A conglomerate corporation is a big parent company. It holds stakes in various smaller businesses across multiple industries. By engaging in different markets, these entities enjoy business risk diversification and access to larger internal capital markets1. This strategy leads to significant economies of scale. It also protects against takeovers2. However, their large size and complexity can cause inefficiencies. This is often called the conglomerate “curse of bigness”3.
Conglomerates are versatile, covering media, manufacturing, food, and more1. Their key advantages are spreading risk across diverse areas, reducing costs, and using internal capital for growth. They do face challenges like management complexity and potential stock value discounts. Yet, their strategic diversification helps offset poor performance in one sector with success in another1.
Key Takeaways
- A conglomerate corporation holds stakes in various smaller businesses across different industries1.
- Engaging in different markets helps achieve business risk diversification and economies of scale1.
- Conglomerates can mitigate poor performance in one sector with success in another2.
- Challenges include management complexity and potential stock value discounts, often known as the conglomerate “curse of bigness”3.
- Examples of conglomerates include Berkshire Hathaway, with a significant role in diverse industries, and South Korean chaebols like Samsung and Hyundai2.
Introduction to Conglomerate Business
A conglomerate business is a group of different companies under one big corporation. In 1968, the trend of companies merging hit its peak in the U.S., with around 4,500 mergers. Back then, 10 out of the 200 biggest American companies turned into conglomerates4. Over time, these conglomerates have changed to include companies from various industries. They aim for corporate stability and diversified business ventures.
Berkshire Hathaway, led by Warren Buffett, is a famous conglomerate. It holds major shares in over 50 companies and has smaller investments in many others4. Another example is General Electric (GE), which started with Thomas Edison and grew to include companies in energy, real estate, finance, and more4. These examples show that spreading business across different sectors can lead to growth and stability even when the economy changes.
Conglomerates are created for many reasons, like achieving economies of scale and diversifying business risks5. They mix resources from various industries to improve productivity and profits. Even though they’re sometimes criticized for being inefficient, conglomerates manage to stay relevant across different sectors45. This success proves that their strategy of diversification and adaptation is solid.
What Is Conglomerate Business
A conglomerate business combines different, unrelated businesses under one main company. These businesses usually work on their own but follow the main company’s rules.
Basic Definition
A conglomerate is a big company that owns a lot of smaller ones. These smaller companies run by themselves but the big company keeps an eye on them. Companies like Berkshire Hathaway and Amazon are good examples6.
Structure of Conglomerate
The setup of a conglomerate helps it work in many industries at once. Each part of the company might focus on a different area. But, big decisions come from the top to make sure everyone is moving together7.
Being big allows conglomerates to save money and get easier funding. This helps them make more money and grow. By being in different markets, they can handle ups and downs better6.
How Conglomerates Are Formed
Conglomerates come to life by merging companies, buying other businesses, or growing on their own. They aim to mix different types of businesses, enter new fields, and get bigger benefits from working together. For example, General Electric works in areas like healthcare, energy, and aerospace. This shows how wide the reach of conglomerates can be8.
Acquisitions
Buying other companies is a key way conglomerates are made. This method helps them quickly enter new areas and use the strengths of the companies they buy. A well-known example is The Walt Disney Company buying ABC. This move made Disney stronger and broader in its market reach. Often, buying companies is the chosen path to create diverse and wide-ranging business groups8.
Mergers
Merging businesses is another path to forming conglomerates. These mergers can bring together companies from very different fields. They help companies gain strategic benefits and cut down risks. Take Siemens AG, for instance. Its merging strategy helps protect against bad times in any one industry. This mix and match of businesses make the conglomerate stronger against outside threats9.
Organic Expansion
Organic growth is when companies expand on their own into new areas. Google, for instance, became Alphabet to branch out and reorganize its businesses internally. Family businesses, like Louis Vuitton, sometimes grow by entering new industries or combining with different companies. Growing this way helps companies expand steadily, keeping them strong and stable across various markets.
Advantages of Conglomerate Business
Joining a conglomerate business brings several conglomerate benefits like spreading risk, bigger buying power, and easier access to finance. Diversification helps companies manage risk by mixing their business across different fields.
This method protects them from downturns in any one sector they operate in.
Risk Diversification
Conglomerates shine at spreading risks over various markets. They don’t put all their eggs in one basket, thus reducing their risk10. An example is the Disney-Pixar merger in 2006, showcasing how diversification promotes creativity and growth11.
