WSJ on Conglomerates

4 February 2011 at 1:56 pm 1 comment

| Peter Klein |

Industrial conglomerate ITT announced in January a split into three more focused companies, one concentrated in hotels and gaming, one in education (technical training centers), and a slimmed-down ITT Corporation containing the remaining manufacturing businesses. This is the second major restructuring for ITT, once the poster child of the conglomerate movement of the 1960s and early 1970s.

The Wall Street Journal’s article of 13 January contains a nice graphic on the firm’s history, including a picture of Harold Geneen, the quintessential “management by the numbers” CEO (click to enlarge). It also includes ruminations on the conglomerate form more generally, about which I have a continuing research interest. Yale’s Jeffrey Sonnenfeld says conglomerates represented “an unholy mix of opportunistic investment bankers, misguided consultants and the vanities of CEOs.” A companion article puts it this way: “Conglomerates blossomed five decades ago, when favorable interest rates made it relatively easy to boost revenue and stock prices with serial acquisitions. But they fell out of favor when the stock increases slowed and investors began to question whether promised efficiencies would materialize.”

But this is not quite right. In fact, the research literature finds little evidence that conglomerate growth was fueled mainly by cheap credit and rising stock prices. Acquisitions were made largely with stock, rather than debt, and there is no clear evidence that acquirers were systematically overvalued relative to targets. The main problem, is is often the case in popular writing on diversification, is the failure to distinguish among different types of conglomerates. Some of them made economic and financial sense, some of them didn’t. (For a more balanced overview and introduction to the topic, I suggest Bhide 1990 and Berlin 1999.)

NYU’s Richard Sylla notes that diversification through the conglomerate form makes little sense for investors, who can do it themselves by holding diversified portfolios. This is true, of course, but shows only that conglomeration is not an efficient means of reducing portfolio risk. To add value, conglomerates must exploit some kind of economies of scope, such as internal-capital-market efficiencies — a challenge, to be sure, but hardly impossible.

Entry filed under: - Klein -, Business/Economic History, Financial Markets, Myths and Realities, Strategic Management, Theory of the Firm.

John Nye on the New Institutional Economics and Economic Development Another Field Experiment

1 Comment Add your own

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Nicolai J. Foss | home | posts
Peter G. Klein | home | posts
Richard Langlois | home | posts
Lasse B. Lien | home | posts


Former Guests | posts


Recent Posts



Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

%d bloggers like this: