General Electric is divesting its finance business, starting with the sale of $26.5 billion of real estate assets. Back to its roots as an industrial manufacturing powerhouse, churning out jet engines, medical devices, oil drilling equipment and the other heavy equipment. Jeff Immelt finally has reversed the conglomerating surge that made his CEO predecessor, Jack Welch, a revered and legendary figure on Wall Street, on television talk shows, and among the corporate elite. Welch rode a wave of financial deregulation to an ocean of profits; Immelt finds himself drowning in post-crisis financial regulations and wants the safer harbor of the old-time industrial sector. So the age of conglomeration is over, and the advice of Andrew Carnegie (some say it was Mark Twain) is once again fashionable, “Put all your eggs in one basket and watch that basket.” Or is it?
News that conglomerates are no longer in fashion has not reached Omaha, Nebraska, where Warren Buffett’s Berkshire Hathaway conglomerate is home to companies selling insurance (Geico), underwear (Fruit of the Loom), furniture (Jordan’s and RC Willey), transportation services (NetJets and Burlington Northern railroad), ice cream (Dairy Queen), Ketchup and mayonnaise (Heinz and Kraft), and a lot more. Buffett remains on the acquisition trail, the Kraft deal having been completed just last month.
So it is more a case of chacun à son gout than a trend either away from de-conglomeration by GE, or toward it by Berkshire Hathaway, which never adopted the true conglomerates’ view that managerial skills are transferable from industry to industry -- a CEO or CFO in one industry can successfully spread his expertise over other sectors. Buffett leaves the “All Star” managements of acquired companies in place. Berkshire Hathaway’s small, 24-person in-house staff confines itself to picking winners in the beauty contest of companies paraded before it.
In the case of GE, the decision to exit the finance sector is based on a specific set of circumstances in the post-Lehman Brothers era. Its finance arm has not been growing and, more important, it was designated a “systemically important financial institution” by regulators. That means it will be subject to regulations that have caused serious problems for big banks. So GE’s on-going dribble of sales of small financial firms has been changed to a program of take-the-money-and-run. To the delight of buyers Wells Fargo and Blackstone, and of JPMorgan Chase and Centerview Partners, advisors headed for a fee bonanza. Not to mention shareholders. The price of their shares has soared despite the fact that GE also decided to repatriate some of its overseas profits, triggering some $6 billion in additional taxes.
The real “take away” from the GE decision, to lapse into management jargon, is less what it tells about optimal corporate structures than what it tells about the outlook for the business of lending money, which is what GE financial was all about. The regulatory risks run by players in this sector are now obvious -- even the best-managed banks have become involuntary financiers of the Department of Justice, which has separated them from billions in fines, and is now considering how it can appease the liberal base of the Democratic party by bringing criminal actions against individual bankers. And talk that the only way to end “too big to fail” is to end “too big” by breaking up the big banks -- the top five control almost half of all bank assets in the U.S. -- has gained enough traction to force Jamie Dimon, JPMorgan’s CEO, on the defensive. Unthinkable? No more so than breaking up AT&T was thought to be before it was dismembered in 1982, with subsequent benefits for consumers, most notably in accelerated innovation in the telecoms sector. “The regulatory environment today is the most tension-filled, confrontational … of any time in my professional career,” H. Rodgin Cohen told a finance industry conference a few weeks ago. As senior chairman of Sullivan & Cromwell, the law firm of choice for many banks, he knows whereof he speaks.
Yes, there is still money to be made in banking, but profits are harder to come by and less certain in these post-crisis days: first-quarter earnings of such titans as Wells Fargo, America’s largest mortgage lender, and Bank of America disappointed investors. The persistence of low interest rates and regulators’ imposition of higher capital requirements are more than offsetting the cost-cutting efforts of many banks.