Everything firms: meet the new breed of conglomerates

Conglomerates. The dinosaurs of the corporate world, aren’t they? Their ancient bones — in the form of stories about Lord Hanson, the raider who was briefly engaged to Audrey Hepburn, and Greg Hutchings, a lover of company flats and private jets — preserved in the glass cases of newspaper cuttings, to be marvelled at by future generations?

Our article on the PR industry mentions Hanson’s failed attempt to take over ICI in 1991, seen as a turning point in the former’s fortunes. Five years later, the company that had been one of the stock market’s most feared predators — swallowing prey including Imperial Tobacco — was itself broken into four. Other conglomerates followed: BTR, Williams Holdings and Tomkins — the last known as the “buns-to-guns” group because it owned both Smith & Wesson and Hovis. In the US, the unravelling has taken longer. Johnson & Johnson, Kellogg and General Electric have spent the past couple of years splitting themselves up.

The asteroid that toppled this breed was a fusion of sharper focus by institutional shareholders and the rise of private equity, with its higher tolerance for debt and turbocharged operating model. So there is an amusing rhyme to the fact that private equity firms are now becoming conglomerates themselves.

Giants such as Blackstone have long since stopped wanting to be known purely for buyouts: the leveraged taking over, re-engineering and selling of firms. They also want to be known as insurers, infrastructure specialists and providers of private credit. Blackstone floated in 2007 and soon after purchased GSO, a sophisticated lending business. In recent years, the trend has accelerated: the Canadian giant Brookfield has bought distressed debt outfit Oaktree, Apollo has bought the life and annuities business Athene, and BlackRock has bought Global Infrastructure Partners, which does what it sounds like. The list could go on for a long time.

Three things have been driving this.

The people who run these firms will tell you that their clients — who oversee big university endowments and the like — increasingly want one-stop shops, where they can choose between a range of products under a single brand. Globalisation may be on the back foot in the halls of Washington and Beijing, but it is still very much alive in the skyscrapers of New York and Hong Kong.

Then there’s the fact that stock markets, where many of these companies are now traded, no longer like the sugar highs and lows of lumpy, transactional income; they want steady, “recurring” revenue. Diversifying is a good way of smoothing it out.

The third factor is paranoia. It takes a brave person to stand still when all around them are rushing to get bigger. Other than the desire to crystallise trouserings for the founders, this was the main motivation for CVC’s listing in Amsterdam in April.

“Everythingisation” has fuelled the creation of the new conglomerates — and not just in private equity. With the same three forces behind it, the advisory world is going a similar way. CBRE used to be known primarily as a broker for buying, selling and leasing commercial buildings. Now, four fifths of its turnover comes from disparate activities such as engineering consultancy and facilities management. PR, too, is in the early stages of everythingisation, with communications firms trying to expand into other areas. FTI Consulting, the big quoted player, has done the reverse, starting out as an arbitration business and expanding into PR through the 2006 acquisition of Financial Dynamics.

A glance at the share prices of three leading new conglomerates in different sectors versus the S&P index shows you how much the stock market has lapped up this strategy. In full swing, trends always feel irresistible — as both the rise and the fall of the old conglomerates did in the 1980s and 1990s.

But it is worth pausing and looking at two industries, banking and accounting, which have been doing the opposite. Under post-financial crisis regulatory pressure, banks have mostly got out of activities such as proprietary trading and racier lending — hence the explosion in hedge funds and private equity. Accountants, under pressure to improve audit quality and minimise conflicts of interest, have been quitting business lines such as restructuring — and, in EY’s case, looking at breaking themselves up.

Momentum usually turns in the end. For now, the acquisition stampede in private equity and advisory services will continue. But watch out for the birth of nimbler competitors and client complaints over conflicts. They might constitute the next asteroid — or at least a few meteorites.

HL: a very private takeover

Hargreaves Lansdown was set up to channel retail investors’ money into the stock market. Now, some 17 years after it floated, the platform is itself leaving the market in a £5.4 billion deal led by CVC.HL has been ailing for some time and needs a revival. But there is something unsatisfying about this takeover. The price, £11.40 a share, is less than half 2019’s peak of £24. CVC and friends have been shy about their plans, speaking broadly about investing in technology and hinting at cutting charges (almost double those offered by AJ Bell).

• What the Hargreaves Lansdown takeover means for your money

There is an option for investors to roll over their stakes, as co-founder Peter Hargreaves is doing with half of his. But the absence of real information about what they would be rolling over into doesn’t help. And it’s technically not very easy. If you are an HL customer who happens to hold shares in HL, you will be able to stay invested in its private incarnation, provided you move them out of an Isa and into a Sipp.

I suspect most will follow Hargreaves’ co-founder, Stephen Lansdown, and take the money — even at a price that would have had them channelling their money in, not out, just a few years ago.