Conglomerate – Explained

What is a Conglomerate?

A conglomerate is a combination of multiple businesses or different parts of companies that function as a single group. A conglomerate is made up of several firms that are distinct in operations but stringed together to operate under one group. In many cases, conglomerates are large and multinational companies, in this set up, one parent company controls the stake of other distinct firms and businesses. Conglomerates are not restricted to a single industry, it comprises of firms from diverse markets which are often won over through mergers and acquisitions. Each firm or business in a conglomerate operate separately but are controlled by one company and operate under a corporate name.

How Does a Conglomerate Work?

Usually, conglomerates are multi-industry and multinational corporations, that is, they are large and have wide coverage of firms in different industries. Different businesses that make up a conglomerate run independently but under a single corporate name. In a conglomerate, one parent company controls the stake and ownership of all other companies in the group, other companies are called subsidiaries. Oftentimes, they are acquired through mergers and acquisitions. Every market or industry has its risks, operating a conglomerate helps a company hedge the risk of operating in a single market, rather, through diversification, the company is able to reduce risks and maximizes profit. The efficiency of conglomerates is not guaranteed, this is because the larger a conglomerate grows, the lower its efficiency. A conglomerate can emanate from any industry, it expands its reach by acquiring other companies.

Well-Known Conglomerate

Below are examples of most popular conglomerates; One of the biggest conglomerates in the world today is Warren Buffets Berkshire Hathaway that has a significant stake in the finance industry, real estate, insurance, utilities and manufacturing industries. Berkshire Hathaway Inc is well-known and has a prestige when it comes to allowing companies in the conglomerate manage their operations with little or no regulation from the parent company. Another example of a well-known conglomerate is General Electric that has multiple firms and companies in the real estate, energy, finance, healthcare and others. Every conglomerate comprises of firms that work independently but under a corporate name. Despite that the companies have distinct operations, they are connected by the conglomerate.

Benefits of Conglomerates

Not all conglomerates start big, some start by taking little steps before their expansion. A good example is the General Electric conglomerate that was originally founded by Thomas Edison, which later expanded to one of the biggest conglomerates in the world. There are many benefits of conglomerate., the major ones are;

  • The risk, losses or liabilities of one company can be offset by the earnings or profits of another company in the conglomerate.
  • It helps to hedge poor performance of companies in the group.
  • In a conglomerate, the parent company diversifies and is able to effectively utilize available resources and reduce costs. ]conglomerates enjoy access to internal capital market .

Cons of Conglomerates

  • The efficiency of a conglomerate can be impeded when it grows in number of companies. When a conglomerate is very large in company size, its efficiency will be reduced.
  • The value of stock owned by conglomerates is affected by their size.
  • Conglomerates often experience the problem of non-accountability, non-transparency and other management issues due to their large size.
  • Conglomerates accrue overhead due to the multiple layers of management they have.
  • In certain cases, diversification is a problem for conglomerates because they become more complicated the more they diversify.
  • Regulators, analysts, and investors find it difficult to determine how financially healthy a conglomerate is due to its large size and complex accounting statements.

Conglomerates in the 1960s

In the 1960s, conglomerates enjoyed much popularity given the fact that they are big companies that leverage buyouts easily. It was believed that companies would be more efficient when they are purchased or acquired, in fact. Purchasing a company was seen as a way of redeeming such company. Also, at that period, big companies enjoyed low interest rates and a return on investment. Buyouts were seen as safe investments by financial institutions at that time, so they were willing to lend companies money for the purpose of buyouts. However, much later, it was noticed that purchase of companies does not necessarily mean there will be an improved performance of such companies. This coupled with decline in profits led to the reduction of the number of conglomerates.

Foreign Conglomerates

In Korea, Chaebol is the work used when referencing a conglomerate. This is based on family ownership of companies, in which the president of the conglomerate is one of the members of the family. LG, Samsung, Hyundai, and many others are examples of Chaebol companies. In Japan, a conglomerate is referred to as Keiretsu, this form of conglomerate entails that a parent company owns a portion of another company’s shares and form a conglomerate. A popular conglomerate in Japan that exhibited the Keiretsu model is Mitsubishi.

Related Topics

Other Related Topics