.

In the 1980s, investors became aware of all of this – and there was a bloodbath for conglomerates in the United States. Jerry Davis, professor at the Ross School of Business at the University of Michigan, published a study on their dramatic decline. He says this was facilitated, in part, by a 1982 Supreme Court case that made it easier for financial companies to take over and restructure struggling businesses. In 1990, Davis says, “the typical business was much lighter and focused on its core competencies.”

The rise of Techglomerate

Baruch Lev has worked on a book on mergers and acquisitions, and as part of it, he recently analyzed 36,000 business acquisitions over the past two decades. He found that over the past 10 to 15 years, the percentage of acquisitions that can be classified as conglomerate-type acquisitions has reached around 47%. “It surprised me enormously,” says Lev.

This conglomerate spike is driven by tech companies. Facebook, which recently rebranded itself as Meta, bought out companies like Ascenta, a maker of solar-powered drones, and Oculus, a virtual reality company. Amazon bought out companies like Metro-Goldwyn-Mayer, a media company, and Whole Foods. Google has ventured into companies involved in everything from smartphones and glasses to self-driving cars and podcasting.

The stock market has historically punished conglomerates. Even CEOs of conglomerates like 3M Deny they’re a conglomerate because the term is stinky. But the Techglomerates appear to be getting a pass.

Baruch Lev thinks they shouldn’t. For the same reasons the old-school conglomerates got it 2 + 2 = 3, he says, these new-school conglomerates will do the same. Their attention will be too dispersed. They will not find synergies in their acquisitions. They will mismanage their subsidiaries. The implacable logic of the diversification discount will also come for their stock prices.

The reason they skate in the capital markets, says Lev, is that their core businesses are incredibly profitable. It’s like they have a halo, which allows them to get away with things that traditional businesses can’t. They can play with billions of dollars and get away with it, at least for now. “The day of reckoning is approaching,” he said.

But it’s also possible that unlike old-school conglomerates, tech companies really do have ideas, talents, and know-how that translate well into a wide range of activities outside of their core specialization. Jerry Davis suggests that maybe the Techglomerates really sprinkle some sort of special sauce on their acquisitions. The future is cloudy, he says, but the future will be technological. It may make sense to invest in companies that are trying to specialize in all things tech, even if they are expanding into areas outside of their comfort zone. Of course, there will be a lot of duds in their wallet. But there could be big winners.

Davis, somewhat ironically, pointed to GE’s centuries-old reign as a successful conglomerate. The child of Thomas Edison, GE stepped out of the door as a conglomerate, operating in a diverse set of industries such as power generation, light bulbs, radios, and more. GE, he says, was originally “in the business of anything you can do with electricity,” and he really had the ideas, the talent and the know-how that made him successful in a business environment. wide range of industries for a long time. time.

“Google is the General Electric of the 21st century,” says Davis. “GE was what you can do with electricity. Google is what you can do with the Internet.”

But when Google starts buying cat food and microwave oven makers or something like that, beware.


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