Economies of Scale
Economies of scale are a huge plus. Being active in different areas allows conglomerates to cut significant costs11. They use shared services, like marketing and admin support, to run more efficiently.
This method helps them spend less money. The Johnson & Johnson purchase of Actelion for $30 billion in 2017 is an example of boosting growth through economies of scale11.
Access to Capital
Conglomerates also get better access to money. They have an easier time finding funds for growth and new ideas, even when the economy is tough. This helps them grow and remain stable over time.
Amazon’s buyout of Whole Foods Market for $13.7 billion in 2017 shows how conglomerates use their financial power to expand11.
The key conglomerate benefits of risk spreading, buying power, and finance access set conglomerates up for success in different areas. By wisely using resources and lowering risks, they build a strong and flexible business model. This model does well in various market situations.
Disadvantages of Conglomerate Structure
Although conglomerates have strategic advantages, they face big hurdles. A major problem is the conglomerate discount. This happens when the market values the whole entity less than its parts. Investors often doubt if management can effectively handle different businesses12.
Running many unrelated businesses increases management overhead. This leads to higher costs and can distract leaders. Conglomerates also deal with financial complexity because of their numerous subsidiaries. This makes financial analysis very challenging13.
Conglomerates can lose focus on their main tasks. To combat this, they might sell parts of their business. For instance, GE plans to divide into three separate companies by 202412. This is to lessen the management challenge conglomerates face.
Inside a conglomerate, the culture can be mixed. Differences in corporate culture are common after mergers. It’s tough to unite different cultures, which can hurt the company’s results12.
Even though conglomerates aim for benefits like diversification, they can’t ignore the downsides. Issues like management overhead and financial complexity are significant. Companies must understand these drawbacks to create better strategies.
Evolution of Conglomerates Over Decades
The evolution of conglomerates has gone through big changes over time. Economic and regulatory factors have played a huge role. 1960s business environment had a major boom in conglomerates because of low-interest rates and fast-changing stock markets14. The Celler-Kefauver Act of 1950 stopped companies from buying competitors or suppliers. This led them to buy companies in unrelated fields14.
Historical Trends
In the 60s and 70s, conglomerates were a big deal in the U.S. economy15. Companies like Ling-Temco-Vought (LTV) spread their wings into many industries, like pharmaceuticals and sporting goods14. But, by the 1970s, high-interest rates and inefficiencies made them get rid of or sell many acquisitions14.
At one point, 20% of Fortune 500 companies were conglomerates. This shows how important this strategy was16.
Modern Day Conglomerates
Today’s conglomerates have seen a lot of changes. Companies like General Electric did well in the 80s and 90s. But they faced problems, especially GE Capital, during the financial crisis16. Now, these companies have to deal with a complex world market and use digitization to stay on top. Yet, by 2010, only 22 true conglomerates were left in the United States, showing a drop in their traditional structure16.
Modern conglomerates are now more streamlined than before. They focus on what they’re best at and use synergistic business strategies to keep making money. They have to keep up with changes in the economy and technology to succeed today.
Examples of Successful Conglomerates
Some top conglomerates show how diversity and smart strategies lead to success. A great example is Berkshire Hathaway. It has made big strides in many sectors. Its $37 billion buyout of Precision Castparts in 2015 is a monumental deal17. In 2009, investing $27 billion in Burlington Northern Santa Fe (BNSF) moved it into the transportation world17.
General Electric (GE) stands as another leading conglomerate. By buying NBC Universal in 2004, GE expanded its reach and found new ways to make money18. This move highlights how GE brilliantly adapts to new business climates.
Looking at global giants, United Technologies can’t be ignored. The 2017 merger with Rockwell Collins for $30 billion shows its commitment to aerospace17. These strategic steps show how big companies can transform through smart mergers.
In healthcare, Johnson & Johnson’s purchase of Actelion in 2017 shows its growth. It strengthened its drug lineup and entered the rare disease arena18. Stories like those of Berkshire Hathaway and General Electric set the stage for other firms worldwide.
Challenges in Managing Conglomerates
Running a big company with many different parts is tough. There are lots of things to manage, which can lead to mistakes and problems with using resources the right way. Let’s look into the big hurdles these companies face.
Management Complexity
Big companies like Johnson & Johnson and General Electric show us two things. Having many ways to make money can help grow steadily. But, it means you have to manage lots of different areas, each needing its own approach19. However, spreading out too much can sometimes lead to big problems. Like how General Electric struggled because it got into finance and then hit hard times during the 2008 financial crisis19.
