It is a multi-industry firm that combines various business units operating in distinct industries into a single corporate group.

Author: Sid Arora
Sid Arora
Sid Arora
Investment Banking | Hedge Fund | Private Equity

Currently an investment analyst focused on the TMT sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a BS from The Tepper School of Business at Carnegie Mellon.

Reviewed By: Adin Lykken
Adin Lykken
Adin Lykken
Consulting | Private Equity

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The Boston Consulting Group as an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

Last Updated:October 3, 2023

What Is a Conglomerate Merger?

A conglomerate is a multi-industry firm that combines various business units operating in distinct industries into a single corporate group.

This corporate group typically consists of a parent company and numerous subsidiaries. In addition, these groups frequently have a significant global presence.

A collection of unconnected companies with a shared ownership structure is the same. Due to the lack of operational activity connecting them, each subsidiary of this group is likely to conduct business independently of its sister companies.

A single set of financial statements for the entire organization is created by consolidating the subsidiaries' financial results.

The process of forming a company conglomerate is referred to as conglomeration. In this process, a single company buys shares in numerous other businesses, some of which may be engaged in similar or unrelated activities.

A business may also create subsidiaries or buy stakes through the creation of intermediary companies. It developed over a long to medium time frame.

Understanding Conglomerate Merger

To create parent-subsidiary corporations, corporate structures, and company diversification, aggregation gained steam in the 1950s and 1960s.

A corporate chain conducts business through many companies in many industry sectors. It also entails international investments in businesses or the establishment of a location for a company abroad.

It aids in scaling up operations and raising financing for corporate growth. These are made possible by low lending rates and open economies.

During a slump or a recession in the global economy, a business group searches for opportunities to buy at steep discounts. In a down market, it also profits from low-interest rates.

Reliance Industries Limited, which operates in various industries, including petrochemicals, telecommunications, and retail, is an example of an Indian commercial company chain.

Reliance Industries, with a market capitalization of $226.2 billion, is the world's largest conglomerate by market capitalization as of 2022.

The managerial, labor and other challenges that can arise from mergers and acquisitions are also avoided with portfolio investments. Unfortunately, the United States was engulfed in a "conglomerate infatuation" in the 1960s, becoming a speculative mania.

These acquired smaller businesses through leveraged buyouts due to cheap lending rates and an ongoing bear-bull market (sometimes at temporarily deflated values).

Ling-Temco-Vought, ITT Corporation, Litton IndustriesTextron, and Teledyne are a few well-known examples from the 1960s. But, again, the key was finding acquisition targets with solid earnings and significantly lower price-earnings ratios than the acquirer.

In a tender offer to the target's shareholders, the firm would pay a hefty premium over the target's current stock price.

Following shareholder approval, these chains typically closed the deal using debentures, bonds, warrants, or convertible debentures as an alternative to cash.

Issuing the latter two would effectively dilute its shareholders in the future, but many shareholders were not thinking that far ahead.

After that, the consortium would combine the target's earnings with its earnings to raise its overall earnings per share. The deal was "accretive to earnings" to use financial terminology.

Because of the era's relatively liberal accounting regulations, accountants frequently got away with using inventive math to determine the firm's post-acquisition consolidated earnings figures.

When the business chain trend was at its height in 1968, U.S. corporations completed a record 4,500 mergers. At least 26 of the 500 largest firms in the nation were bought that year, 12 of which had assets worth more than $250 million.

People who worked for businesses that were either bought by firms or were anticipated to be acquired by them had natural consequences due to all this intricate financial engineering.

Leadership at acquired companies found the process of acquisitions confusing and discouraging; those who weren't instantly laid off found themselves at the mercy of the company's executives in some other far-flung or distant cities.

While many of their purchases were situated in the country's interior, most corporations had headquarters on the West Coast or East Coast of the United States.

The frequent loss of corporate headquarters to mergers, in which autonomous ventures were transformed into subsidiaries of companies with offices in New York or Los Angeles, caused devastation in many interior communities.

For instance, Pittsburgh, United States, lost approximately a dozen.

CEOs at all firms viewed as prime acquisition targets during this era were constantly preoccupied with thwarting takeovers, whether genuine or imagined, due to the fear that such severe consequences for executives and their home cities would result. 

Conglomerate Merger Comprehension

Rapid growth through acquisitions could not continue indefinitely. Their profits started to decline as interest rates increased to counteract growing inflation.

In January 1968, Litton Industries startled Wall Street by posting a quarterly profit of just 21 cents per share, compared to 63 cents for the previous quarter. This was the beginning of the end. But unfortunately, before it became apparent that this trend was passing, it would take another two years.

The stock market eventually realized that the firms' bloated, ineffective businesses were just as cyclical as any other. Their decline "put the lie to the claim that diversification allowed them to ride out a downturn."

It was these businesses' cyclical nature that had initially made them such attractive targets for acquisition. However, company shares after that experienced a significant selloff.

Most companies had been reduced to shells by the middle of the 1970s after being compelled to sell the new firms they had recently acquired to survive.

Later, fresh concepts like concentrating on a company's core strength and unlocking shareholder value took the place of the firm trend (which often translates into spinoffs).

In other instances, companies are established for fundamental diversification purposes instead of falsifying investment returns on paper.

Only when they believed it would boost profitability or stability by sharing risks would businesses pursue acquisitions or open new branches in other industries with this approach.

With plenty of cash, General Electric expanded into the financing and financial services industry during the 1980s, which in 2005 contributed nearly 45% of the company's net earnings.

