Conglomerate (company)
Encyclopedia
A conglomerate is a combination of two or more corporation
s engaged in entirely different businesses that fall under one corporate structure (a corporate group
), usually involving a parent company
and several (or many) subsidiaries
. Often, a conglomerate is a multi-industry company. Conglomerates are often large and multinational
.
, which allowed the conglomerates to buy companies in leveraged buyout
s, sometimes at temporarily deflated values. Famous examples from the 1960s include Ling-Temco-Vought
, ITT Corporation
, Litton Industries
, Textron
, Teledyne
, Gulf and Western Industries
, and Transamerica
. As long as the target company had profits greater than the interest on the loans, the overall return on investment
(ROI) of the conglomerate appeared to grow. Also, the conglomerate had a better ability to borrow in the money market
, or capital market
, than the smaller firm at their community bank
.
For many years this was enough to make the company's stock price rise, as companies were often valued largely on their ROI. The aggressive nature of the conglomerators themselves was enough to make many investors, who saw a "powerful" and seemingly unstoppable force in business, buy their stock. High stock prices allowed them to raise more loans, based on the value of their stock, and thereby buy even more companies. This led to a chain reaction
, which allowed them to grow very rapidly.
However, all of this growth was somewhat illusory. When interest rates rose to offset inflation
, the profits of the conglomerates fell. Investors noticed that the companies inside the conglomerate were growing no faster than before they were purchased, whereas the rationale for buying a company was that "synergies" would provide efficiency. By the late 1960s they were shunned by the market, and a major sell-off of their shares ensued. To keep the companies going, many conglomerates were forced to shed the industries they had purchased recently, and by the mid-1970s most had been reduced to shells. The conglomerate fad
was subsequently replaced by newer ideas like focusing on a company's core competency
.
In other cases, conglomerates are formed for genuine interests of diversification
rather than manipulation of paper ROI. Companies with this orientation would only make acquisitions or start new branches in other sectors when they believe this will increase profitability or stability by sharing risks. Flush with cash during the 1980s, General Electric
also moved into financing and financial services
, which in 2005 accounted for about 45% of the company's net earnings. GE also owns a minority interest in NBC Universal
, which owns the NBC
television network
and several cable network
s. In some ways GE is the opposite of the "typical" 1960s conglomerate in that the company was not highly leveraged
, and when interest rates went up they were able to turn this to their advantage, as it was often less expensive to lease from GE than buy new equipment using loans. United Technologies
has also proven to be a successful conglomerate.
With the spread of mutual fund
s (especially index fund
s since 1976), investors could more easily obtain diversification by owning a small slice of many companies in a fund rather than owning shares in a conglomerate.
Another example of a successful conglomerate is Warren Buffett
's Berkshire Hathaway
, a holding company
which used surplus capital from its insurance subsidiaries to invest in a variety of manufacturing and service businesses.
, established the most powerful private economic conglomerate in 1920s Europe – Stinnes Enterprises – which embraced sectors as diverse as manufacturing, mining, shipbuilding, hotels, newspapers, and other enterprises.
The best known British
conglomerate was Hanson plc
. It followed a rather different timescale than the US examples mentioned above, as it was founded in 1964 and ceased to be a conglomerate when it split itself into four separate listed companies between 1995 and 1997.
In Hong Kong
, two most well-known conglomerates are the Swire Group
and Jardine Matheson, both are British-owned companies that have a history of over 100 years and have business interests that span across four continents with a focus in Asia. Swire Group
(or Swire Pacific) controls a wide range of businesses, including property (Swire Properties
), aviation (i.e. Cathay Pacific
and Dragonair
), beverages (bottler of Coca Cola), shipping and trading. Jardine Matheson operates businesses in the fields of property, finance, trading, retail and hotel (i.e. Mandarin Oriental
).
