- July 30, 2022
- Posted by: Ramkumar
- Category: Posts
GE recently split itself into three companies focusing primarily on GE Aviation, GE Healthcare, and GE Power. I had written an article in my blog a few years back on why #conglomerates‘ businesses like GE will need to break up to survive.
Conglomerates spread themselves to multiple businesses primarily through #mergersandacquisitions to reduce earnings volatility and increase their potential #valuations. Although diversification is essential in #modernportfoliotheory, my reason was that investors could do this by investing in multiple stocks rather than diversifying themselves.
The transaction costs associated with investor diversification when compared with the costs and the premiums paid by conglomerates, doing the same, investors in most publicly traded firms can diversify far more cheaply than conglomerates can.
Thus, investors generally assign a #conglomeratediscount when valuing such companies as multiple divisions within conglomerates do not function as efficiently as the overall conglomerate.
My only concern with GE is whether this recent move is too little and too late.