- In today’s CEO Daily: Geoff Colvin on the failure of once-trendy diversified conglomerates.
- The big story: U.S.-Russia meeting on Ukraine.
- The markets: No drama.
- Analyst notes from UBS, JP Morgan, and Wedbush.
- Plus: All the news and watercooler chat from Fortune.
Good morning. I’ve watched with great interest the recent news from Honeywell, that the company plans to break itself up into three independent entities (automation technology, aerospace technology, and advanced materials). An activist investor, Elliott Management, had prodded the company to separate its businesses as its stock price went nowhere over the past four years, while the S&P 500 rocketed some 60%. Just maybe the planned separation will finally put a stake through the heart of a terrible business idea that lived far too long: the diversified conglomerate.
The wonder is that it didn’t happen sooner. Diversified conglomerates were a niche business structure that got hot in the 1960s on the theory that wisely chosen but unrelated companies would wax and wane at different times. The parent company would thus ride a smooth upward trajectory, and investors would pay a premium for the stock.
But it didn’t work out that way. If investors wanted a diversified portfolio, they could build their own, buying and selling single-business stocks as they wished. By contrast, conglomerates locked investors into a portfolio which included businesses that they may not have liked. Instead of selling at a premium over the sum of the parts, some conglomerate stocks sold at a discount.
Yet the conglomerate mystique carried on for decades, in large part because of General Electric, arguably America’s most revered company. In 1980, Fortune asked the Fortune 500 CEOs which company they admired most, and the winner was GE—a decidedly diversified conglomerate that had expanded into guided missiles, computers, uranium mining, and much else. Its stock had languished through the 1970s, But then that was a tough decade for everyone.
At that same time, 1980, a company then called Allied, later called Allied Signal, now called Honeywell, started to become a mini-GE. For the following 36 years, its CEOs were all high-performing ex-GE executives (Edward Hennessy 1980 - 1992, Larry Bossidy 1992 - 2002 except for a 14-month hiatus, David Cote 2002 - 2016). And they diversified vigorously; when the company merged with Honeywell, it took that name. For long stretches the company performed well. For other stretches it didn’t.
In recent years the anti-conglomerate view has built momentum among high-profile companies. GE, Alcoa, United Technologies, and Danaher have all broken themselves up. Now that the club includes Honeywell, a component of the Dow Jones Industrial Average, maybe the end is near.
But wait—what about Jack Welch, the GE chief of 20 years who spectacularly outperformed the S&P 500? For that matter, what about Warren Buffett? His company, Berkshire Hathaway, owns a brick maker, a TV station, a jewelry retailer, and dozens more unrelated businesses. In 2015 he proudly declared, “Berkshire is now a sprawling conglomerate, constantly trying to sprawl further.” Don’t those examples show that conglomerates can work well?
For investors, the answer is clear. Even diversified conglomerates can be great investments if they’re run by geniuses—but not if they’re run by anybody else. — Geoff Colvin
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Contact CEO Daily via Diane Brady, diane.brady@fortune.com, LinkedIn.
