Conglomerates Are Broken

In September 1967 the cover of Time magazine featured a grinning portrait of industrialist Harold Geneen underneath a banner headline declaring, “CONGLOMERATES: The New Business Giants.” It seemed appropriate for the era. During the ’60s, Geneen had used hundreds of acquisitions to build International Telephone & Telegraph Corp. into a dizzying collection of businesses—everything from Wonder Bread to Sheraton Hotels & Resorts to timberland giant Rayonier Inc., one of the largest private landowners in the U.S. ITT’s constituent parts had little in common beyond their parent. But after being heralded as the cutting-edge model of American business, the giant shrank. Over the next few decades, a series of splits and sales whittled away most traces of ITT, leaving what is today a smallish manufacturer of industrial and aerospace parts.

To Jerry Davis, a business professor at the University of Michigan who studies corporate organization, the decline of ITT wasn’t an anomaly. Conglomerates—aka multi-industry companies or business groups, if you prefer—once provided efficiencies that investors couldn’t get from unsophisticated capital markets. Sprawling outfits such as ITT, Litton Industries Inc., and Ling-Temco-Vought Inc. essentially operated partly as actively managed mutual funds and partly as private equity shops in an age before concepts such as “synergy” and “competitive advantage” chipped away at their raison d’être. Once investors started to question whether deal-savvy managers truly could manage everything from soup to nuts, their fall was swift. “We loved them in the ’60s and ’70s,” Davis says, “and then we hated them.”