Why some of the world’s most famous companies decided to split up

Does the break-up of so many of the world’s largest corporate conglomerates mark the end of an era – or the end of an error? Julian Birkinshaw, vice dean and professor of strategy at London Business School, leans towards the latter view, telling Management Today: “In management, we have always been sceptical of conglomerates – it never seemed particularly sensible to put a number of different companies under a single management structure.” Investors and shareholders increasingly see things the same way, which is why over the past five years some of the world’s most famous and venerable companies have chosen to self-destruct.

The most dramatic setbacks have been at DuPont (which in May announced plans to split into three publicly traded companies, less than seven years after its mega-merger with Dow Chemicals), General Electric (which has already split into three) and Kellogg’s (now Kellanova, which focuses on snacks and other foods, and WK Kellogg, home of the cereal brands).

Similar restructurings have occurred at chemicals giant Bayer (which spun off its materials science unit Covestro), computer giant Hewlett-Packard (which split into HP and Hewlett Packard Enterprise), Whitbread (which sold coffee brand Costa), Kraft (which divested snack maker Mondelez), Thomson Reuters (which divested from financial and risk management firm Refinitiv) and GlaxoSmithKline, which spun off its consumer healthcare business Haleon in 2022, which in turn recently sold its nicotine replacement business outside the US.

Birkinshaw says: “The industrial sector has always experienced waves of mergers and break-ups. The original conglomerate era, for example, dates back to the 1960s and 1970s when companies like ITT existed in the US and Hanson in the UK. In the 1980s and 1990s there was a massive break-up of conglomerates, with companies like ITT, GEC, ICI and Hanson being broken up. This was driven by the growth of private equity, the so-called ‘barbarians at the gates’ like KKR, who made a lot of money breaking up companies and taking the conglomerate discount. Some conglomerates survived, but by the early 2000s most of them were much more focused than before.”

The hill that many of these conglomerates have fallen on – and where others may yet die – is shareholder value. Many diversified corporations have discovered that size does not always improve performance. The supposed advantages – economies of scale, synergies and risk diversification to manage volatility – were often outweighed by the burdens of a larger bureaucracy, which often increased overhead costs, reduced the speed and quality of decision-making and distanced them from their diverse customer groups. For many business leaders, it was an unpleasant surprise that one underperforming division could be enough to convince investors that a conglomerate was less than the sum of its parts.

DuPont’s recent split into water, electronics and industrial materials provides a good illustration of Birkinshaw’s argument about the “corporate discount.” Reuters’ Breaking Insight team has calculated that the company’s electronics and water businesses would be worth $15 billion or more if they traded at the same EBITDA multiple as their main competitors.

In addition, a line must be drawn between related diversification (for example, when Disney acquired the television network ABC) and independent diversification (which Warren Buffett’s conglomerate Berkshire Hathaway has consistently implemented well).

The most disastrous example of unrelated diversification is RCA in the 1960s and 1970s. One of the entertainment industry’s most innovative companies, the corporation suffered huge losses after expanding, largely through acquisitions, into such unrelated markets as computers, carpets, prepared foods and car rentals. One unimpressed analyst joked that the company’s acronym no longer stood for Radio Corporation of America, but for Rugs, Chickens and Automobiles.

CEO Robert Sarnoff, son of founder David, paid the price for his ouster in a 1983 board coup. Today, RCA exists only as a brand. But Sarnoff’s reasoning makes sense. Investors expect growth, and for a company as big in the entertainment business as RCA, some degree of diversification was almost inevitable. And the traditional business model of many American conglomerates was in tatters. One management consultant told me, “The 1950s through the 1970s were the golden age of the ‘inertia company,’ when large conglomerates could grow simply by releasing a new product through their powerful distribution channels, supported by a big marketing campaign. It almost didn’t matter how good the product was. That era is long gone. If you look at a sector like retail and consumer goods, almost all of the growth of the 2000s was driven by insurgents rather than established companies – whether it was Amazon, optician Warby Parker or discounters like Aldi and Lidl.”

The breakup of GE is particularly significant because under Jack Welch, CEO from 1981 to 2001, that powerful corporation embodied the theory that good managers could run any company in any industry. Critics have since suggested that the only tasks at which Welch really excelled were media management (his candor in interviews and books fueled his celebrity cult) and staff layoffs. At an infamous 1991 executive meeting, he fired the CEOs of four divisions. After an ambitious program of diversification (primarily into banking) and acquisitions, he left his self-appointed successor, Jeff Immelt, as Malcolm Gladwell noted in the New Yorker, “a company built of parts that have no logical connection.” GE’s recent breakup of aerospace, energy and health care has added an estimated $200 billion to shareholder value.

Birkinshaw points out that management experts are increasingly skeptical of the idea that bigger is better in a single sector: “A typical example of this is BP, which talks about ‘value over volume.’ In other words, BP recognizes that it should focus on what it does best and not just be big for the sake of being big.”

That’s why, in his view, the deconstruction of conglomerates has only just begun. Any financial turmoil – like the 2008 credit crisis that undid Immelt’s turnaround at GE – can prompt investors, especially activists like billionaire Nelson Peltz, to ask fundamental questions about a company’s purpose and management competence. Even a vague, not necessarily accurate, feeling that a publicly traded conglomerate is underperforming could, Birkinshaw says, leave established conglomerates like Associated British Foods, British American Tobacco, HSBC, Shell, Unilever (which is already deconstructing itself) and WPP vulnerable to a forced change in strategy or even breakup.

That doesn’t necessarily prove that impatient investors are always right. An analysis of 350 spin-offs by management consultancy Bain & Co found that two years later, half of them failed to create value for shareholders and one in four were liquidated. However, the fact that more than half of activist investor campaigns currently calling for divestments or restructurings, according to Barclays research, suggests that when there is a compelling business model for conglomerates, the CEOs in question are failing to pull it off. And that failure could even hurt new conglomerates. As Birkinshaw says, “At some point Amazon will come under pressure to split because it’s probably the most diversified company of all, but first they’ll have to take a stumble.”

Andy Jassy, ​​CEO of Amazon, you have been warned.

Photo credit: Houston Chronicle/Hearst Newspapers/NurPhoto/Gary Hershorn/Getty Images.