A few decades ago, conglomerates gained traction but in the end it proved to be a failed business model. According to Wikipedia, a conglomerate is “a combination of two more corporations engaged in entirely different businesses that fail under one corporate group.” That model failed because it had been proved that no entity trying to compete in all these different businesses could be consistently better than a company that was 100% focused.
Last week, I read an excellent article about Samsung, which sadly is not traded on U.S. markets. That company seems to be the latest of many successful conglomerates. Think about where it started, building fridges and other electronics. These days, the company is in many ways the top mobile phone manufacturer, it is building TVs, software for its phones, buildings, etc. The company had sales of $179B last year and employs 370,000 people in more than 18 countries. It has been doing extremely well overall and continues to grow both at home (where it is 17% of South Korea’s GDP) and abroad. In fact, its stock has returned close to 25% annually over the past 20 years.
Berkshire Hathaway (BRK.B)
In many ways, Berkshire is the most known of these conglomerates in the financial sector. It has a foundation built on insurance businesses that generate significant cash flow. Then, Berkshire can get into businesses such as railroads that require important capital. It certainly seems like a smart way and returns over the past two decades have certainly showed it. Yes, part of it is Warren Buffett’s genius mind at work but another is him using a corporate structure and instead of paying out dividends, reinvesting the money in a more efficient way.
Are Conglomerates More Efficient These Days?
I’ve been thinking about this and while in a way you could think that building cars, producing electricity and mapping the world could be totally unrelated, a company like Google (GOOG) has been able to find a way to use its strengths in one area to become dominant in everything else. As the planet becomes more connected and more global, it seems like all of these industries are becoming more connected. Google is the ultimate player. It started off with search and quickly expanded into all kinds of online services (video-Youtube, email, storage, software, etc), has expanded into other areas such self-driving cars, maps, mobile phones, clean energy, internet provider, same day shipping, etc. You could argue that a couple of those don’t make as much sense (I’ve argued against the same day shipping for example) but overall, it does seem like Google has an edge in each of those.
While it’s not as diversified, I would argue that Amazon (AMZN) building a global storage and distribution for physical and digital goods, building hardware such as Kindles and more is another type of 21st century conglomerate where the company can sell for years at little to no profit in order to gain market share and eliminate competitors.
The One Key
For both Samsung and Berkshire, the leader has incredible power and vision to see how to best allocate resources. That seems to be the key rather than having paralysis at the top because the units are all competing for dollars and resources. I do think that Google’s new leader, Larry Page, does seem to have what it takes so far and I think it’s clear the same is true for Jeff Bezos.