In Japan, a different model of conglomerate, the keiretsu
, evolved. Whereas the Western model of conglomerate consists of a single corporation with multiple subsidiaries controlled by that corporation, the companies in a keiretsu are linked by interlocking shareholdings and a central role of a bank. Mitsubishi
is one of Japan's best known keiretsu, reaching from automobile manufacturing to the production of electronics such as televisions.
In South Korea
, Chaebol
is a type of conglomerate owned and operated by a family. A chaebol is also inheritable, as most of current presidents of chaebols succeeded their fathers or grandfathers. Some of the well-known Korean chaebols are Samsung
, LG
and Hyundai Kia Automotive Group
.
The era of Licence Raj
(1947–1990) in India
created some of Asia's largest conglomerates, such as the Tata Group
, Kirloskar Group
, Larsen & Toubro
, Mahindra Group
, Sahara India, ITC Limited, Essar Group
, Reliance ADA Group
, Reliance Industries, Aditya Birla Group
and the Bharti Enterprises
.
Some cite the decreased cost of conglomerate stock (a phenomenon known as conglomerate discount) as evidential of these disadvantages, while other traders believe this tendency to be a market inefficiency, which undervalues the true strength of these stocks.
, Naomi Klein
provides several examples of mergers and acquisitions
between media companies designed to create conglomerates for the purposes of creating synergies
between them:
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
s engaged in entirely different businesses that fall under one corporate structure (a corporate group
Corporate group
A corporate group is a collection of parent and subsidiary corporations that function as a single economic entity through a common source of control. The concept of a group is frequently used in tax law, accounting and company law to attribute the rights and duties of one member of the group to...
), usually involving a parent company
Parent company
A parent company is a company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors; the second company being deemed as a subsidiary of the parent company...
and several (or many) subsidiaries
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
. Often, a conglomerate is a multi-industry company. Conglomerates are often large and multinational
Multinational corporation
A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...
.
Modernization
Conglomerates were popular in the 1960s due to a combination of low interest rate(s) and a repeating bear/bull marketMarket trend
A market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames...
, which allowed the conglomerates to buy companies in leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
s, sometimes at temporarily deflated values. Famous examples from the 1960s include Ling-Temco-Vought
Ling-Temco-Vought
Ling-Temco-Vought was a large U.S. conglomerate which existed from 1969 to 2000. At its peak, its component parts were involved in the aerospace industry, electronics, steel manufacturing, sporting goods, the airline industry, meat packing, car rentals and pharmaceuticals, among other...
, ITT Corporation
ITT Corporation
ITT Corporation is a global diversified manufacturing company based in the United States. ITT participates in global markets including water and fluids management, defense and security, and motion and flow control...
, Litton Industries
Litton Industries
Named after inventor Charles Litton, Sr., Litton Industries was a large defense contractor in the United States, bought by the Northrop Grumman Corporation in 2001.-History:...
, Textron
Textron
Textron is a conglomerate that includes Bell Helicopter, E-Z-GO, Cessna Aircraft Company, and Greenlee, among others. It was founded by Royal Little in 1923 as the Special Yarns Company, and is headquartered at the Textron Tower in Providence, Rhode Island, United States.With total revenues of...
, Teledyne
Teledyne
Teledyne Technologies Incorporated is an industrial conglomerate primarily based in the United States but with global operations. It was founded in 1960, as Teledyne, Inc., by Henry Singleton and George Kozmetsky....
, Gulf and Western Industries
Gulf+Western
Gulf and Western Industries, Inc., for a number of years known as Gulf+Western, was an American conglomerate.- History :Gulf and Western's prosaic origins date to a manufacturer named Michigan Bumper Co. founded in 1934, though Charles Bluhdorn treated his 1958 takeover of what was then Michigan...
, and Transamerica
Transamerica Corporation
Transamerica Corporation is a holding company for various life insurance companies and investment firms doing business primarily in the United States. It was acquired by the Dutch financial services conglomerate AEGON in 1999.-History:...
. As long as the target company had profits greater than the interest on the loans, the overall return on investment
Return on investment
Return on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...
