Michael C. Jensen, a Nobel laureate and professor emeritus at Harvard Business School, famously — and successfully — made the case in the 1970s and 1980s that conglomerates like RJR, which owned tobacco and food brands like Nabisco, wasted “billions in unproductive capital expenditures and organizational inefficiencies.”
That is very likely true of today’s tech-enabled conglomerates, too, which are spending, and often losing, tens of billions of dollars annually on all sorts of projects and acquisitions that may or may not turn out to be successful. But investors are seemingly willing to give these new behemoths a free pass in the name of growth and innovation — until they aren’t.
If there is any lesson from the last breed of industrial conglomerates, it is that there is a natural life cycle to most of them.
The model begins like this: A company that is successful in one area turns itself into a conglomerate by using its free cash flow to finance the development or acquisition of businesses in other areas — at first, ones that are similar to their current business, and later often ones that are farther afield. And then the company does this again and again.
When such an economic machine works, it works extraordinarily well. But when any one of the major levers in the machine breaks or even stalls, the entire enterprise comes under pressure. Shareholders start complaining that the sum of the parts would be worth more separately than together.
“You look at companies that got really big in the world, the record is not very good,” Charles T. Munger, vice chairman of Berkshire Hathaway — the world’s largest conglomerate — told investors several years ago.