The traditional conglomerate structure is under scrutiny, largely due to the systematic undervaluation by markets, known as the "conglomerate discount." This refers to the market treating diversified companies with a blended average valuation, causing high-growth units to be dragged down by slower-growing ones. Activist investors are leveraging this, as seen with Elliott Management's $5 billion-plus stake in a company where they argued for a 51-75% upside by simply removing the conglomerate structure. This indicates that the sum of the parts is often greater than the whole, a fact supported by measurable market data.
The breakup of General Electric serves as a key example. Once valued at $68.8 billion in 2022, its separated entities (GE Aerospace, GE Vernova, and GE HealthCare) are now collectively worth $334 billion by 2026—nearly five times their previous combined value. GE Vernova alone is up 122% post-split, with GE Aerospace up 43% and GE HealthCare up 42%. This dramatic value unlock is attributed to the market finally valuing these businesses on their own merits, proving that the conglomerate model had "hidden" their true value.
Four structural forces are making the traditional conglomerate economically unsustainable: the conglomerate discount itself, the end of cheap capital, the management bandwidth problem, and the increasing power of activist investors utilizing better tools. While some, like Elon Musk and Jeff Bezos, are attempting to build new-age conglomerates glued together by AI, leveraging superior management, data, or operational strategies, this is an ambitious endeavor. AI's ability to provide oversight across a vast empire is acknowledge; however, it also empowers analysts and activists to see through complexity, potentially negating the very advantage conglomerates once held.
Honeywell, another industrial conglomerate, is splitting into three entities by 2025-26 (Aerospace, Automation, and Advanced Materials), with its CEO noting that the value creation from scale in the era of globalization "got maxed out." Even Berkshire Hathaway has invested $10 billion into Alphabet, a tech giant that has expanded beyond its core search business into various sectors, including self-driving cars and longevity research. This suggests a shift toward a new kind of holding company, potentially AI-powered, but the efficacy of traditional conglomerates as portfolio diversifiers is being questioned by shareholders.
