A column in the Financial Times on Sept. 2 asks, “is the time right for the return of the conglomerate”? In the 1960’s, and later in the 1990’s, it became fashionable for large companies to diversify their businesses by acquiring companies in a wide range of different industries. The idea was based on financial diversification and spreading risk. If retailing did poorly, well, perhaps media and entertainment would offset it. The core of the idea came from a Harvard Business School proposition that management is management — if you could manage an oil business, you could also manage a movie study, because the basic fundamental principles were the same.

This hubris (excessive pride) proved inaccurate. Management is not management universally, and there is a core competency of understanding deeply the industry in which one operates, based on long experience. Many conglomerates failed for this reason. Exxon, for instance, expanded into non-oil industries like high-tech and failed in them. 

But — is it time to revive this conglomerate business model? And if so, what is the rationale?

The reason is simple. A key constraint limiting growth and expansion today is credit and finance. Banks are reluctant to lend, and even when the recovery picks up steam, banks will likely be far more stringent with their loans than in the past. Conglomerates, because of their size and clout and ability to generate cash, will be able to surmount this constraint and supply credit to their constituent businesses. This may prove a key strategic asset. 

Consultant Ian Harnett notes: Companies that generate free cash flow for their group can provide risk capital for more widespread investment, when banks’ risk appetite disappears.

Look for the conglomerate to return. If it does, it will be a wise reaction to the paradigm shift in finance and financial services, that suddenly makes companies become their own financiers.