Conglomerates are dead, but tech giants are conglomerates in the making
The conglomerates are dead. Will big tech get the memo?
Consider these recent developments:
- GE splits into three public companies.
- Johnson & Johnson separates its consumer goods from its medical devices and pharmaceutical businesses.
- Toshiba is divided into three independent companies.
We could cite a few other examples such as AT&T also separating from its media activities.
The rationale for these conglomerate breakups is fairly straightforward. These giants have grown large and bulky and have been made heavier. By breaking up, the offspring of these companies can perform better with more focus. When growth goes, the raison d’être of a conglomerate goes. The argument for conglomerates – the idea that magic management can run any business – is fading.
Ray Wang, author of Everyone wants to rule the world, said in a recent interview that the conglomerate’s playbook is flawed. But conglomerates can compete. They need to form joint ventures, build an ecosystem and attract investors. Think of the Honeywell Quantum-Cambridge Quantum deal.
“Many of them, like existing businesses, need more joint ventures to end up with a portfolio of innovative startups in these industries,” Wang said. “That’s how they’re going to be successful. The incumbents should be holding companies.”
The big question here is when the tech giants become historical players. Big tech is busy building quasi-conglomerates and can do well because the growth is there. However, gravity still exists and it’s a safe bet that big tech will make disruptions at some point. Think of the Hewlett-Packard split between HP and HPE.
Consider the following tech giants.
- Amazon. The company is best known for its e-commerce operations, but Amazon Web Services, a cloud giant, is making the profits. At some point, shareholders and activists will wonder why the cloud unit is subsidizing retail. Amazon is also growing in advertising. You could argue that these businesses are loosely related (until the music stops).
- Microsoft. Despite Microsoft’s obsession with being cool, it is a giant enterprise software company. Microsoft is about productivity. However, Xbox is not about productivity. Would the Xbox do better on its own?
- Apple. All other things being equal, Apple is the most concentrated of the group. Apple combines software, hardware and experiences. From there, Apple locks you into services and its ecosystem. This plan only becomes a problem when Apple does something absurd, like launching an Apple Car and becoming an auto maker.
- Google / Alphabet. Google has become a semi-conglomerate but has set up a structure that allows it to make big bets through its Alphabet structure. Google will remain more focused, but you can safely say that Google Cloud may ultimately be the search giant’s version of AWS. Alphabet will make big bets and eventually set up independent companies.
- Meta. The company formerly known as Facebook has built a conglomerate focused on capturing your time and attention. In this build, the metaverse is consistent with Instagram, WhatsApp, and Facebook. However, don’t be surprised if someone starts asking if Oculus should be part of Meta or a separate entity.
Today, these giants are forming conglomerates with a relatively strong belief in magical management and duopolies. Fast forward a decade or two and they are likely to turn into breakup stories.
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