A conglomerate is a large, diverse company made up of many smaller businesses. Conglomerates are often composed of companies in different industries that operate in different parts of the world. Conglomerates offer a number of advantages, including economies of scale, greater financial stability, and access to new markets.
A corporation is a conglomerate made up of several distinct enterprises. One firm controls a significant portion of numerous small firms that operate independently in a conglomerate. Mergers and acquisitions are two ways to establish a conglomerate. By becoming a diversified conglomerate across several industrial sectors, the parent company may reduce its exposure to single market risk. Economists warn that conglomerates may become too big to function properly.
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What is a Conglomerate?
A conglomerate is a multi-industry company, such as General Electric and NBC Universal, that includes multiple business enterprises operating in distinct industries under the same corporate umbrella. They are generally large and multinational.
To put it another way, a corporation that is composed of different combined companies to sell a variety of goods and services is known as a conglomerate. A conglomerate is sometimes referred to as an “umbrella company,” since it includes several different companies that have been combined together through takeovers or mergers (or both). The majority of conglomerates offer a variety of products and services that aren’t always connected.
The Walt Disney Company, for example, is a media conglomerate that owns and operates businesses in the entertainment, parks, resorts, and consumer products industries.
Conglomerate Meaning
A successful conglomerate is a company whose parts are made up of several smaller independent companies that operate in various sectors. Each subsidiary business operates independently from the other divisions in the conglomerate, but the managers of those subsidiaries report to the senior management team at the parent firm that is responsible for overseeing the various businesses and making sure they are all performing well. A legal entity may also be there as a company or organization that has a separate existence from its owners.
Many conglomerates are thus multinational and multi-industry organizations. Participating in a number of different enterprises might help a conglomerate firm diversify the risks associated with being in only one market. Doing so may also assist the parent company to save money on operational costs while at the same time requiring less manpower.
However, there are times when such a firm grows to be unwieldy and inefficient. In order to handle this, the corporation may sell off its holdings. The “big-company sickness” is referred to as this. Today, there are many various sorts of more specialized conglomerates, ranging from manufacturing to media to food. A newspaper company may begin by acquiring television and radio stations before purchasing book publishers. Potato chips might be the first product offered by a food conglomerate.
The firm may decide to diversify by purchasing a soft drink firm, after which it can grow via the acquisition of other firms that produce different types of air-fried snacks. Hence, the term conglomeration refers to the procedure by which a conglomerate is formed when a parent firm starts to acquire subsidiaries.
Different Ways Conglomeration Occurs
Conglomerate diversification is a strategy employed by large corporations to expand their businesses into new and unrelated sectors. This is done by acquiring smaller companies that are not necessarily related to the corporation’s existing businesses. Media conglomerates are a good example of this type of diversification. These companies often own a number of smaller companies that operate in different sectors, such as television, radio, films, and the internet.
Some of the ways through which companies conglomerate are-
1. Acquisitions
Conglomerates are usually formed via acquisitions, in which one company buys a controlling stake in another firm. The target company then becomes a subsidiary of the conglomerate.
One popular example of acquisition can be found in the energy sector. In October 2016, Exxon Mobil Corporation (XOM) announced that it would be acquiring InterOil Corporation (IOC), an oil and gas exploration and production company with assets in Papua New Guinea, for $2.5 billion. The deal gave Exxon a controlling stake in one of the world’s largest undeveloped natural gas fields.
2. Greenfield Ventures
Conglomerates may also conglomerate via greenfield ventures, which is when a company builds a new facility from scratch rather than acquiring an existing one.
For example, in 2014, Walmart (WMT) announced that it would be building a new distribution center in Texas that would create more than 500 jobs.
3. Mergers
Conglomerates can also be created through mergers, which occur when two companies of approximately equal size combine to form a new company.
One example of a Conglomerate merger is the combination of Dow Chemical and DuPont, which was announced in December 2015. The two companies merged to form DowDuPont Inc. (DWDP), a new company that would be equally owned by shareholders of both firms.
4. Joint Ventures
Conglomerates may also be created through joint ventures, which occur when two companies come together to form a new company that is jointly owned by both firms.
In 2014, General Electric (GE) and Alstom, a French company that specializes in rail transportation, announced the formation of a joint venture that would combine their rail businesses. The new company, known as GE Alstom, was jointly owned by both GE and Alstom.
5. Expansions
Conglomerates can also be created when a company expands its operations into new markets or industries.
For example, in 2014, Amazon (AMZN) announced that it would be expanding its Amazon Web Services (AWS) cloud computing business into the government sector with a new GovCloud region.
6. Extensions
Conglomerates may also be created when a company extends its operations into new product lines or services.
For example, in 2013, General Motors (GM) announced that it would be extending its Chevrolet brand into the bicycle market with the launch of a new line of electric bicycles.
Benefits of Conglomerates
Conglomerates offer many benefits to their parent companies. One of the most important benefits is that they diversify the risks associated with being in only one market. In the stock market, it is understood as portfolio diversification.
Doing so may also assist the parent company to save money on operational costs while at the same time requiring less manpower. Let us have a look at some of the key benefits of conglomeration-
1. Diversification of risks
Conglomerates offer diversification of risks to their parent companies. This is because a conglomerate is usually composed of a number of different subsidiaries that operate in different markets. As a result, the risks associated with being in only one market are diversified. This can be seen as an insurance policy for the parent company, as the performance of one subsidiary may offset the performance of another.
2. Scale economies
Conglomerates can also benefit from scale economies. Conglomerates can also benefit from scale economies. Conglomerate firms often have greater access to capital markets and can spread research and development costs over a larger number of businesses. Conglomerates may also find it easier to diversify their businesses because they can use existing resources and capabilities to enter new markets.
