It’s a crazy time. Tesla, which last year made only 80,000 vehicles and is still losing money, just surpassed General Motors in market capitalization. GM, by contrast, sold 10 million and earned $8 billion. GM has even beaten Tesla to the compact and mid-size electric car markets. But investors don’t seem to care.
The theory goes that Tesla is focused on the technology of the future, while GM, for all its recent investment in Silicon Valley, is still a conventional car company heavily invested in 20th century practices. There’s some truth to that, but lost in the techno-buzz is a remarkable shift in how financial markets assess corporate structure.
Since the 1990s, Wall Street has frowned on diversified companies. Analysts, doubting that management can oversee different business, have treated those stocks to a “conglomerate discount.” Conventional wisdom has it that diversification arises from executive egos more than real synergies. It’s also just easier to analyze pure-play companies. General Electric, for example, has strong positions in several industries, yet its stock price has long lagged the market.
That focus on focus, however, has gone out the window when it comes to tech companies. Google’s stratospheric rise continued even after it became the Alphabet conglomerate. Apple stopped being a computer company long ago and now competes everywhere from phones and wearables to television, music, and even “mobility systems.” Facebook is getting into virtual reality, cloud computing, and e-commerce. Amazon, besides being the “everything store,” is a leader in cloud computing and data centers, not to mention investing in drones and other delivery systems. All of these tech giants have been busy gobbling up smaller firms faster than Gulf+Western, ITT, and other conglomerates did in the 1960s.
Even lesser luminaries such as Uber are getting their high valuations from assumptions they will thrive far beyond their home industries. As for Tesla, CEO Elon Musk recently merged the auto operation with solar and battery companies. He’s also managing SpaceX and musing about hyperloops and urban tunneling. No one would ever accuse him of focus. So why isn’t Wall Street worried?
One reason is surely the sense that we’re in a temporary phase of technological ferment. It isn’t clear where markets will settle down. Even the giants are nervous that their dominant market shares could collapse if a competitor offers a cooler technology. Nobody wants to become the next Myspace, Blackberry, or Yahoo. So investors are happy to see companies make diverse bets.
But the bigger reason has to do with the nature of management and coordination in the digital age. When ITT was acquiring companies in everything from telecommunications to food processing, it focused on modernizing the their internal processes. A team of executives swooped in with financial and managerial systems that boosted efficiency, but then moved on to the next acquisition. Day-to-day coordination was nil, as headquarters focused on allocating capital and little else. Synergies were non-existent.
Tech conglomerates are very different. They enter only highly digitized businesses, and they invest heavily in sophisticated software platforms. Those platforms can transcend industries, and they can take on most of the work of managing operations. When headquarters is looking for synergies among seemingly diverse businesses, they can work through the platforms. Complexity, which prevented past conglomerates from integrating their operations, falls dramatically.
These platforms are now spreading far beyond the information-based industries, into physical objects. Sophisticated electronics are embedded in everything from factory machines to tractors to watches. Cloud computers and sensors can track the creation and movement of every product and even adjust it according to emerging consumer preferences. Such tight control and real-time information could yield all sorts of benefits across industries, while reducing their complexity.
With these new capabilities, industries are widening in scope. Advanced technology is spreading everywhere and bringing on a boundaryless world, where industries overlap so much they essentially disapear. Wall Street is going to struggle with this shift, since analysts on the non-tech side like the ease of assessing pure-play companies. But eventually it might treat all diversified companies with new respect, not just the native tech ones.
GE, for example, is investing heavily in the internet-of-things and 3D printing to transcend its separate industry operations. CEO Jeffrey Immelt says the company – which joined the Dow Jones Industrials a century ago — is on track to become one of the largest software houses in the world. Maybe that will get Wall Street’s attention. If you can’t beat ‘em, join ‘em.
This blog was originally published online by Forbes magazine on April 18, 2017, at https://www.forbes.com/sites/richarddaveni/2017/04/18/is-wall-street-losing-its-focus-in-a-boundaryless-world/#6e939e8b1507
Copyright Forbes 2017