If recollection serves, it was in 1969 that I was invited by a congressional antirust committee to share my views on conglomerates. International Telephone & Telegraph CEO Harold Geneen had built an $800 million company into a $6 billion conglomerate that owned rental-car company Avis, the Sheraton hotel chain, Hartford insurance and Continental Baking (Wonder Bread). And, at $766,000 per year, had become the highest paid executive in America.
Carnegie and Eggs
I told the committee that two theories were vying for acceptance. In 1885 Andrew Carnegie, the great Scottish entrepreneur whose control of the US steel industry had made him the richest man in the world, told students, “The concerns which fail are those which have scattered their capital, which means they have scattered their brains also…. I tell you, ‘put all your eggs in one basket and watch that basket.’ … It is trying to carry too many baskets that breaks most eggs in this country.”
The Omniscient Manager Thesis
Geneen and conglomerators had a different view. They argued that management skills can be spread across industries. Talented financial officers, or marketing specialists, or CEOs can capitalize on their skills by spreading them across a diverse set of industries, from telephones to bread, jet engines to credit cards. I was more inclined to Carnegie than to Geneen, but it took 26 years and a new CEO to dismantle the IT&T conglomerate, so Geneen can reasonably be said to have carried the day.
As for many years did über conglomerator Jack Welch, who made about 1,000 acquisitions in the process of creating the world’s most valuable company. Expanding on Geneen’s notion that talented executives in central HQ could manage diverse enterprises, it established a “Leadership Institute” where thousands of executives were trained in the operating and strategic arts at an annual cost of $1 billion reports Jason Zweig in The Wall Street Journal. As late as 2008 it was the second largest U.S company by market value. Après Welch, who retired in 2001, the outsize risks GE capital had taken caught up with it, and its market value fell from a peak of $550 billion in 2000 to about $100 billion in 2009.
AT&T Meets Antitrust
In 1984 AT&T, a then-client of my firm, was formally broken up by the federal government. Unlike IT&T (no relation) this was an integrated company – it did the research in its vaunted Bell Labs, populated by scientists and engineers with off-the-charts IQs, manufactured the equipment in Western Electric plants, and provided telephone service through local Bell telephone companies. It was a responsible monopolist, but lagged in providing direct-dial long-distance service, tried to freeze out answering machines, and refused to duplicate the designer-style handsets I brought from France to show to its Western Electric engineers. They pointed out that their black handsets were built to last 75 years, which designer handsets definitely were not. Being engineers working for a company with monopoly franchises that would keep out competitors, they thought unneeded durability more important than catering to consumer tastes and whims.
That changed when the courts ordered the break-up of the company, unleashing one of the greatest revolutions in telecommunications since smoke signals were replaced by the telegraph. Doubt that, and Google the history of telecommunications on your cell phone – from anywhere, no wires needed.
A De-Conglomeration Wave?
- Policymakers once again must decide what to do about companies misbehaving – the so-called internet giants. Here’s a clue from what markets are telling us. Dealogic reports 178 spinout deals worth $800 billion, not counting GE, since 2017. Recent headline grabbers:
- GE (jet engines to finance to plastics) is dividing itself into three separate companies focusing on aviation, health care and energy. CEO Larry Culp, rejecting the Geneen-Welch expansive view of managers’ talents, says the move “heightens focus and accountability”.
- Johnson & Johnson is spinning off its consumer products division ( Neutrogena, Band-Aids, Zyrtec, Tylenol, talc baby powder), while retaining its faster- growing pharmaceutical and medical devices businesses.
- Toshiba, after multiple scandals and recent reports of unethical behavior by several executives, is splitting into separate electronic device and infrastructure companies, with another holding assets in memory chip-making.
Focused Managers and Investors
These de-conglomerateurs say the separate entities can better serve both investors and consumers. Instead of being forced to buy a bundle of enterprises with wildly varying growth and risk prospects, investors can choose the companies most congruent with their risk tolerance. Consumers benefit from more rapid innovation as the CEO of an unleashed Johnson & Johnson medical devices business, liberated from a company dealing with the possible relation of talcum powder to cancer, can make quick decisions concerning product innovation. And the head of GE’s one-time aviation division will be free to decide where to go for capital rather than being confined to competing with the head of the oil division for capital available to the combined operation.
It is not difficult to imagine the heads of the electric vehicle divisions of America’s auto giants wondering what it would be like to be relieved of the legacy costs and bureaucracy of the gasoline-engine division, with its need to pace innovation so as to preserve the value of existing investments and the jobs of unionized workers with the wrong skill sets for an electrified industry. Each division head can easily imagine himself another Elon Musk, brimming with ideas that will emerge from the corporate capita- allocation and decision-making process a mere shadow of their original selves.
Wither Big Tech?
Which brings us to an important policy point: regulation and fines cannot eliminate abuses. One need only know that Mark Zuckerberg is calling for regulation to know that such regulation would be an uneven battle between an internet giant with limitless resources, and a government agency attempting to understand the latest wrinkle in Facebook’s algorithms. And even the biggest fines are manageable by these companies. The $2.7 billion fine recently levied on Google by the EC for multi-year misbehavior comes to a bit less than 2 per cent of its cash currently on hand.
The more effective solution would be to force these companies to do what markets are forcing others to do: divest some operations. Separating Google’s powerful search engine from maps and comparison shopping, might prevent it from leveraging its fairly-won power in search to the disadvantage of independent companies. Forcing Facebook to spin off Instagram and WhatsApp might free them to develop into competitors for the media giant, as Zuckerberg apparently feared. Forcing Amazon to divest its retail arm might prevent it from using third-party data to craft competing Amazon-owned products. I say “might” rather than suggest certainty because all these cases are fact-specific, making broad-brush statements mere starting points.
Exploring and pursuing the possibilities would give President Biden’s new, vigorous trust-busters an outlet for their energies. Without, one hopes, veering into the “big is bad” notion long rejected by the courts.