General Electric is to split itself up into three companies in a continuation of a process that has been going on for decades more generally - that death of the conglomerate. In a description of why they used to exist we have this:
What’s more, the cash generated by one division could be used to fund research and development in another.
We would not say that what is about to follow is the entire explanation but we would insist that it’s part of it.
Raising money used to be an expensive operation. Stock and other capital markets were not that liquid. Spreads were wide. The pool of capital was not that deep.
As those people complaining about the financialisation of everything have been saying, the financial markets are much larger now. They’re distinctly more efficient. Spreads are vastly lower - we’ve seen one estimate that stock spreads in New York have declined by two orders of magnitude in the last few decades. This is, of course, at least partially a result of High Frequency Trading.
The influence upon conglomerates is that it used to be sensible enough to keep money within a company and reinvest it within the corporate envelope. Thus disparate lines of business with the cash flow of one financing the next. This has obvious costs in that a structure, management, workforce, optimised for one task didn’t necessarily have the skills - possibly the gumption, or even a clue - to run that entirely different line of business. But that cost of running finance across the corporate boundary made up for that.
Now that cost of raising finance is much lower. So too is the cost of paying out past profits to shareholders. So the cost of specialisation has come down - and so we see more specialisation.
This is exactly the flip side of all those complaints that companies are paying out profits as dividends, performing stock buybacks and so on, rather than investing internally. We have more efficient financial markets now so paying out the gains from one line of business to leave individual investors with the capital allocation decision now makes more sense than it did.
As we say, we’d not die in a ditch to insist that this is the only thing that has been going on. But we’d certainly deploy those logical shovels to dig in on the point that this is partially to largely true.
The increased efficiency of financial markets has meant that we no longer have to put up with the inherent inefficiencies of conglomerates. Or at least less so that we used to. We take this to be a good thing as we generally do about increased economic efficiency.