Conglomerates, we’re just not that into you

The point of breaking up conglomerates is pretty well moot if one considers the private property aspect of things. Private companies are the private property of either the owners or the stockholders. Now, we have certain anti-trust laws in place to help deter monopolization, service bundling, price discrimination and market concentration. Look at what the anti-trust legislation has given us: a legacy of turning efficient operating companies into less efficient, higher cost (read higher price) companies. Now we want the state to get involved with conglomerates for the “good of society”? I would choose to have the state back out and let truly free markets determine who is fit to give us our daily quota of satisfactions. Also: why is the only good monopoly a state sanctioned one?

I am surprised at you Not Even. There is much more here than whether financial institutions (themselves “economic entities”) are inept. The bigger issue is the focus of the CEO and top management. Should they concentrate on running a good company that produces profit by applying itself to what it does well and thereby producing respectable returns to their stock holders well into the future, or do they concentrate on managing the stock price directly (which often results in a short term perspective).

Lets look at Enron. They were a well run company when top management focused on managing a company. When that changed to managing the stock price, they became a conglomerate with a corporate culture of doing wahtever it took to make the balance sheet look good in order for the stock price to continue to grow faster than the market. For a few years these guys were hailed as great leaders and geniuses. However the real complexity of the entity then made it easy to fabricate and hide the “off balance sheet investments” along with the other errors and wrongdoing that led to the company’s demise.

This is an extreme example, but the problem here was not ineptitude on the part of financial institutions, but weaknesses not uncommon in conglomerates.

There are certain economies of scale for big companies, but that is all lost when the company become too diversified to realize what is its core business. I personally believe that during the last decade too many companies got greedy and followed a bandwagon effect of doing what everyone else was doing, which was grow by merging and acqusitions. Now that the economies is in a downtown the big companies are forced to slim down, which means many people will lose their jobs and further exacerbate the economy.

No. Ineptitude on the part of financial institutions should not be the grounds for determining the viability of an economic entity.

Probably, but we need more data. There is a raft of research about the pitiful success rate of mergers; the vast majority of them produce losses for shareholders of the acquiring companies. The shareholders of the acquired companies appear to be the only consistent winners. Logically, it would seem that spinoffs would reverse this loss of value. So, it would be interesting to see if there is any published research in the ’success rate of break ups’, i.e. does the shareholder value rise for the company that is selling off divisions/assets ?

A lot of companies will need to break up in order to return to simply being able to conduct business well enough to turn a profit.

Conglomerates spend a lot more energy obscuring financial actualities, stifling competition and acquiring more parts then they do practicing good business. This is great for short term (apparent) gains. But in the long run, business suffers from inefficiency, and bad news is always an unpleasant and huge surprise.

First, I think the question is not “should big comglomerates be broken up?”, but “should big conglomerates break up?”. The former implies that the breaking up would be done by some outside force or agency, while the latter makes it clear that it is a management/policy decision to break up, based on sound business practice.

Yes, some of these conglomerates should break up. GE should and the corporate name should remain with the consumer electronic business. GE is a classic example of the grow at any cost. At some point their top management stopped managing the company to maximize the return to investors and skipped to managing the stock value. As a result they went out and bought growth in other industries with little relation to their core expertise. Now they want to divest thenselves of their consumer electronics business, the very thing that brought them to the party. Hopefully, if they break up the management of the resulting smaller companies will return to managing a good company rather than managing stock prices.