In Japan the were called zaibatsus, vast interconnected holding that run mulitple companies through complex cross-ownership. In Europe, the concept still invests with large banks owning pieces of major corporations and sitting on their boards. It extends to companies that are in the same industry. Porsche own a large piece of VW.
It is perhaps an old world concept from Asia and Europe, but, with the rise of private equity, the structure has come to the US.
As The Economist points out, there are some significant differences, at least on the surface, between classic conglomerates and private equity firms. Private equity usually does not want to hold companies for a long period. And, the debt that take on often burdens their operating companies, perhaps too much to allow them to operate properly.
But, what if the private equity firms has forced to hold some of their companies, especially if easy credit disappears and operating results at their companies cannot easily support debt loads.
Then, the game might change consideraably and finding the hideous "synergy" word, and operating efficiencie among companies in a private equity portfolion might become an unintended necessity.
Private equity firm shy away from the "conglomerate" designations because may of the large, multi-dimentional companies like GE have had trouble convince the market that their model works.
But, if the economy and credit markets turn dark, conglomerates they may be.
Douglas A. McIntyre can be reached at [email protected]. He does not own stocks in companies that he writes about.
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