General Electric announced yesterday (Nov. 9) it will separate into three businesses focused on aviation, healthcare, and energy. The move signals the end of an era for a conglomerate that grew its market value from $15 billion to $594 billion in the 1980s and 1990s by diversifying its portfolio, only to see this same strategy fall short in recent decades.
This latest decision puts an end to GE’s conglomerate structure, but the company has been looking to downsize its portfolio for a number of years. In 2013 GE sold off the rest of its stake in NBC Universal to Comcast for $16.7 billion. And in May 2020 the company sold off its lightbulb business to Savant Systems, saying goodbye to a signature product that helped put the 129-year-old company on the map.
GE is the latest in a series of conglomerates to downsize their businesses in recent years, suggesting the model is “becoming extinct” in the US, says Michael Useem, a professor emeritus of management at University of Pennsylvania’s Wharton School of Business.
Why conglomerates are no longer a viable business model
GE’s expansion, which was driven by the company’s late CEO Jack Welch, occurred at a time when diversifying business portfolios was considered to be an effective way to mitigate risk. The argument was that when one industry was in a downturn, another might be thriving. As this line of thinking gained popularity, companies like Coca Cola acquired Columbia Pictures, and the service industry corporation Cendant bought companies ranging from Avis Car Rental to Match.com to Century 21.
During his tenure as CEO Welch invested in new businesses ranging from aviation to media to oil and gas, in turn transforming GE into one of the most reliable publicly-traded companies on the stock market. But this success took a turn at the start of the new millennium, as GE suffered losses triggered by the dot-com crash and the 2008 recession from which it never fully recovered. The company is now valued at $120 billion, representing a fifth of its peak valuation under Welch’s leadership.
While GE had a highly visible fall from grace, it’s far from the only company to turn away from a conglomerate structure in recent years. Honeywell, ITT, and Dupont have all sold off businesses from their once-diverse portfolios as well. Useem believes two main factors are driving this trend: Wall Street is not adept at valuing highly diversified companies, and firms are no longer tailoring their leadership and management to oversee such vast portfolios.
Equity analysts and investors specialize in industries such as consumer goods, insurance, or specific types of manufacturing, Useem says. As a result they have “a really hard time understanding a company or forecasting its results a year out if it has several different companies under its umbrella,” he said. This is not necessarily true in countries like China and India, where conglomerates continue to thrive, but it is in the US.
What’s more, Useem adds, top corporate executives are no longer being groomed to manage across sectors. Under Welch’s leadership, GE focused on identifying and training managers who would be equally adept at running industrial equipment businesses as they would at television or financial services. But today, the market requires managers to be agile and skilled at dealing with uncertainty. As such, he adds, “the process of picking and promoting senior managers has become more difficult, and often more specific to industrial and business sectors.”
Some US companies, like Amazon and Alphabet, have successfully tailored their conglomerate structures to the digital age. But it’s clear the model no longer makes sense for the likes of executives at industrial companies such as GE. CEO Larry Culp said in a statement the breakup was a “defining moment” for the firm, and that splitting off GE into three distinct companies would allow them to tailor their investment strategies to “industry-specific dynamics.”