Is thematic investing putting an end to large conglomerates?

To centralize or decentralize is the never-ending question in the world of large conglomerates. Large corporates have had a tendency to go round in circles when it comes to deciding what drives more innovation, efficiency and ultimately shareholder value. Is it better to go large and pool resources or to split into smaller autonomous companies?

Whilst previous CEO Jack Welsh from GE is known for acquiring more and larger businesses in order to centralize operations, the most recent trend is to decentralize and split up businesses such as the latest announcements by GE, Johnson & Johnson, Toshiba, IBM and many more are demonstrating.

What’s driving this change? In an interesting interview with Bloomberg, GE CEO Larry Culp explains that greater focus by teams, directors with domain expertise, and a talent pool driven by mission and values have been some of the factors that helped the GE board and management make their decision.

But the most interesting comment Culp made was that pure-play investors who may be interested in investing specifically in aviation, healthcare or renewable energy, are currently not investing in GE as a conglomerate even though GE could be world-leading in each of those areas.

By referring to pure-play investors Culp is highlighting an ever-increasing trend of thematic investing and the difficulty Wall Street has with assessing large conglomerates that are difficult to value and don’t always fit a specific theme, trend or ETF.

What is thematic investing?

Thematic investing is what is referred to when investing in long-term trends or themes. For instance, you might be interested in renewable energy and decide to invest only in companies that are dedicated to renewable energy such as Hydrogen. If you invest only in specific companies and funds or into an ETF that is solely dedicated to this theme you are a thematic or pure-play investor. You can also see how it would be difficult to argue that a company such as GE is a pure-play renewable business if they do anything from producing plane parts to medical specialist devices. Even though they might also be building world-class wind turbines.

Thematic investing has been around for a while, but it has recently experienced a boom. Assets in thematic ETFs have hit $133 billion in 2021, up from $27 billion as reported by Jay Jacobs, head of research and strategy for Global X ETFs, who spoke at CNBC’s Financial Advisor Summit.

With global rising concerns about climate change and increasingly informed younger retail investors on the rise, this trend could be here to stay for a while.

What’s the future for conglomerates?

As with any investing and predictions, no one can say for certain, whether splitting up large conglomerates is better or worse for shareholders in the long term. Just like any merger and acquisition, splitting up businesses always comes with a hefty cost attached and can be a slow and disruptive process. A lot depends on the execution and how well it will operate and perform within its own right.

There are benefits to being part of a larger operation, such as pooling of resources and synergies, but when pressed on this point GE CEO Culp was certain that greater focus and accountability beats synergy any given day and he sounds confident that splitting up the businesses will result in success and a greater future headcount.

Nimble, focused, effective resource allocation. These are words often used when explaining why conglomerates are making these decisions. In their official statement, Johnson & Johnson’s Mr. Duato, current Vice Chairman of the Company’s Executive Committee and future CEO similarly commented, “We believe that the new Johnson & Johnson and the New Consumer Health Company would each be able to more effectively allocate resources to deliver for patients and consumers, drive growth and unlock significant value.”

What are conglomerates splitting into?

Johnson and Johnson announced that their New Consumer Health Company would be a leading global consumer health company that will include iconic brands such as Neutrogena, AVEENO, Tylenol, Listerine, JOHNSON’s, and BAND-AID whilst the other business will focus on advancing Pharmaceuticals and medical devices.

GE has announced that it will split into three distinct businesses: 1. aviation, 2. healthcare and 3. renewable energy, power and digital. Whilst the new names and brands of GE are yet to be unveiled, Toshiba has declared a split into three distinct companies: Infrastructure Service Co, Device Co, and Toshiba.

As per Toshiba’s recent announcement Infrastructure Service Co will be focused on realizing carbon neutrality and infrastructure reliance by focussing on power generation and systems for public infrastructure. Device Co is focused on social and IT support with their main focus on semiconductors.

Toshiba itself will be looking to monetize shares in Kioxia, a Japanese multinational computer memory manufacturer by cashing in shares and utilizing Net Operating Losses.

For traders, this means to look out for a number of large and refreshed household names arriving on stock exchanges in healthcare, pharma, aviation and renewable energy in the next couple of years.

If things go according to their current CEOs’ plans, they should be more nimble, efficient, focussed and trustworthy.

Time will tell if their strategy pays off.