General Electric announced this week that it would divest nearly all of GE Capital, the financial business that had been a major profit generator in the past. The latest strategic shift at GE marks the continued move away from the firm's historic strategy of unrelated diversification. Few true conglomerates (i.e. unrelated diversifiers) remain in the United States. Investors can diversify risk more efficiently than corporate executives. Without true economies of scope, conglomerates could not justify their existence. The argument that governance economies existed did not hold water in many cases, i.e. corporate parents could not argue that they simply had better many management systems through which they added value to each of the business units. For this reason, many conglomerates have broken up over the past two decades. GE remained an exception to the rule for many years. Investors did not push for a breakup when the company routinely outperformed competitors for each of its major business units. The whole seemed clearly greater than the sum of the parts. Governance economies did seem to exist. People raved about the quality of the management systems and the leadership talent at GE. A lagging stock price in the past decade shifted the conversation. Investors begin to ask a question that once seemed unthinkable to ask: Should GE break up? Could the whole no longer be worth more than the sum of the parts?
The divestiture of GE Capital does not end this conversation though. GE has returned to its industrial roots in many ways. It no longer owns a television network or a major financial business. However, it still owns quite a wide array of industrial businesses. Investors will continue to ask the question: Are these businesses worth more together than apart? They will continue to ask: Where are the economies of scope (i.e. the synergies)? Are the governance economies sufficient to justify keeping all the units together? Yes, these businesses are more similar than the portfolio was in the past. However, we still aren't talking about the type of relatedness that we see at a company such as Disney. If performance lags, the questions will continue. GE has moved in the right direction, but the strategy will likely continue to evolve.