To be or Not to be (A Conglomerate’s Dilemma)
For those of us who have spent some time in any large corporate, whether healthcare or otherwise, talks about diversification vs talks about ‘focusing on our strengths’ is not a new thing. Most large organizations go through almost cyclical diversification periods-they start with deep, narrow focus, then grow by acquisitions, and then start feeling bloated and that’s when they try to shed off the excess baggage.
Over the last few months, we have seen these cycles play out in both directions in healthcare and this is my attempt to put these things in perspective.
Not to be a conglomerate…
On this side of the equation, quite a few corporates decided to move away from a diversified portfolio, including mainstream healthcare organizations-
- In Feb 2021, Zimmer Biomet, a medical device company with $25 billion market cap, announced spinning off spine and dental businesses, currently grossing about a billion dollars in revenue per annum.
- GSK announced in June 2021 that it will spin off its consumer healthcare business; in 2020, this unit reported ~$13 billion in sales and is being reportedly valued at ~$54 billion.
- In October 2021, Novartis announced ‘strategic review’ of its Sandoz generics/biosimilars division. (this may not count as a proper spin off for 2021, at least not yet!)
- November 2021 saw a spate of announcements, starting with GE announcing healthcare spin-off planned for 2023. GE Healthcare is sized to be a $17 billion business, however revenues have been declining. GE itself has been known for being a typical industry behemoth, selling everything from light bulbs and cars to insurance.
- Next up was Toshiba, breaking up into three businesses, will spin out its energy and infrastructure divisions.
- Finally, and possibly the biggest spin-off news of the year, is Johnson & Johnson announcing spinning off its consumer business by creating a new consumer health company, while keeping the biopharma and medical device groups together.
Other side of the coin
This does not mean that big mergers are not happening anymore. In fact, there is definitely a counter-trend of corporates continuing to actively invest in mergers and acquisitions. Here are some big names-
- Google-Fitbit: The year began with Google completing acquisition of of Fitbit, the leading wearable company.
- Microsoft’s $20 billion acquisition of Nuance Corp: Known to be a leader in conversational AI in healthcare, Nuance’s addition is supposed to help Microsoft’s Cloud for Healthcare business
- $17.4 billion acquisition of PPD by Thermo Fisher Sci: Thermo Fisher is known for being in instrumentation, reagents and consumables while PPD is one of the leading clinical research contractors.
- Baxter’s ~$10B acquisition of Hillrom: Baxter is a healthcare company focusing on kidney care, and with Hillrom specialising in connected care and collaboration tool vendor.
- UnitedHealth’s $8 billion acquisition of Change Healthcare: Optum Insights, a part of the healthcare tech leader, will be the new home for Change, a new relatively new entrant on the digital health/information exchange side.
- Excluded from the above list is of course the ever-growing biotech acquisitions by biopharma and mergers of healthcare operations by healthcare systems across the world.
Making sense of all of it
Several industry analysts and observers have commented on all such activities and the tug-of-war between conglomerates vs lean corporate structures. These analyses have taken all shapes and hues, from ‘death of the conglomerate’ through ‘maybe’ to ‘not just yet’. Here are some interesting notes-
- For most analysts, GE’s breakup was inevitable, it was losing value for several decades and not able to work out a better business model keeping all of its diverse units together-
- This alarm of ‘conglomerates are dead’ is not new- Observers announced the “decline and fall of the conglomerate” in 1994 and declared “conglomerates are dead” in 2007. The 1980s wave of corporate break-ups cut the share of large US groups operating in three or more sectors from half to 30 per cent. ITT split in 1995 and Tyco broke up after a scandal in 2006. Yet each had become big enough by 2011 to split themselves up again.
- There appears to be even a rule for investors called ‘Diversification Discount’. It refers to evidence that a conglomerate’s stock price is around 10 percent lower than it would be if the conglomerate were instead broken apart and sold on the stock market as separate companies. It turns out the whole is actually worth less than the sum of its parts. With a conglomerate, 2 + 2 = 3.
- However, these things definitely seem to be cyclical. FT quotes Alexander Pepper, a London School of Economics professor of management.
“It becomes the conventional wisdom that conglomerates are no good and need to be broken up. Then we end up with companies that are so specialised that somebody decides that there is merit in vertical and horizontal integration; ten years later you end up with a conglomerate.”
- We don’t have to look any further than Novartis itself, which is not 20 years into its diversification journey-
Conglomerates, technomerates and platforms (and superapps?!)
All of this conventional wisdom is yet to incorporate the newest phenomenon-the rising heft of the tech giants such as Amazon, Apple and Google. All of the Big Tech has been on a multi-billion dollar acquisition spree-
Many suggests that the technomerates of tomorrow will have a distinct advantage-that of ‘demand-side economies of scale’. Conglomerates of yesteryears benefited from economies of production but for the tech giants, the more customers you have, and the more interconnected services you sell to each, the more each customer is worth to you. This is commonly termed as ‘network effects’ and what it creates is a ‘platform’
Perhaps this is also anticipated in healthcare? According to CB Insights, Big tech has invested in deals worth a cumulative USD 6.8 billion since the start of 2020. According to researchers, Big Tech has many advantages in healthcare-
- The data they already have, aiding them to understand consumers’ needs better;
- Advanced analytics to enable them to deepen this understanding further; and
- The reliance on strong network effects, from leveraging their large consumer base.
From this perspective, spin-offs from healthcare of consumer facing businesses such as those being done by GSK, J&J and Novartis seem a bit esoteric; these pharma companies want to become digital and more consumer-centric, while spinning off the best assets they already have that would help them get a leg-up with consumers!
Perhaps it is no wonder that the departing CEO of Johnson & Johnson-Alex Gorsky, who touted the planned separation of the consumer business, will be joining Apple’s board of directors!
