Breakup wave hastens conglomerates’ end
By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK — Another breakup wave is hastening the end for some conglomerates. Motorola, Fortune Brands and possibly Sara Lee are doing the splits. Now ITT Corp, an offshoot of a three-way split in 1995, is breaking in three again. The financial benefits of specialization have long been in style. But reviving animal spirits explain the current swell of activity.
ITT once did everything from insurance underwriting to defense contracting to baking Wonder Bread. The current ITT, already only a piece of the original accumulation of businesses, has decided it’s still too much of a conglomerate. And investors agreed, sending its stock up well over 10 percent on Tuesday morning with the news of its breakup plan. Sara Lee and Fortune Brands shares have also gained as a result of theirs.
Traditional conglomerates have been persistently out of favor for several decades. It’s hard for managers to grasp too many differing industries at once. Chief executives may over-invest in familiar areas and miss opportunities elsewhere. Valuing these firms is also difficult. Their financial statements tend to be hard to disentangle. And investors struggle in the same way as managers. Take General Electric — few understand everything in the company’s gas turbines-to-credit cards portfolio. So investors often demand an extra bit of safety, a conglomerate discount, to compensate.
The time seems to be right for action. Company coffers are bulging with cash, and executives are searching for acquisitions. So Sara Lee, for instance, should have little trouble selling its sausage business to a rival. Meanwhile, rising equity markets embolden activist investors to buy stakes in underperforming companies like Fortune Brands and push for a breakup. And private equity firms can once again borrow money — but often only enough to buy one business at a time rather than to swallow a conglomerate whole and do the breakup themselves.
Not all the candidates have businesses as obviously mismatched as, say, ITT. Some conglomerates, like United Technologies, perhaps deserve the benefit of the doubt. Though it produces everything from elevators to helicopters, the company has stuck to its manufacturing knitting. Others, like GE and financial giant Citigroup, have some business units that are connected by history but little else. The breakers washing over other conglomerates may yet reach them.