American Conglomerates: Past, Present and Future
Conglomerates are parent companies that own a number of large subsidiaries. They became popular back in the 1960s with corporations like ITT, LTV and GE, to name a few. In recent years, behemoth American conglomerates have spun off, sold off and pared down.1
However, there are ways to invest in a single “parent company” for exposure to a wide range of holdings. For example, you can purchase stock in Berkshire Hathaway (BRK.A, which currently trades at $400,000-plus per share), a holding company that buys what it believes to be high-value companies in key industries and then improves upon them until they are high-revenue performers.2 Similarly, some hedge funds invest in distressed debt at a steep discount of companies that have filed for bankruptcy — with the anticipation that they will emerge stronger.3
Clearly, these are high-risk, high-reward opportunities, but they do offer investors the potential to buy shares in a “conglomerate” type of fund of diversified companies. If you’d like to discuss ways to take advantage of today’s conglomerate breakups, please contact us.
The newest breed of conglomerate today is dubbed Techglomerate. These consist of large, diversified tech giants such as Google, Facebook and Amazon. These powerful technology companies have scooped up many smaller startups in an effort to reduce potential competition and purchase innovations honed by entrepreneurs.4 Unfortunately, this concentration of power has created a bit of a monopoly that is not highly regulated. Without significant competition, it is difficult for the principles of capitalism to work properly — namely, keeping prices competitive.5
In the pharmaceutical industry, companies like Amgen, a biotech firm, have maintained a patent on the arthritis drug Enbrel for 37 years — 17 years past the standard patent term. Through a series of intellectual property protection filings, the company has earned more than $70 billion from sales of this one drug — a practice that contributes to the high price of pharmaceuticals.6
Just recently, Congress introduced the Platform Competition and Opportunity Act, a bill that would restrict acquisitions in digital markets that eliminate competition and enhance monopolies.7
In lieu of legislated regulation, another option is for conglomerates to break up of their own volition. For example, Johnson & Johnson and General Electric recently announced plans to split their conglomerates into separate companies designated by industry. These recent breakups tend to enhance stock prices, which is a positive sign that this may be a better strategy than awaiting legislative measures. And while diversification can help large companies weather volatile swings across a variety of industries, this new trend recognizes that divestiture may create better value. Recent data has shown that splintering into smaller companies offers the potential for superior operational performance and higher returns.8
Content prepared by Kara Stefan Communications.
1 Greg Rosalsky. NPR. Nov. 23, 2021. “The Conglomerate Paradox: As GE splinters, Facebook becomes Meta.” https://www.npr.org/sections/money/2021/11/23/1057446470/the-conglomerate-paradox-as-ge-splinters-facebook-becomes-meta. Accessed Nov. 29, 2021.
2 Greg McFarlane. Investopedia. May 5, 2021. “How Warren Buffett Made Berkshire Hathaway a Winner.” https://www.investopedia.com/articles/markets/041714/how-warren-buffett-made-berkshire-hathaway-worldbeater.asp. Accessed Nov. 30, 2021.
3 Rebecca Baldridge. Investopedia. Jan. 30, 2021. “Why Hedge Funds Love Investing in Distressed Debt.” https://www.investopedia.com/articles/bonds/08/distressed-debt-hedge-fund.asp. Accessed Nov. 30, 2021.
4 Greg Rosalsky. NPR. Nov. 23, 2021. “The Conglomerate Paradox: As GE splinters, Facebook becomes Meta.” https://www.npr.org/sections/money/2021/11/23/1057446470/the-conglomerate-paradox-as-ge-splinters-facebook-becomes-meta. Accessed Nov. 29, 2021.
5 Jennifer Ryan. Bloomberg. Nov. 9, 2021. “Big Tech’s ‘Natural Monopoly’ Tough to Self-Regulate, Malone Says.” https://www.bloomberg.com/news/articles/2021-11-09/malone-says-big-tech-s-natural-monopoly-tough-to-self-regulate. Accessed Nov. 29, 2021.
6 Jonathan Gardner. Biopharmadive. Nov. 1, 2021. “A three-decade monopoly: How Amgen built a patent thicket around its top-selling drug.” https://www.biopharmadive.com/news/amgen-enbrel-patent-thicket-monopoly-biosimilar/609042/. Accessed Nov. 29, 2021.
7 Dave Kovaleski. Financial Regulation News. Nov. 10, 2021. “Sens. Klobuchar, Cotton introduce bill to halt monopolies among online platforms.” https://financialregnews.com/sens-klobuchar-cotton-introduce-bill-to-halt-monopolies-among-online-platforms/. Accessed Nov. 29, 2021.
8 Knowledge@Wharton. Nov. 16, 2021. “The Breakup of GE and J&J: The End of the Conglomerate?” https://knowledge.wharton.upenn.edu/article/the-breakup-of-ge-and-jj-the-end-of-the-conglomerate/. Accessed Nov. 29, 2021.
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