The Incredible Shrinking Conglomerate
General Electric is “finally abandoning the strategy of sprawl,” said Geoff Colvin. The storied conglomerate is selling off the assets of its biggest business, financial-services arm GE Capital, to focus on manufacturing. GE Capital has been the source of half of GE’s profits in previous years, yet investors cheered the sale. Why? “The world’s biggest diversified conglomerates are finally realizing that combining entirely dissimilar businesses in one company almost never works.” From 2002 to 2010, conglomerates produced a median annual total return of 7.5 percent to shareholders, versus 11.8 percent for more focused companies, according to research firm McKinsey.
And the truth is, profitable operations that bear no connection to the rest of the company are probably worth more on their own anyway. Recognition of that fact has sparked “an epidemic of breakups” in recent years: News Corp. has separated its print and entertainment businesses, eBay has parted ways with PayPal, and Hewlett-Packard has split off its PC business from its enterprisehardware interests, among dozens of other examples. Now, “GE is on the road to becoming a coherent whole,” focused on power generation, locomotives, jet engines, and oil and gas equipment. Let’s hope more outsize companies follow its “deconglomeration” lead.
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