Will Indian conglomerates also go the General Electric way?

 Johnson and Johnson, GE, and Toshiba recently announced a split into multiple entities. Do the demands of an emerging market like India require a different approach? Let's find an answer to this question

Conglomerates, and the demerits of being one, are once again in the news. This month, General Electric broke up into three public companies. Experts suggest the development was long overdue. General Electric’s revenue for 2020 was $79.62 billion, a far cry from the $180 billion-plus revenue it booked in 2008. In India too, Vedanta took a similar call of restructuring.

Market imperatives obviously drive such decisions. This is why conglomerates have come to be regarded as dinosaurs in the western world, a relic of a bygone business climate that favored such company structures. Diversification into multiple businesses was once considered to be an effective way to mitigate risk. The logic was that when one industry was in a downturn, another might be thriving. However, this strategy doesn't have many buyers today, at least not in the West anyway.  

But as former Business Standard editor Shyamal Majumdar pointed out in his latest column, conglomerates continue to remain relevant in emerging markets such as India. Majumdar highlighted two important reasons. First, there are too many dwarf companies that fail to make an impact because of scalability issues. And second, diversified business groups have the advantage of low-cost capital, as money earned from performing businesses can be invested in new businesses, which have the potential to become hugely profitable over the long term. 

While on the flip side, even among Indian firms, there is the view that moving away from the conglomerate structure could actually unlock great value. That is what Anil Agarwal-led Vedanta is counting on.