Gongol.com Archives: November 2021
November 10, 2021
Conglomerates aren't dead -- managers just don't know how to run them
Americans don't really fall in love with corporations, but we do adopt some of them -- less like pets, more like barn cats. We accept their utility and don't mind seeing them remain a little hungry, but otherwise fed well enough to keep doing their work. We don't want them close and cuddly, but a sort of friendly symbiosis is welcome. ■ General Electric is one such barn cat. From having its logo on everyday lightbulbs to its once-giant presence in the Manhattan skyline, GE has long been the default "industrial" name in America. ■ News that GE is breaking up seems like dirt on the grave of the conglomerate structure. The three resulting companies will independently focus on health care, energy, and aviation, which seems to be the kind of thing that financial managers reward today. ■ The conglomerate form has been in retreat for some time -- ITT has broken up twice: First in the 1990s, then again in 2011. Gulf + Western spun off and slimmed down in the 1980s. United Technologies is no longer united. ■ And yet, it's not the conglomerate format itself that is fundamentally flawed. If a corporation can be managed by people with a well-tuned skill for capital allocation, then it makes all kinds of sense to capture the profits of individual companies under a broader corporate umbrella and deploy them where they can earn high returns. Matters like the cost of capital and the prevailing tax policies of a country can make big differences in how much incentive exists to spur the formation of conglomerates, but let's not kid ourselves: Conglomerates exist, even if they don't appear as known companies in the stock market. ■ When a money manager claims to be able to set up an actively-managed mutual fund, a private-equity fund, or even a private "wealth management plan", they're promising that they can assemble groups of businesses under a conglomerate-like umbrella in order to maximize returns. It's not that Americans are opposed to conglomeration -- it's that one form is unpopular and another happens right under our noses without so much as a nod of recognition. If you don't think the $130 billion Fidelity Contrafund is a conglomerate, you're just not using your imagination. ■ A handful of skilled capital-allocators will always have a chance to shine in this world -- people like Royal Little, Bob and Larry Tisch, and Jay and Robert Pritzker. Warren Buffett may be the only household name among them living today, but he won't be the last. As Buffett's partner Charlie Munger said in 2014, "We think the conglomerate model works very well when you do it right." ■ GE may have decided to pull the plug on conglomeration, but don't think that the sun has set on that corporate form altogether. In a sense, some of today's high-tech corporations (like Alphabet) are the likeliest candidates to become the next generation of true conglomerates. But new ones will be formed out of old companies, too. And the better we realize that it isn't the fault of the form that GE and others have broken up, but rather the fault of the managers at the helm, then the more likely it is that we'll adopt a few more useful barn cats along the way.