(ROI) of the conglomerate appeared to grow. Also, the conglomerate had a better ability to borrow in the money market
Money market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
, or capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
, than the smaller firm at their community bank
Community banks
A community bank is a depository institution that is typically locally owned and operated. Community banks tend to focus on the needs of the businesses and families where the bank holds branches and offices. Lending decisions are made by people who understand the local needs of families,...
.
For many years this was enough to make the company's stock price rise, as companies were often valued largely on their ROI. The aggressive nature of the conglomerators themselves was enough to make many investors, who saw a "powerful" and seemingly unstoppable force in business, buy their stock. High stock prices allowed them to raise more loans, based on the value of their stock, and thereby buy even more companies. This led to a chain reaction
Chain reaction
A chain reaction is a sequence of reactions where a reactive product or by-product causes additional reactions to take place. In a chain reaction, positive feedback leads to a self-amplifying chain of events....
, which allowed them to grow very rapidly.
However, all of this growth was somewhat illusory. When interest rates rose to offset inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
, the profits of the conglomerates fell. Investors noticed that the companies inside the conglomerate were growing no faster than before they were purchased, whereas the rationale for buying a company was that "synergies" would provide efficiency. By the late 1960s they were shunned by the market, and a major sell-off of their shares ensued. To keep the companies going, many conglomerates were forced to shed the industries they had purchased recently, and by the mid-1970s most had been reduced to shells. The conglomerate fad
FAD
In biochemistry, flavin adenine dinucleotide is a redox cofactor involved in several important reactions in metabolism. FAD can exist in two different redox states, which it converts between by accepting or donating electrons. The molecule consists of a riboflavin moiety bound to the phosphate...
was subsequently replaced by newer ideas like focusing on a company's core competency
Core competency
A core competency is a concept in management theory originally advocated by CK Prahalad, and Gary Hamel, two business book writers. In their view a core competency is a specific factor that a business sees as being central to the way it, or its employees, works...
.
In other cases, conglomerates are formed for genuine interests of diversification
Diversification (marketing strategy)
Diversification is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit level or at the corporate level. At the business unit level, it is most...
rather than manipulation of paper ROI. Companies with this orientation would only make acquisitions or start new branches in other sectors when they believe this will increase profitability or stability by sharing risks. Flush with cash during the 1980s, General Electric
General Electric
General Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...
also moved into financing and financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
, which in 2005 accounted for about 45% of the company's net earnings. GE also owns a minority interest in NBC Universal
NBC Universal
NBCUniversal Media, LLC is a media and entertainment company engaged in the production and marketing of entertainment, news, and information products and services to a global customer base...
, which owns the NBC
NBC
The National Broadcasting Company is an American commercial broadcasting television network and former radio network headquartered in the GE Building in New York City's Rockefeller Center with additional major offices near Los Angeles and in Chicago...
television network
Television network
A television network is a telecommunications network for distribution of television program content, whereby a central operation provides programming to many television stations or pay TV providers. Until the mid-1980s, television programming in most countries of the world was dominated by a small...
and several cable network
Cable network
A cable channel is a television channel available via cable television. Such channels are usually also available via satellite television, including direct broadcast satellite providers such as DirecTV, Dish Network and BSkyB...
s. In some ways GE is the opposite of the "typical" 1960s conglomerate in that the company was not highly leveraged
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
, and when interest rates went up they were able to turn this to their advantage, as it was often less expensive to lease from GE than buy new equipment using loans. United Technologies
United Technologies Corporation
United Technologies Corporation is an American multinational conglomerate headquartered in the United Technologies Building in Hartford, Connecticut...
has also proven to be a successful conglomerate.
With the spread of mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s (especially index fund
Index fund
An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions.-Tracking:Tracking can be achieved by trying to hold all of the...
s since 1976), investors could more easily obtain diversification by owning a small slice of many companies in a fund rather than owning shares in a conglomerate.
