The Synopsis
General Electric (GE) announced a few weeks ago that it will break its company into three independent publicly traded entities. The three new businesses will now concentrate on three distinct business lines: aviation, healthcare, and energy. Jet engines will be manufactured by a single business, which will be a behemoth in and of itself. The second will concentrate on healthcare, especially the production of life-saving medical equipment. Finally, the third firm, GE's bread and butter, will continue to light up the power market. These progeny are intended to function independently within a few years, with their own management teams and boards of directors. And, if all goes as planned, one of America's biggest and most valuable public companies will cease to exist as a conglomerate in a few years.
But here's the thing: it's a trend that we're seeing all over the place.
Johnson & Johnson (JNJ) followed GE's lead and announced its separation only weeks afterwards. They divided their firm into two parts: a consumer goods division and a pharmaceutical and medical device division. Then, in the same week, Toshiba, the Japanese electronics behemoth, announced that it will be divided into three sections.
Three renowned 100-year-old enterprises are attempting to eliminate the conglomerate. On the same day.
Doesn't it make you wonder?
Is it true that larger isn't always better?
Why are multibillion-dollar corporations devolving into little businesses?
First and first, we must define conglomerates. These are major corporations that possess a controlling interest in a number of apparently unconnected businesses. For a long time, researchers and entrepreneurs felt that these bigger companies had enormous potential. You may diversify risk to a considerable extent when you have numerous lines of business running under the same umbrella, for example. Imagine having a very lucrative petrochemical company and then realising that you could achieve so much more in the commerce and telecom sectors. You may start these firms on their own or combine and buy companies that appear to be a good match.
If you're low on cash, you may transfer money across firms to assist lessen the burden. You might also profit from economies of scale, which means you could use the same contractors, perhaps depend on the same talent pool, and pool resources at a lower cost. In other circumstances, being a member of a large family might help you get through a crisis. When the commodities cycle bottoms out, a steel magnate can have a few tough years. In such situations, the consumer products industry may be able to assist stabilise matters. As a result, firms have been lining up for decades to either purchase unrelated businesses or build them from the bottom up. It's why Coca-Cola bought Columbia Pictures in 1982, and why Disney decided to construct theme parks and hotel complexes.
They adopted this technique in order to minimise their risk, and it worked admirably for over a century. However, in the twenty-first century, several of these mega-corporations are collapsing under their own weight.
For example, GE is saddled with massive debt and poor businesses. The stock has lost a lot of value in recent years, and investors are seeking for a silver lining. That silver lining, believe it or not, may arise when these firms break apart and begin operating independently of one another. In fact, corporations that break up and go public nearly often trade at a premium, so there's some instant value here. There's also the reality that some of these businesses now think they need to be agile — particularly in an era where disruptions are the norm. So the plan is to swallow a painful pill today in the hopes of protecting shareholder interests over the next several decades.
But here's the kicker: whereas conglomerates in the United States and certain areas of Asia are splitting apart, Indian conglomerates seem to be stronger than ever. What is the source of this tenacity? We don't know, to be honest. But wouldn't that make for an interesting story?
(Source: Finshots)
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