Private equity is resurrecting one of the worst ideas in City history –

Here’s the problem, however. We have seen giant quoted businesses that bring together lots of different companies, lick them into shape, sweat their balance sheets, break them into pieces, reshuffle their management, and re-engineer their cash flow, lots of times before.

Back in the day, they used to be known as conglomerates, and many of them were the biggest beasts in the jungle. The likes of Hanson Trust, BTR and Williams Holdings rampaged across continents, buying up more and more companies, and minting fortunes for their founders and shareholders in the process.

True, they did really well for a while. Buying assets at bargain prices, they could drive up performance and deliver stellar returns for shareholders. And yet, they always ran into two big problems. The first was that they needed bigger and bigger deals to keep on growing. When a conglomerate needs a £500m acquisition to double in size it is not that hard to find a deal. When it needs a £10bn or £20bn deal it suddenly gets a lot harder.

All the conglomerates eventually found themselves stalking bigger and bigger targets. Hanson, for example, ended up trying to buy ICI, then one of Britain’s biggest companies, in 1991, and when that ended in failure the company started to go into decline.

The same was true of all its rivals. Everything has to be scaled up until either there is nothing left to buy that will make any real difference, or else the conglomerate ends up biting off more than it can chew. Either way, the model works when the conglomerate is relatively small. As it grows, it becomes less and less effective – and that is hardly a recipe for sustained success.

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