Weekly Brief: The World’s Conglomerates Are Realizing They Need To Be Lighter On Their Feet

Weekly Brief: The World’s Conglomerates Are Realizing They Need To Be Lighter On Their Feet

over 2 years ago3 mins

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Plenty of industrial conglomerates have been announcing plans to sell off parts of their business lately, as they look to shed a few pounds and get ship-shape for investors.

🕰 Recap

  • Earlier this month, industrial conglomerate General Electric (GE) said it’d split into three separate companies
  • Then healthcare giant Johnson & Johnson (J&J) revealed it’d be spinning off its consumer products segment into an independent company
  • And last week, engineering conglomerate Thyssenkrupp announced its own plans to split off its hydrogen business

✍️ Connecting The Dots

Conglomerates: the sprawling, typically industrial, giants that house multiple seemingly unrelated businesses under the same corporate umbrella. Take GE: arguably the most famous conglomerate of them all encompasses aviation, healthcare, and energy businesses right now.

Investors couldn’t get enough of these industry titans once upon a time, with GE previously holding the title of America’s most valuable company. But the times – or rather, investors’ tastes – are a-changing, and GE’s trying to change with them by splitting its three segments into standalone companies. Other conglomerates are making the same move: tech giant Toshiba’s eyeing up a three-way split, while J&J and Thyssenkrupp are both cleaving off parts of themselves into separate businesses.

It’s not hard to see why. Splitting up makes it easier for investors to understand what’s going on at each firm, and the easier it is to get to grips with what’s driving earnings, the more likely they are to invest. That means the individual companies’ values might turn out higher than the combined entity was once worth.

But let’s come back to GE, because its split represents the end of an era. GE’s stock rose 4,000% from the 1980s to the early 2000s, but a series of questionable investments and acquisitions between 2010 and 2014 burned through GE’s cash and singed the company’s stock price. It sold off its finance division in an effort to turn things around, and that forced selling hasn’t stopped since. The final nail in the coffin was when GE lost its place in the Dow Jones Industrial Average index of thirty prominent US companies in 2018, and this final split could see the company fade into history with a whimper.

🥡 Takeaways

1. Don’t count out all conglomerates.

Major companies often see their market value subjected to a “conglomerate discount”, where the value of the whole firm falls short of the sum of its individual parts. In fact, investors might deliberately lowball the value of the company’s assets, despite the diversification benefits that come from having unrelated businesses grouped together. But some conglomerates are celebrated for their wide-ranging investments: Warren Buffett’s Berkshire Hathaway, for instance, has a track record of strong returns, which could be why investors are fans of the peculiar mix of insurance, banks, tech companies, and food businesses.

2. Out with industrials, in with tech.

Old-school industrial conglomerates like Siemens and DowDuPont have for years been selling off assets and focusing their businesses. Meanwhile, tech companies like Amazon and Alphabet have expanded beyond their core focuses into autonomous cars, cloud computing, and drones. But their stock prices are only going from strength to strength, suggesting investors aren’t necessarily put off by all big, diverse companies.

🎯 Also On Our Radar

European consumer staples giant Unilever is set to sell tea brands including Lipton and PG Tips for $5 billion to a private equity firm. With traditional teas’ popularity weakening in recent years, Unilever’s hoping that the move will allow the rest of the company to grow at a faster clip, attracting investors who will push its share price up.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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