Last Updated Jun 12, 2009 7:10 AM EDT
Last year I wrote about e-conglomeration, or the trend of such companies as Google, Amazon, and Microsoft to enter wildly divergent areas of business. I'll repeat something from that post.
The original conglomerates were all the rage in the 1950s and 60s, as University of Buffalo finance professor Michael Rozeff notes, with a single corporation owning dozens of separate companies whose markets and operations had nothing to do with one another. By and large, they had a number of common characteristics:Clearly not all of this is a fit. For example, many of the current tech corporate powers have exceptionally strong balance sheets, with lots of cash in the bank and a reasonable amount of debt. Many are handsomely profitable.
- They sold at premiums;
- Operations were not particularly profitable or safe;
- They carried more debt than the average company;
- They seemed over-valued;
- Analysts had difficult times understanding the wildly diverse operations;
- They were "glamorous";
- The men -- they were all white men at the time -- running them were broadly admired in business, though today few remember them.
But consider some of the other points. Many big tech companies match the characteristics. And, the most important one, is that plenty either have or are jumping into a range of businesses that are outside their core experiences:
- As Michael pointed out, Cisco's UCS is an attempt to get into the server space has not taken off strongly -- not surprising, given that it is attempting to enter an already crowded and consolidated field.
- Cisco also bought Pure Digital Technologies, maker of the Flip video camera, for $590 million. Networking for the home? Maybe. Video conferencing as a network service? Maybe. Consumer video camera? Uh ... no.
- Microsoft finally beat a sluggish retreat from the personal finance software market, which makes you wonder if, when all was said and done, given their market share, whether they made a reasonable return for the total corporate cost of the investment.
- Oracle decided to buy Sun. Although I still think the strategy has potential strength, it is still an example of a company going far afield, from software to hardware. The channel, support, cost, and sales issues are quite different.
- Amazon has gone into cloud computing, trying to leverage the large and expensive infrastructure it had to build for its main line of business. It might seem like a natural until you realize that being a mass retailer and providing hosted computing services to large corporations have virtually nothing in common, other than some physical/virtual tools.
- EMC is pushing to get into the home storage market. Well, at least it's storage, but getting to consumers is a far different set of channel issues and a significantly different financial model.
- Google's push into the apps market is hardly a natural extension of its core expertise of ad-supported search. (And apparently, according to one commenter on a thread of Michael's, the enterprise support, critical to this sort of offering, "sucks", and the offerings are "99% betas".)
- They require investment of time and energy in a significantly different type of business.
- By entering new markets, the initiatives force the companies to develop new skills and new organizations that can deal with a different set of design issues, customer requirements and preferences, and support and service delivery issues.
- Because of the change needed in internal abilities, focus, and market knowledge, each is to some significant degree or other a gamble. And they can leave you scratching your head.
- Some of the product or service areas may generate relatively significant revenue and appear successful. But business extensions aren't autonomous and must work within corporate strategy and managerial focus, or there is a cost to the overall corporation.
To the degree that there are some scary similarities between the tech e-conglomerates and the older conglomerates, it might be well for executives to remember some other characteristics that Rozeff mentions:
- They pay big premiums over market value. (Can you say Web 2.0?)
- The economies of scale that formed the raison d'Ãªtre of the conglomerate were often impossible to achieve because of the premiums paid.
- Company heads were building personal empires, because they were paid based on the revenue they managed.
- A rising stock market (or apparent total revenue) make many strategies look intelligent because the damage is masked.
- Management with experience in one industry didn't necessarily know how to intelligently run a company in another.
Image via stock.xchng user CraigPJ, site standard license.