NBCUniversal, which controls the NBC television network and several other cable networks, was once partially owned by GE. Another prosperous corporation was United Technologies, which was disassembled in the late 2010s.

Rather than buying shares in a company, investors could now more readily diversify their holdings by purchasing a small portion of many different companies through mutual funds.

Another successful consortium is Warren Buffett's Berkshire Hathaway, a holding company that invested in companies in various industries using extra cash from its insurance subsidiaries.

A consortium is frequently a multinational business that oversees operations worldwide. Therefore, no company subsidiary, whether domestic or worldwide, should be responsible for most of its earnings or success.

These usually run up enormous debt when growing their activities and adding new ones, a challenge they commonly encounter. A firm must carefully manage its debt if it wants to grow profitably. Low debt levels boost a company's financial stability and profits. lists General Electric, HitachiEmerson Electric, ITT Industries, and Textron as some of the most dominant global conglomerates.

Many global firms report billion-dollar profit margins.

In a firm, a parent firm owns most of the shares in many smaller, unrelated companies that run separately.

Sometimes a holding firm that focuses on mergers and acquisitions will engage in this process. To build a business chain, the holding company's sole purpose is to acquire smaller businesses.

Examples of a Conglomerate Merger

Japan's conglomerate is known as keiretsu, and it consists of companies that own small stakes in one another and are centered on a core bank.

In some ways, this business structure is defensive, shielding companies from wild stock market rises and falls and hostile takeovers. Mitsubishi is an excellent example of a company that follows the Keiretsu model.

Regarding this, Korea's equivalent is known as chaebol, a type of family-owned company in which family members inherit the position of president.

Who ultimately have more control over the company than shareholders or board members. Samsung, Hyundai, and LG are examples of well-known Chaebol corporations.

Here are six business chains from various parts of the world.

1. Alphabet
In 2015, Google was reorganized into this group of businesses with headquarters in California.

2. Berkshire Hathaway
One of the world's most prosperous and varied businesses, Berkshire Hathaway, is owned by Warren Buffett. It has over 50 distinct companies in various industries, such as jewelry production, plane manufacturing, real estate, and insurance.

3. General Electric
Thomas Edison
 first established General Electric in 1892 as an electronics business. Since then, it has grown into a big corporation with numerous separate divisions that serve a variety of industries, including real estate, media, financial services, and energy.

4. The Walt Disney Company
The most prominent media conglomerate in the world is Disney. Disney has expanded during the past 20 years by acquiring other significant media firms, such as Marvel, 20th Century Fox, Pixar, and Lucasfilm, under the guidance of previous CEO Bob Iger.

5. Mitsubishi
These business chains are known as keiretsu in Japan, where the bank acts as the parent firm and buys tiny shares in several businesses that are all grouped under one roof.

This paradigm is shown by the company Mitsubishi, which consists of the trading firm Mitsubishi Shoji, Mitsubishi Motors, Mitsubishi Trust and Banking, and the Bank of Tokyo.

Advantages of a Conglomerate Merger

These corporations may offer several possible economic benefits for the entities that manage them. The following are a few benefits of a big corporation.

A diverse range of companies in various industries can be a real boon to the management team of corporations.

Other sectors can compensate for poorly performing businesses or industries, and cyclical companies can be matched by counter-cyclical or non-cyclical firms.

Furthermore, companies owned by these have access to their capital markets, allowing for more remarkable company growth.

The parent corporation can reduce costs by using fewer inputs shared across subsidiaries and diversifying business interests by participating in several unrelated businesses. As a result, the risks associated with operating in a single market are reduced.

1. Lower Risk Profile

By diversifying their financial holdings across numerous smaller companies in various industries, firms can reduce their financial risk.

2. Internal capital markets exist

Corporations profit from internal capital markets because they can distribute funds among their businesses. A firm's other businesses, which may be functioning better, may be able to make up for a weaker business's sales or financial market performance.

3. The company companies may develop synergies

Consolidation, in which firms share inputs or resources among their subsidiaries, can lower the operating costs of the numerous businesses that make up a business chain. 

For instance, many companies are vertically integrated, which means they control businesses by providing goods and services for their products at every stage of the supply chain. This means that a company's businesses can assist one another and benefit from every stage of the production process.

Disadvantages of a Conglomerate Merger

History has proven that these can grow so complex and diverse that they become impossible to manage efficiently.

Management layers increase the overhead of their business owners, and depending on how diverse their interests are, the company's attention can be stretched thin.

Investors, analysts, and regulators find it difficult to assess a conglomerate's financial health because numbers are typically announced in aggregate, making it difficult to determine the performance of any independent organization held by a firm.

The lack of transparency may put some investors off.

Many firms have reduced the number of businesses under their planning to a few select subsidiaries through divestment and spinoffs since their peak of popularity here between the 1960s and the 1980s.

Investors and government regulators frequently examine companies for any potential drawbacks. Here are some of those possible drawbacks.

1. Stock value is susceptible to sharp declines

If a company grows too large, its overall stock value may fall below that of its constituent companies. Conglomerate discount is the term used for this.

2. Difficult to manage

If a business chain diversifies too much, management may find it challenging to run the entire organization, raising management costs effectively.

3. Lack of transparency

Since these often announce their financial results in one lump amount, it can be challenging for investors and analysts to ascertain how each conglomerate's separate businesses are faring.

Research and authored by Khadeeja C Abbas  | LinkedIn

Reviewed and Edited by Aditya Salunke I LinkedIn

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