November 30, 2021

Divestitures: The End of the Conglomerate? Don’t Bet On It

I recently stumbled across a Wharton article that discusses the recent decisions of two of America’s most storied companies – General Electric and Johnson & Johnson – to spin off large chunks of their existing businesses.  The title of the article questions whether this represents the end of the conglomerate, but the body of suggests that it probably doesn’t. This excerpt says that are plenty of advantages to companies looking to divest non-strategic businesses in the current environment:

The twin announcements immediately boosted stock prices for each firm, a sign that divestiture is a rational strategy for conglomerates once thought of as too big to fail. In the 1990s, GE was the most valuable company in the world, making everything from lightbulbs to jet engines and creating a massive finance unit that never recovered from the Great Recession.

“The word is finally starting to get out that divestitures are very value-creating for companies that undertake them. In fact, the longer that companies wait to divest their businesses [and] the more they hold on, oftentimes the more value destruction happens,” Wharton management professor Emilie Feldman told the Wharton Business Daily show on SiriusXM. (Listen to the podcast above.) “My view is that companies need to use divestiture much more proactively as a strategic tool in reshaping their corporate portfolios.”

When conglomerates break apart into focused companies, those offspring tend to post higher returns and have better operational performance because they devote all their attention and resources to a single core competence. Feldman said divestitures reached a “high-water mark” in 2015 and 2016, and they have continued during the pandemic. She expects the current frothy market will spur more companies to look at divestiture as a viable option.

I’ve always found the rise and fall of conglomerates to be a really fascinating topic.  They sprouted like wheat in the 1960s, only for many to come crashing down in the 1970s as interest rates rose. A trend toward de-conglomeration began in the 1980s with the rise of the “bust-up” takeover. But conglomerates have never really gone away and despite the high-profile break ups of GE and J&J, they’re unlikely to anytime soon.

The original conglomerates of the 1960s generated a lot of interesting stories along the way, and one of the most interesting is the tale of “Jimmy Ling, the Merger King.” You’ve probably never heard of him, although you might have heard of his company, LTV. Check out this article for his story and some thoughts about the broader implications of the rise of the conglomerate in post-war America.

John Jenkins