Transparency Issues
Being open about how the business does is key for keeping investors happy and managing the company well. But, when all the financial stuff is mixed together, it’s hard for investors to see how each part is doing. It’s important to handle this well to keep the company’s actions clear and trustworthy. Also, breaking big companies into smaller, more focused parts can make things clearer for investors20. This can also help attract the best people to work for them, just like how startups do compared to big, slow companies20.
Conclusion
Conglomerates are complex but can bring big rewards and challenges. Through strategic analysis, we see they spread risks and grow thanks to their size. Reliance Industries, worth ₹22620 crores, and Berkshire Hathaway show how diversification works21. Honeywell and The Walt Disney Company prove these business types succeed worldwide22.
Yet, running conglomerates is hard. They often struggle with complicated management and being open about their workings. The Federal Trade Commission points out the various merge types, showing how these companies can overlap and interact23. These issues may lower efficiency and affect how well the conglomerate does.
Thinking about the future of conglomerates, their innovation and flexibility will matter a lot. They must balance the perks of their structure while handling the downsides. This corporate diversification conclusion highlights the importance of being adaptable and smart in governance. Knowing this will help you as you dive into the conglomerate world.
Source Links
- Conglomerate – Definition, What is Conglomerate, Advantages of Conglomerate, and Latest News – ClearTax – https://cleartax.in/glossary/conglomerate
- What Is a Conglomerate? | The Motley Fool – https://www.fool.com/terms/c/conglomerate/
- What Is a Conglomerate Merger: Definition and Examples – https://www.cloudficient.com/blog/what-is-a-conglomerate-merger-definition-and-examples
- Conglomerate: Definition, Meaning, Creation, and Examples – https://www.investopedia.com/terms/c/conglomerate.asp
- Conglomerate (company) – https://en.wikipedia.org/wiki/Conglomerate_(company)
- What Is a Conglomeration? How It Forms, Benefits, and Risks – https://www.investopedia.com/terms/c/conglomeration.asp
- Conglomerate – https://corporatefinanceinstitute.com/resources/valuation/conglomerate/
- Conglomerate in Business | History, Creation & Examples | Study.com – https://study.com/academy/lesson/conglomerate-overview-examples-business.html
- Conglomerate Merger – https://www.wallstreetprep.com/knowledge/conglomerate-merger/
- Conglomerate merger: definition, examples, pros, and cons – https://mnacommunity.com/insights/conglomerate-merger/
- Conglomerate Mergers Definition, Benefits & Examples – https://www.idealsvdr.com/blog/conglomerate-mergers-examples/
- What is a Conglomerate Merger? | Tipalti – https://tipalti.com/financial-operations-hub/conglomerate-merger/
- Conglomerate Mergers: Definition, Purposes, and Examples – https://www.investopedia.com/terms/c/conlgomeratemerger.asp
- Conglomerate Boom: What It Is, How It Works, Example – https://www.investopedia.com/terms/c/conglomerate-boom.asp
- Opinion | Baruch Lev | The Rise, Fall, And Rise? Of The Conglomerates – https://www.stern.nyu.edu/experience-stern/faculty-research/rise-fall-and-rise-conglomerates
- Private Capital: Lessons from the Conglomerate Era – https://blogs.cfainstitute.org/investor/2023/10/04/private-capital-lessons-from-the-conglomerate-era/
- 10 Largest Conglomerate Mergers in History (Top Merger Examples) – https://dealroom.net/blog/largest-conglomerate-mergers-in-history
- Conglomerate Mergers Examples – https://www.devensoft.com/blog/conglomerate-mergers-examples/
- Conglomerate: Exploring the Success of Diversified Companies – FasterCapital – https://fastercapital.com/content/Conglomerate–Exploring-the-Success-of-Diversified-Companies.html
- Why Conglomerates Are Breaking Up · Babson Thought & Action – https://entrepreneurship.babson.edu/conglomerates-breaking-up/
- Conglomerate Meaning, Business Examples, How it Works? – https://khatabook.com/blog/conglomerate/
- Conglomerate | Reasons for Creating Financial Conglomerate – https://www.educba.com/conglomerate/
- The Nature and Significance of Conglomerate Firms – https://scholarship.law.stjohns.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=3467&context=lawreview