Axios Markets

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November 16, 2021

😎 Good morning, and welcome back to Axios Markets!

# of the day: 432, the grams of fat in this very extra Thanksgiving Pie from the good people at Reese's (they also want you to cut it into 48 pieces).

⏱ Today's newsletter is 1,104 words, 4.5 minutes.

1 big thing: Why conglomerates break themselves up

Illustration of a shape of a briefcase compiled of numerous smaller briefcases

Illustration: Annelise Capossela/Axios

Three giant conglomerates announced their breakups in the past week. All of them are seeking to put their recent past behind them, Axios' Felix Salmon writes.

Why it matters: GE, Johnson & Johnson and Toshiba weren't the last of the conglomerates. Giants both old and new remain. (Think 3M or Softbank.) In today's financially optimized stock market, however, the arguments for internal diversification have mostly lost the day.

Driving the news: GE is splitting into three parts; J&J is splitting into two; Toshiba is splitting into three. In each case, the newly independent businesses are going to be a lot easier to describe than the sprawling corporate octopi from which they descended.

The big picture: When a company underperforms on the stock market, there are often calls to break it up. (See Shell for a recent example.) Financial analysts look at how much each of the component parts would be worth as standalone companies and calculate that the current whole is worth much less than the sum of the parts.

  • Senior managers generally resist such moves, but an extended period of disappointing stock returns will weaken their position.

How it works: Companies like GE, J&J and Toshiba generally had four broad arguments for the conglomerate model.

  • Management: The idea was that the breadth of businesses allowed managers to learn from the best in a variety of different companies and countries, giving the company a managerial edge.
  • R&D: The bigger the company, the bigger the research and development budget, and the more opportunities for profit that might come from innovation. If GE came up with an improvement on making a machine spin more accurately, for instance, that could conceivably benefit its turbine business and its jet-engine business, and its MRI machine business.
  • Brand: A strong global brand could engender trust across businesses. If you trust Toshiba's disk drives, you might well apply that same level of trust to its semiconductors.
  • Finances: An internally diversified company tends to have stronger and more predictable cash flows, and therefore a higher credit rating and a lower cost of funds. That in turn can allow it to make investments out of the reach of smaller competitors.

Reality check: Large conglomerates often become bloated and sclerotic, with central offices taking up an ever-increasing proportion of total overhead while producing no revenues. They can also become too big to manage — a syndrome that can often result in massive scandals and lawsuits.

  • GE and J&J have both had to pay billions of dollars in fines for corporate malfeasance. Toshiba became a poster child for bad corporate governance. None of which was good for the overarching brand, at any of the companies.

The bottom line: That which financial engineering brings together, financial engineering can just as easily put asunder.

Bonus chart: Stock laggards

Data: YCharts; Chart: Axios Visuals
Data: YCharts; Chart: Axios Visuals

2. Catch up quick

More market watchers are saying the Fed may need to speed up its tapering process after last week’s inflation print. (Bloomberg)

A growing supply of crude oil could start to ease the rapid rise of oil prices. (WSJ)

JPMorgan sued Tesla, alleging it’s owed $162 million in connection with its Tesla stock warrants. Tesla did not immediately respond to requests for comment after market hours. (Reuters)

3. What workers really want

Illustration of an office chair.

Illustration: Eniola Odetunde/Axios

There are some stark disconnects between what Americans think society values at work, and what they themselves think is important, according to a new survey from the think tank Populace, provided first to Axios, Axios' Erica Pandey writes.

Why it matters: CEOs need to understand what workers really want out of their jobs as they deal with unprecedented attrition amid the "Great Resignation."

The big picture: Populace attempts to discern the difference between peoples' perceptions and beliefs with a unique approach.

  • Its method pushes respondents to choose between priorities — such as the ability to work remotely versus perks like free food at the office — instead of simply stating if they consider a given factor important or not.

Consider this: Americans ranked the importance of the statement "my job is recognized as prestigious” 55th out of 60 factors associated with success at work. But they perceived it to be a top-five priority for others.

  • And although polling indicates that workers — especially younger ones — expect their employers to speak on societal issues like racial injustice and climate change, Populace's latest survey ranks "the organization's leadership takes strong positions on current events” as 57th out of 60. The perception of how much others value this was also ranked 57th.

Of note: In a 2019 Gallup/Populace survey, before the pandemic changed the working world, Americans ranked flexibility to set their own work schedules as the 74th most important out of 76 attributes associated with a successful and happy life.

  • Now, after the pandemic popularized remote and hybrid work, it sits at No. 2, second only to compensation.
  • "A lot of CEOs are seeing hybrid work as a provisional thing, but if you’re not thoughtful about this, you could lose talent," says Todd Rose, president of Populace.

4. Charted: Americans' wealth

U.S. household net worth as a multiple of GDP
Data: Bureau of Economic Analysis; Federal Reserve Board; World Bank; McKinsey Global Institute analysis; Chart: Axios Visuals

U.S. household net worth has soared to a nearly sixfold multiple of the country’s gross domestic product.

  • Not a coincidence: Net worth levels broke away from historical norms around the time the U.S. began its long-running low-interest-rate policy.

Why it matters: The past two decades of growth in net worth are mostly due to the appreciation of assets like real estate and equities — not to the accumulation of savings, according to a new report out from McKinsey Global Institute.

  • This growth has been supported by loose monetary policy “launched against the backdrop of two massive shocks— the 2008 financial crisis and the COVID-19 pandemic,” the McKinsey analysts write.

5. Wall Street's new favorite buzzword

Illustration of a dollar bill with Ben Franklin wearing VR glasses.

Illustration: Rebecca Zisser/Axios

The promise of a "metaverse" is being used by companies across entertainment, tech and gaming to lure developers and excite investors, Axios’ Sara Fischer and Scott Rosenberg write.

Why it matters: While each company defines metaverse differently, the broad concept of bringing people together in a virtual interactive world seems to have taken over the chatter in Hollywood and Silicon Valley.

Driving the news: The word "metaverse" has been mentioned 128 times so far this year during investor presentations, compared to just 7 times last year, according to data from corporate research company Sentieo.

  • Disney, for one, on Thursday shocked Wall Street by telling investors it hopes to connect consumers via "our own Disney metaverse."

The bottom line: Most metaverse visions imagine an interoperable digital environment shared by multiple companies, but most companies are charging ahead with their own plans long before standards have jelled.

  • The tech industry has already seen several waves of investment in, and then pullback from, virtual reality and avatar-based communities in the 1990s and 2000s.

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