As they expand across multiple industries, big technology firms are starting to resemble industrial conglomerates, many of which are now restructuring.

Boyden's perspectives on the news and trends that are transforming industries

Changing ideas about corporate diversification in the developed world are evident in the restructuring of some of the world’s most established conglomerates. Last year General Electric (GE) announced that it will split into three. Restructuring is also underway at American multinationals Johnson & Johnson, 3M and Kellogg. German industrial conglomerates Thyssenkrupp and Siemens recently completed major divestments. Japan’s Toshiba announced a breakup in 2021, but the plan was scrapped earlier this year.

Concurrently, a new generation of conglomerates is rising, notably in the technology sector. American giants Alphabet, Amazon, Apple, Meta and Microsoft, which together comprise one fifth of the market value of the S&P 500, have all been investing mightily in diversification. Technology executives are quick to distance themselves from the industrial conglomerates that mushroomed over the past century, however. They say their diversification is founded on the profitability of a cohesive digital economy, not the desire for a collection of disparate subsidiaries.

Bundled services and products within a digital ecosystem are strongly linked to one another – take Apple’s virtually inescapable iOS, for example. This interconnectedness, along with access to treasure troves of data, give technology firms economies of scale in product development as well as large, ready-made customer bases for new products.

There are similarities between today’s growing technology empires and old-school conglomerates; for example companies’ more far-flung enterprises are financially dependent on profitable core businesses. Amazon’s cloud computing business, once meant to support its e-commerce marketplace, contributes most of the profits now being invested in entertainment, health, and even space. Alphabet’s search advertising and YouTube businesses pay for its cloud service and X R&D moonshot division.

Private equity firms are also resembling conglomerates as they amass diversified portfolios of epic proportions. The portfolio companies of Apollo Global Management, for instance, employ more than twice as many people as GE. Big private equity firms spent more than $1.1 trillion globally in 2021, and their financial reach is stretching their holdings across multiple industries. But as The Economist points out, their funds have time limits by design. “Eventually, the funds’ managers will be forced to sell the assets and return cash to investors. Underperformers will find themselves unable to raise new funds.”

An important difference between sprawling private equity portfolios and diversified tech giants is that the latter have no such control mechanism. As long as their core businesses continue to generate untold riches, investors have been willing to tolerate their diverse endeavours. But declining returns on capital are becoming less tolerable. As the big five’s profit engines come under pressure, says Emilie Feldman of the Wharton School, investors are questioning the logic of the firms’ portfolios. Having investors and empowered boards to hold them accountable may be in the companies’ own best interests.

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