Source: The Economist:
Conglomerates are back in fashion, but only the best will thrive
FEW management fashions have waxed and waned quite as dramatically as that for conglomerates. From the 1960s to the 1980s business gurus praised conglomerates such as ITT of America and Hanson Trust of Britain as the highest form of capitalism. Today they routinely dismiss them as bloated anachronisms. Companies should stick to their knitting; investors should minimise risk by investing in a portfolio of companies rather than backing corporate megalomaniacs. Peter Lynch, an investment guru, talks about “diworsification”. Stockmarkets routinely apply a sizeable “conglomerate discount” to diversified companies.
To judge by this week’s events, the mood has shifted again. Warren Buffett has been steadily and almost single-handedly restoring the popular appeal of conglomerates. And the positive reception given to the latest deal by his investment vehicle, Berkshire Hathaway, shows how he has succeeded. On August 10th the group said it would buy Precision Castparts, a maker of aerospace components, for $37 billion, in the biggest deal in Berkshire’s 50-year history. Mr Buffett boasts of running a sprawling conglomerate that is “constantly trying to sprawl further”. Read the rest of this entry »