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With industrial conglomerate DowDuPont ultimately finalizing its split – is it a further indication for the end of the conglomerate era?


  • Overview of the slow down and split of conglomerates
  • Details of the split for DowDuPont
  • Future outlook on conglomerates

 

The business model that a single company can manage diverse businesses well in the form of a conglomerate seems to have taken a back seat for some of history’s most successful industrial conglomerate giants. It was back in the 1980s and 1990s that massive conglomerates were all rage, and companies went on for aggressive mergers and acquisitions and also underwent integration in the value chain to handle a wide range of customer needs. But today, conglomerates around the world appear to have given way to pure players, which have become more dominant in markets where they operate.

In recent years, conglomerates across the world have seen a slowdown in their performances (much unlike their hay days) and thereby, forced them to split and take new approaches in order to sustain. Few mega industrial conglomerates that have split to become more focused companies include; United Technologies, which split into different companies and includes the aviation business, Carrier and Otis. Even Danaher (where United Technologies has a stake) decided to split further to become more focused. General Electric split into GS Healthcare, GE Transportation and even Baker Hughes, a GE company is going for a more synthesized operation by selling off chunks of its business. Honeywell International also spun into two companies; Garrett Motion and Resideo Technologies. Hence, from the trends that have been observed lately; conglomerates will be forced to reinvent in order to survive.

One of the largest mergers in the past decade is facing a similar fate. DowDuPont since the merger between Dow Chemical and El du Pont de Nemours (2014) has been facing some tough times and is not performing on expected lines. Numbers will give more perspective to the performance as the two companies have eliminated 18,000 jobs since they came under the hedge-fund managers in 2014. They have closed, sold or spun off about 82 factories since the merger, leaving the company with about 441 factories in 2018. Research spending, which is crucial for such companies to keep abreast with the latest technology and offerings has been down by more than 40 percent at about $2.1 billion (2018). Even the capital expenditure fell by one-third to $3.8 billion. Additionally, since 2014 both the companies have been buying back their shares to increase stock prices while issuing as many new shares, including insider compensation, spending an overall of more than $3 billion. Both firms have lost value of around $40 billion since the merger instead of gaining more valuation as predicted earlier.

DowDuPont, one of the largest industrial conglomerates (sales of about $86 billion [2018] makes it larger than any other company in its line of business) was formed with the combination of Dow Chemical and El du Pont de Nemours in a $130 billion merger. Further, from the very beginning, the plan was to break the newly formed company into three business entities. The newly formed company was viewed as a way to complement its operations in agriculture, materials and other speciality products thereby, increasing its scale and the merger was meant to take advantage of the synergies. The benefits were then expected to pay off as the company split into three separate entity as was planned. But the benefits that were viewed never materialized and the company saw its share prices nearly unchanged ever since the company announced the plan for a strategic split about four years ago, right when it merged. The company has now finally split its long intention of three entities into three different companies; Dow Inc., which is already trading as on April 2019 and is dedicated to commodity chemical production; DuPont its speciality chemical producer; and Corteva, which is dedicated to agricultural chemicals. Currently, Dow Inc. is worth $49.33 per share with a market cap of $36.9 billion, DowDuPont is trading at $74.18 per share with a market cap of $55.5 billion and Corteva is trading at $28.8 per share with a market cap of $21.6 billion (figures as of 3rd July 2019).

Though all the three lines of businesses have been streamlined and will be independently managed going forward, it might take years before the investors will see a growth in their valuations.

At present, as a business model, conglomerates and generalists are viewed as somewhat difficult to manage and since company-wide decisions and re-inventions will have to be very swift in the current market scenario, these are not the most ideal structure for an organisation. Evolving economies also introduces new challenges and only the most sustainable players will flourish. Thereby, it becomes more crucial for conglomerates to trim down their portfolio to a smaller set of leading businesses. But there are certain exceptions and some conglomerates have found a way around and are sustained by incorporating new and improved capabilities along with the advancement of technology. These conglomerates have actively re-shaped their business portfolio, evolved and taken up the challenges and fine-tuned their operations by incorporating necessary changes and proved otherwise. Technically, conglomerates are not completely off the market. They still very much exist such as the Berkshire Hathaway, Reliance Industries and the Japan Post Holdings, which are some of the largest companies in the world by consolidated revenues and are still very successful. It is just that there is a new breed of conglomerates, which are technology sector focused and have taken the world by a storm. The notable names include the Alphabet, Apple, Amazon, Tencent, Baidu and Facebook. These ‘new conglomerates’ have a different drive as compared to the traditional conglomerates. It is well agreed that these companies also have a very diverse portfolio ranging from healthcare, consumer goods, autonomous driving to both augmented and virtual reality and gaming. But it is also worth noting that the core fundamental driver for all these companies is digital technology and the use of data analytics, and they have been capitalising on these drivers very successfully.

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