In November last year, the US industrial powerhouse General Electric (GE) announced that it would split into three companies. The Japanese conglomerate Toshiba and healthcare giant Johnson & Johnson have since announced similar plans. And these are just the latest in a string of such breakups, which include the likes of DowDuPont and Siemens. Is the age of the conglomerate coming to an end?
While tech companies such as Alphabet (Google’s parent company), Amazon, and Meta (formerly Facebook) focus on acquisitions, conglomerates increasingly view breaking up and streamlining their businesses as a way to improve performance. GE stock, for example, has been underperforming for years. Shareholders are betting that its healthcare, aviation, and energy divisions will be able to reap higher profits and compete more effectively over the next century if they can set their own paths, with more focused business models, tailored capital allocation, and strategic flexibility.
This approach seems to have worked for Siemens, which credits deconglomeration with helping it to overtake GE, its historical rival, and post healthy profits for 2021. But the question remains: Why are conglomerates underperforming? The answer comes down to the so-called conglomerate discount. Markets tend to undervalue the stock of companies with a diversified set of businesses. If each of their divisions was valued at the level of a single-focus firm in their sector, they would be worth more overall.