Are conglomerate back in fashion?

Are conglomerate back in fashion?See the pic for the answer

Google’s reorganisation and Warren Buffett’s latest acquisition have reignited the debate about the merits of the conglomerate model.

FEW management fashions have waxed and waned quite as dramatically as that for conglomerates. From the 1960s to the 1980s business gurus praised conglomerates such as ITT of America and Hanson Trust of Britain as the highest form of capitalism. Today they routinely dismiss them as bloated anachronisms. Companies should stick to their knitting; investors should minimise risk by investing in a portfolio of companies rather than backing corporate megalomaniacs. Peter Lynch, an investment guru, talks about “diworsification”. Stockmarkets routinely apply a sizeable “conglomerate discount” to diversified companies.

Google’s transformation into a conglomerate is being driven by two things: technology and cash. The company believes that information technology will transform all manner of established industries, from transport (driverless cars) to education (online courses) to homebuilding (smart thermostats and the like). This means that the company has to put its fingers into all sorts of pies. Google also has a growing cash pile that gives it the luxury to make bets on all sorts of other projects, such as creating artificial meat or delivering internet access through a network of balloons, that might come to nothing or might change the world.

Other tech billionaires are diversifying, each in his own way. Jeff Bezos’s Amazon is investing in server farms and drones. He also personally owns the Washington Post. Mark Zuckerberg’s Facebook is investing in virtual-reality equipment. Elon Musk, the boss of Tesla, an electric-car maker, has separate companies that are investing in space travel and solar-energy systems

But it is now clear that you should not apply the same conglomerate discount to all diversified groups. There are now more examples than ever of a new breed of high-performing conglomerates that bear little relation to the bloated dinosaurs of old. Some possess managerial talents that allow them to achieve rapid growth in an era of stagnation. Others are led by multi-talented entrepreneurs with the ability to revolutionise old industries by applying new technologies. Focused companies may still be safer bets for many investors. But the best conglomerates have the patience and skills to end up changing the world.