To be, or not to be, a conglomerate

James Penn
December 10, 2019

Recently I was reading about the increasing ubiquity of Alexa around the world.

This is Amazon’s smart assistant, which uses voice recognition, data power and machine learning, and is becoming a mine of useless information around the household.

The head of Amazon’s AI division apparently has 17 of the speakers in his house, which he tests to see if they respond properly (difficult, I’d have thought, given they are all called ‘Alexa’).

It demonstrates that Amazon has found yet another business to enter – consumer electronics, something previously the domain of Sony, Philips and Panasonic, LG and Samsung. It already had a foothold here with its Kindle readers and Fire tablets and TVs, but is now extending this.

It adds another business division for Amazon, alongside online retail, cloud services, online advertising, online grocery, and online pharmacy.

It struck me that Amazon is morphing into what used to be called a conglomerate, or an assortment of different business under the same holding company structure.

Google, or Alphabet as it’s now known, looks to be doing a similar thing, as it branches away from its original search business. Alphabet too has a Cloud Services and a Consumer Electronics division, alongside other new areas like autonomous cars.

Perhaps Apple also increasingly falls into the domain of ‘conglomerate’, with its move into services.

The irony is that, as these ‘new economy’ companies move towards a conglomerate structure, various ‘old economy’ companies are moving away from that model.

Siemens, for example, is well down the path of divesting its ‘conglomerate’ status, and with the spin-off of the power division next year will have completed that. Vivendi is much less of a conglomerate than it was 20 years ago.

In the US, GE, or General Electric, has talked of replicating this, although the plans of the previous CEO John Flannery to spin off both the oil services division and the healthcare division have been put on hold for the time being.

While the conglomerate structure was popular in the 1970s and 80s (it supposedly offered investors in-built ‘diversification’, meaning that as one division suffered, another would be prospering), this concept came under increasing pressure in the 1990s.

The Financial Times led the assault on conglomerates, arguing that the sum was worth less than the parts on their own, that cross synergies were negligible, and that investors could achieve the diversification benefits themselves through portfolio management. Conglomerates went out of fashion in the UK and US, though they retained their attraction in Japan and the Far East.

A key UK company in this respect was Hanson, which at one time owned Imperial Tobacco, cement business Hanson, Millenium Chemicals, and the Energy Group, until it was broken up in 1998.

Another famous industrial conglomerate from the 1990s was GEC, though it didn’t stretch across quite such a wide variety of businesses. It too was broken up in the late 1990s, with disastrous consequences in its case.

We also had Pearson, which once owned investment banking, entertainment and newspaper publishing interests, alongside education and publishing. The (albeit more extended) break up of that company has also arguably not been in shareholders’ best interests.

So while conglomerate structure is deemed to be appropriate for Amazon and Google, it isn’t for the likes of Siemens, GE, Hanson, and others – surely a bit of a contradiction?

The difference is that, with the ‘new economy’ companies the new divisions are (largely) self-generated or developed, rather than the result of corporate acquisitions.

The one other company that seems to be getting away with conglomeratisation at present is Warren Buffet’s Berkshire Hathaway, which after various acquisitions over the last 50 years now looks like a microcosm of the US economy. This, perhaps, has much to do with de-risking the company after the great man’s inevitable demise (although he is still very much there at the moment), given it cannot depend indefinitely on the ‘Black Box’ of Buffet’s mind.

As a generalisation, it seems fair to say that as long as profits and the share price are going up investors don’t mind about conglomerate status. But if the reverse happens they do.

As long as FAANG share prices do OK, and US and European regulators don’t decide that break ups are needed on anti-trust grounds, these new conglomerates look set to stay.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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