Some big companies find that breaking up is, well, easy to do
Lesson summary
Hello again, I’m Jeff and this is Plain English, where we help you upgrade your English with current events and trending topics. This is lesson number 420 and that means JR has posted the full and complete lesson to PlainEnglish.com/420.
Coming up today… three big corporate conglomerates are breaking up with themselves. They are Johnson & Johnson, Toshiba, and, if you can believe it, General Electric. Does this mark the end of the conglomerate era? Maybe, maybe not. Today’s English expression is “at first glance,” and I have a quote of the week for you. Let’s dive in.
Breaking up is easy to do
There’s an old song in English called “Breaking up is hard to do.” Today, though, some of the oldest companies in the world have determined that breaking up may be hard to do, but nevertheless, it’s essential.
Johnson & Johnson is a 135-year-old company that makes health products. The company said earlier this month that it would split into two separate companies. One would produce consumer products like Tylenol, baby powder, bandages, and mouthwash. The other would focus on prescription drugs, cancer treatments, and vaccines. The breakup would create two separate companies; the consumer-focused one will keep the trusted Johnson & Johnson name.
Across the Pacific, Japanese conglomerate Toshiba will split itself into three companies. Toshiba is a 146-year-old company that makes semiconductors, rice cookers, elevators, air traffic control systems, personal computers, nuclear reactors, microwaves…I could go on, but you get the idea. Toshiba announced this month that it would split into three businesses, one each focused on infrastructure, semiconductors, and electronic devices.
Now for the shocker, General Electric, the business-school case study of a conglomerate. Compared to Toshiba and J&J, GE is a relative newcomer. The company was formed from a merger in 1892; one of those companies in that merger was Thomas Edison’s electric company. In the more than 125 years since , GE has made airplane engines, train locomotives, washing machines, and more. It has owned a radio network, a television network, and a movie studio. For many years, it was also a major lender.
But over the next several years , GE, too, will break up into three separate companies. This, though, is a bit of an anticlimax, as the company has been slowly unwinding its far-flung businesses for quite some time. When it officially breaks up, it will become three companies where one will focus on aviation, one on health care, and another on energy.
At first glance , it seems that a chapter in business history is closing. For much of the twentieth century, conglomerates were in fashion. A conglomerate is a single company that has many types of businesses. The logic behind these conglomerates is this: assemble a team of the best managers in the world, and then let them run all manner of business units. The large conglomerate, as it’s called, will do better in the market than if these business units were all separate companies without the conglomerate’s secret sauce.
This makes a certain amount of sense. A large company that makes airplane engines and toaster ovens can more easily balance the ups and downs of individual markets. Plus, a larger company can mix and match talent more easily, shifting talented managers to where they’re needed most.
Investors, too, liked conglomerates. An investor could buy a share of General Electric and get exposure to multiple lines of business. That was an advantage in the days before mutual funds and commission-free trading made assembling a stock portfolio easy.
But the logic behind conglomerates began to fall apart in the latter part of the twentieth century, when it became clear that these large companies were slow to embrace change, had high costs, and lost focus. Does it make sense that the same company that developed your COVID vaccine, Johnson & Johnson, also makes the Band-Aid you put on your arm after injecting it?
Smaller companies focused on just one business line are valued more highly in today’s market. In fact, the reason these three conglomerates announced breakups this month is that their companies would be more valuable apart than together. In other words, the stock market values conglomerates at less than the sum of their parts.
So, are we ready to declare the end of the era of conglomerates? Not so fast. A new breed of conglomerates is emerging, but the twenty-first-century version is based on data, not manufacturing. Amazon, for instance, is an online store. But it also makes some of its own products, like batteries. It owns a grocery chain, Whole Foods, and is opening retail stores. Amazon also runs delivery and warehousing services for other retailers. And Amazon Web Services is the world’s leading cloud computing provider.
And it’s not just Amazon. Alphabet, Inc., the parent company of Google, is investing in self-driving cars. Tesla makes electric vehicles, but also batteries for electric cars. Apple makes computers and phones but also streams music and movies. The iPhone maker is also expanding into online advertising.
The difference is that today’s conglomerates take advantage of big data. The more data that can be accumulated, the more uses the company can put that data to. Expect the next generation of conglomerates to be data-focused, not product-focused.
Any more breakups?
What do you think, are there any more breakups on the horizon? Some people say 3M is a potential to break up in the future. Other big conglomerates include Hewlett-Packard and IBM. A lot of those companies have been slowly unwinding, selling off non-core businesses over the years. HP split into two businesses years ago. IBM is focused almost entirely on services these days.
A lot of the big conglomerates that are left are focused, if not on one product line, then at least on one sector. Honda makes cars, motorcycles, and engines. Proctor & Gamble makes consumer products. Nestle makes food and beverages. There aren’t too many conglomerates left that do a little of everything.
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