3. Access to new markets and technologies
Conglomerates also have access to new markets and technologies. This is because different subsidiaries operate in different markets and empower the large corporation to further enter into other sectors and increase profitability. As a result, the conglomerate can gain access to new markets and technologies through its subsidiaries and have many shareholders.
4. Synergies
Conglomerates can also benefit from synergies. Synergies are created when two businesses come together and create efficiencies or cost savings by sharing resources, ideas, or knowledge.
5. Less manpower
Conglomerates require less manpower than companies that are not conglomerates. Conglomerates require less manpower than companies that are not conglomerates. This is because a conglomerate can have many different business types under one umbrella, which means that there are many different people with different skill sets working for the company.
Disadvantages of Conglomerates
Conglomerates also have a number of disadvantages. One of the most important disadvantages is that they can be very complex and difficult to manage. This is because conglomerates usually have a number of different subsidiaries that operate in different markets. As a result, the conglomerate may find it difficult to manage all of its subsidiaries effectively.
Another disadvantage of conglomerates is that they may be less efficient than companies that are not conglomerates. This is because conglomerates usually have a number of different subsidiaries that operate in different markets. As a result, the conglomerate may find it difficult to utilize its economies of scale to save on costs.
Finally, conglomerates may be less responsive to change than companies that are not conglomerates. This is because conglomerates usually have a number of different subsidiaries that operate in different markets. As a result, the conglomerate may find it difficult to respond to changes in the market.
Theory of Synergy in Conglomeration
The theory of synergy is often used to explain the benefits of conglomerate structures. Synergy is the creation of value by two or more entities working together that is greater than the sum of the values of the individual entities.
Conglomerates can benefit from synergies between their subsidiaries to save on costs. For example, a conglomerate may have a subsidiary that manufactures cars and another subsidiary that manufactures tires. The conglomerate can utilize the synergy between these two subsidiaries to save on costs.
They also benefit from synergies between its subsidiaries to gain access to new markets and technologies. The aforementioned two subsidiaries can help conglomerates to gain access to new markets and technologies. In the same way, big conglomerates further enjoy upsides from synergies between their subsidiaries to create scale economies, diversify risks, and create new products and services as per their business interests.
5 Examples of Conglomerates
Some of the popular examples of conglomerates around the world are
1. GE
General Electric is one of the largest conglomerates in the world. GE has a number of subsidiaries that operate in different markets. These subsidiaries include GE Aviation, GE Healthcare, GE Capital, and GE Industrial Solutions. Increasingly, taking cross-enterprise synergy into account is essential for investors to properly evaluate future prospects has been done by GE effectively. It has been able to reduce costs and gain access to new markets and technologies by leveraging the synergies among its subsidiaries.
2. Berkshire Hathaway
Berkshire Hathaway is another conglomerate that has a number of subsidiaries that operate in different markets. These subsidiaries include GEICO, BNSF Railway, and Berkshire Hathaway Energy. Berkshire Hathaway has been able to utilize the synergies between its subsidiaries to create value for shareholders. For example, Berkshire Hathaway has been able to use the synergies between its subsidiaries to save on costs and gain access to new markets and technologies.
3. 3M
3M is a conglomerate that has a number of subsidiaries that operate in different markets. These subsidiaries include 3M Health Care, 3M Automotive, and 3M Industrial. 3M has been able to utilize the synergies between its subsidiaries to create value for shareholders. It has also been effective in using the synergies between its subsidiaries for saving on costs and gaining access to new markets and technologies.
4. Fiat Chrysler
Fiat Chrysler is a conglomerate that has a number of subsidiaries that operate in different markets. These subsidiaries include Ferrari, Maserati, and Fiat Chrysler Automobiles. It also has been able to utilize the synergies between its subsidiaries that created value for shareholders.
5. Dongfeng Motor
Dongfeng Motor is a conglomerate that has a number of subsidiaries that operate in different markets. These subsidiaries include Dongfeng Nissan, Dongfeng Renault, and Dongfeng Peugeot Citroen. Dongfeng Motor has been able to utilize the synergies between its subsidiaries to create value for shareholders.
Multinational Conglomerate
An international conglomerate is a conglomerate that operates in multiple countries through unrelated businesses. A multinational conglomerate can benefit from economies of scale and from the ability to operate in multiple markets. Some of the popular examples of multinational conglomerates are-
1. Sony
Sony is a multinational conglomerate that has a number of subsidiaries that operate in different markets. These subsidiaries include Sony Electronics, Sony Mobile, and Sony Pictures. Sony has been able to utilize the synergies between its subsidiaries to create value for shareholders. For example, Sony has been able to use the synergies between its subsidiaries to save on costs and gain access to new markets and technologies.
2. Honeywell
Honeywell is a multinational conglomerate that has a number of subsidiaries that operate in different markets. These subsidiaries include Honeywell Aerospace, Honeywell Automation, and Honeywell Building Solutions. Honeywell has been able to utilize the synergies between its subsidiaries to create value for shareholders.
3. Boeing
Boeing is a multinational conglomerate that has a number of subsidiaries that operate in different markets. These subsidiaries include Boeing Commercial Airplanes, Boeing Defense, Space & Security, and Jeppesen.
Conclusion!
On the concluding note, it can be said that conglomerates are the big business houses that have many subsidiaries working under them and conglomerates have their own pros and cons.
Some conglomerates are able to utilize the synergies between their subsidiaries to create value for shareholders while some face difficulties in handling so many different businesses together. Anyway, it cannot be denied that conglomerates play a very important role in the economy of any country.
In the end, what are your thoughts on Conglomerates? Do you think they are good or bad for the economy? Let us know in the comments below.
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