The Rise, Fall, And Rise? Of The Conglomerates

Jan. 15, 2021 2:25 PM ET3 Comments
Baruch Lev profile picture
Baruch Lev


  • The old industrial conglomerates are largely gone, but a new breed is emerging.
  • High tech, media, and telecoms are increasingly venturing into unrelated businesses.
  • Investors should be wary of this.

Conglomerates — companies with entities operating in different industries or lines of business ― were in vogue for most of the 20th century. History buffs are surely familiar with the large conglomerates of the 1960s and 1970s, like Ling-Temco-Vought (LTV) with its dozen different lines of business (consumer electronics, tennis rackets, packaged meat, aircraft, steel, etc.), ITT Corp., and Litton Industries. A reporter at the time even gushed that “it is theoretically possible for the United States to become one vast conglomerate.” This came about because most of the mergers in the 1960s and 1970s were conglomerate (buyer and seller operating unrelated businesses), since horizontal (same industry) and vertical mergers were closely scrutinized and often rejected by FTC regulators.

Contrary to the hype, all those conglomerates petered out sooner or later for the simple reason that there was no economic justification for their existence. If an investor wishes to diversify and have stakes in, say, airlines, oil and gas, and insurance, he or she can simply buy shares in companies operating in these industries. Investors don’t need conglomerate companies to do the diversification for them. The alleged synergies and the benefits of “internal capital markets” touted by conglomerate executives turned out to be chimera. Conglomerates didn’t create any efficiencies and they were very hard to manage. They were, in fact, power grab and empire building by executives at the expense of unsuspecting, easy-to-hype investors.

Worse yet, researchers identified a substantial “diversification discount” (loss of value) when they compared the market value of conglomerates with that of similar “stand-alone” (single industry) enterprises. A negative synergy, so to speak, destroying shareholder value. (See, for example, Rajan, R., H. Servaes, and L. Zingales,” The Cost of Diversity: The Diversification Discount and Inefficient Investment,” The Journal of Finance, March 2007. The researchers estimate the

This article was written by

Baruch Lev profile picture
Baruch Lev is an NYU Stern professor of accounting and finance, and coauthor of The End of Accounting and the Path Forward for Investors and Managers (Wiley, 6/27). He has testified before congressional committees, won numerous awards and honorary doctorates, authored five prior books, and published 100+ research studies in top accounting, finance and economic journals. He has been featured in The New York Times, The Wall Street Journal and Barron’s, among other outlets.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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