This week’s news that GE is to demerge into separate energy, healthcare and aviation businesses follows the disposal of GE Capital Aviation Services in March that finally completed the dismantling of GE Capital, finalises the implosion of the business led by Jack Welch between 1981 and 2001.
Shares in GE jumped by more that 10% on the news, suggesting that, even at this stage in the disaggregation of the conglomerate’s activities, owners of GE stock took the view that the corporate entity sitting above the various businesses was destroying over $10 billion in value. To this measure of the destruction of value by the corporate parent of the underlying businesses should be added the $7 billion paid in fees to Wall Street investment banks since 2000, of which $2.3 billion related to M&A advice and $3.3 billion to fees related to bonds (not unconnected to the parent company’s top executives about the corporate structure).
The FT staff’s covering story commented that “investors welcomed the move, which will make it easier for them to decide which of the businesses they want to back.” We have moved a long way from the 1970s and 1980s approach to corporate strategy captured by the BCG 4 box matrix with its Stars, Dogs, Cash Cows and Problem Children and the idea that at a corporation could create value by shifting resources between the business in these quadrants. Jack Welch’s GE, aided by McKinsey, used a 9 box matrix, but the essence was the same.
The FT’s Brooke Masters has written a first class piece reflecting on the conglomerate cycle.[1] She cites the LSE’s Alexander Pepper: “It becomes the conventional wisdom conglomerates are no good and need to be broken up. Then we end up with companies that are so specialised that somebody decides that there is merit in vertical and horizontal integration. Ten years later you end up with a conglomerate”. Brooke Masters further observes that “the conglomerate’s resurgent appeal lies in the normal ambition to improve couple with a hubristic assumption that good managers can manage anything. Entering new business lines seems attractive new business lines seems attractive when competition rules prevent dominance in a single sector. Cynics note that chief executive pay and influence expands with company size.”[2]
The Escondido Framework approach to the conglomerate is to think of the corporate centre as a business in itself, distinct from the portfolio of businesses that it manages. Jack Welch’s GE was in the business of managing a portfolio of activities, allocating capital, buying and selling business according to a number of guiding principles (such as only buying or selling businesses that could demonstrate that they were number one or two – generally on the basis of market share – in their sector), and rolling out some common approaches (such as 6 Sigma quality) to management across the businesses it owns. How businesses in the portfolio created value themselves for their stakeholders and wider society was incidental. Jack Welch’s GE, the corporate centre of the corporation that bore the GE name, has long since failed to meet the test for an organisation to survive, that it should create value for those with whom it interacts above and beyond what is delivered by markets.
[1] FT 10th November 2021
[2] A number of these features apply equally in public sector organisations, not least in the NHS where I spend much of my professional time.