A conglomerate is a large corporation composed of several independent businesses, sometimes operating in unrelated sectors. One company typically holds a controlling stake in various smaller firms that conduct operations independently but under the parent entity’s umbrella.
Key Takeaways
- A conglomerate is a corporation comprising several independent businesses.
- The controlling company owns stakes in smaller businesses operating independently across different industries.
- Conglomerates form through various means like mergers, acquisitions, or expansions.
- This corporate structure can diversify business risk across multiple markets.
- However, conglomerates can grow too large, leading to inefficiency.
Understanding Conglomerates
Conglomerates are expansive parent companies with smaller independent entities under their control, potentially spanning diverse industries. Each subsidiary functions autonomously but reports to the senior management of the overarching parent entity. This ensures both diversification of risk and geographical reach.
Participating in various markets helps conglomerates hedge risks associated with mono-industry operations. Cost efficiencies emerge from shared resources across subsidiaries. However, oversized conglomerates may face inefficiency problems—a phenomenon dubbed the “curse of bigness.”
Modern conglomerates specialize in numerous fields, including media, manufacturing, and food. Take a media conglomerate: it might start with newspapers, acquire TV and radio stations, and incorporate book publishing into its portfolio. A food conglomerate might expand from selling chips to owning soda brands and diversifying into other food products through acquisitions.
How Conglomerates Come to Exist
Conglomerates emerge through various strategies, including acquisitions, organic expansions, and industry extensions.
Acquisitions
Acquisitions involve buying other companies. For instance, The Walt Disney Company’s merging with the American Broadcasting Company (ABC) in 1995 represents a classic conglomerate merger, combining talents, assets, and resources.
Expansions
Companies may organically restructure, creating a parent entity to manage smaller firms. Alphabet Inc.’s restructuring of Google in 2015 exemplifies this—isolating core operations from rapidly diversifying ventures.
Extensions
This involves expansion from a singular business into new areas—a history reflected in Berkshire Hathaway’s transformation from textile mills to a versatile holding company under Warren Buffet.
Combination strategies intertwine these approaches, as seen with LVMH, a French luxury conglomerate combining Moët \
& Chandon with Louis Vuitton.
Benefits of Conglomerates
Conglomerates offer extensive advantages:
- Diversify risks across multiple industries.
- Utilize shared resources to reduce costs.
- Access internal capital markets to fund growth.
- Immunity from hostile takeovers through growth.
Disadvantages of Conglomerates
However, managing a conglomerate poses challenges, including:
- Potential conglomerate discount, reducing the value of conglomerate stock.
- Inefficiency and complexity in management.
- Lack of financial transparency, leading to investor distrust.
Examples of Conglomerates
Berkshire Hathaway
A leading example of a well-managed conglomerate. Warren Buffet strategically allocates capital while subsidiary companies operate independently.
General Electric (GE)
Originally an electronics company founded by Thomas Edison, GE expanded into energy, real estate, finance, media, and healthcare through owning and managing distinct yet interlinked firms.
Conglomerates in Different Countries
Worldwide, conglomerates differ in structure. In Japan, they follow the keiretsu model, centered around a core bank, offering stability against market volatility. Korea’s chaebol describes family-owned conglomerates with presidencies passed down through generations, exemplified by Samsung and Hyundai.
Biggest Conglomerate
As of April 2022, Reliance Industries is the largest global conglomerate based on market value, at $226.2 billion.
Are Facebook and Amazon Conglomerates?
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Facebook (Meta Platforms Inc.): Despite some debate, Facebook is seen as a conglomerate due to acquisitions of Instagram, WhatsApp and more.
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Amazon: Though not fitting the traditional conglomerate mold, it’s metaphorized as a “new-economy conglomerate”—bringing diverse acquisitions like Whole Foods and Twitch under an expansive e-commerce and digital umbrella.
Conclusion
Conglomerates represent a unique corporate structure characterized by diversity, widespread industry involvement, and substantial financial clout. Whether through acquisitions, expansions, or strategic extensions, they epitomize the dynamic strength of modern businesses.
Related Terms: subsidiary, parent company, mergers and acquisitions, multinational corporation, holding company.
References
- D23. “American Broadcasting Company”.
- Alphabet-Investor Relations. “2015 Founders’ Letter”.
- The New York Times. “Textile Concerns Planning Merger; Berkshire Associates and Hathaway Manufacturing Agree on Terms–Vote Set”.
- Csinvesting. “Buffet Partnership Letters 1957 to 1970”, Pages 90-95.
- LVMH. “Milestones”.
- LVMH. “Other Activities”.
- Google Books “The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s”, Page 154.
- Berkshire Hathaway. “Berkshire Hathaway Inc”.
- The Economist. “Keiretsu”.
- The Economist. “Cutting Down the Chaebol”.
- CompaniesMarketCap.com. “Largest Conglomerate Companies by Market Cap”.
- Meta. “Our Mission”.
- Loose Threads. “What is Amazon? Definitely not a conglomerate”.
- The New York Times. “Conglomerates Didn’t Die. They Look Like Amazon”.