Another example of a successful conglomerate is Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
's Berkshire Hathaway
Berkshire Hathaway
Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States, that oversees and manages a number of subsidiary companies. The company averaged an annual growth in book value of 20.3% to its shareholders for the last 44 years,...
, a holding company
Holding company
A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
which used surplus capital from its insurance subsidiaries to invest in a variety of manufacturing and service businesses.
International
The end of the First World War caused a brief economic crisis in Weimar Germany, permitting entrepreneurs to buy businesses at rock-bottom prices. The most successful, Hugo StinnesHugo Stinnes
-Life and career:Stinnes was born in Mülheim, in the Ruhr Valley, North German Confederation. His father was also named Hugo, and his grandfather Matthias Stinnes had founded a modest enterprise in Mülheim....
, established the most powerful private economic conglomerate in 1920s Europe – Stinnes Enterprises – which embraced sectors as diverse as manufacturing, mining, shipbuilding, hotels, newspapers, and other enterprises.
The best known British
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
conglomerate was Hanson plc
Hanson plc
Hanson plc is a British based international building materials company, headquartered in Maidenhead. Traded on the London Stock Exchange and a constituent of the FTSE 100 Index for many years, the company was acquired by a division of German rival Heidelberg Cement in August 2007.-History:Hanson...
. It followed a rather different timescale than the US examples mentioned above, as it was founded in 1964 and ceased to be a conglomerate when it split itself into four separate listed companies between 1995 and 1997.
In Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
, two most well-known conglomerates are the Swire Group
Swire Group
The Swire Group is a transnational corporation headquartered in the Swire House in the City of Westminster, London, England. It controls a range of wholly owned businesses, including deep-sea shipping, cold storage, road transport, and agricultural activities. The current chairman is James...
and Jardine Matheson, both are British-owned companies that have a history of over 100 years and have business interests that span across four continents with a focus in Asia. Swire Group
Swire Group
The Swire Group is a transnational corporation headquartered in the Swire House in the City of Westminster, London, England. It controls a range of wholly owned businesses, including deep-sea shipping, cold storage, road transport, and agricultural activities. The current chairman is James...
(or Swire Pacific) controls a wide range of businesses, including property (Swire Properties
Swire Properties
Swire Properties Limited is a property developer in Hong Kong and mainland China, with its headquarters in Hong Kong. The company is a subsidiary of publicly-listed Swire Pacific...
), aviation (i.e. Cathay Pacific
Cathay Pacific
Cathay Pacific is the flag carrier of Hong Kong, with its head office and main hub located at Hong Kong International Airport, although the airline's registered office is on the 33rd floor of One Pacific Place...
and Dragonair
Dragonair
Hong Kong Dragon Airlines Limited , operating as Dragonair, is an international airline and flag carrier headquartered in Hong Kong; with its corporate headquarters, Dragonair House Hong Kong Dragon Airlines Limited (T: 港龍航空有限公司, S: 港龙航空有限公司, Cantonese: gong2 lung4 hong4 hung1 jau5 haan6 gung1 si1,...
), beverages (bottler of Coca Cola), shipping and trading. Jardine Matheson operates businesses in the fields of property, finance, trading, retail and hotel (i.e. Mandarin Oriental
Mandarin Oriental
Mandarin Oriental Hotel Group , a member of the Jardine Matheson Group, is an international hotel investment and management group with luxury hotels, resorts and residences in Asia, Europe and the Americas...
).
In Japan, a different model of conglomerate, the keiretsu
Keiretsu
A is a set of companies with interlocking business relationships and shareholdings. It is a type of business group. The keiretsu has maintained dominance over the Japanese economy for the greater half of the twentieth century....
, evolved. Whereas the Western model of conglomerate consists of a single corporation with multiple subsidiaries controlled by that corporation, the companies in a keiretsu are linked by interlocking shareholdings and a central role of a bank. Mitsubishi
Mitsubishi
The Mitsubishi Group , Mitsubishi Group of Companies, or Mitsubishi Companies is a Japanese multinational conglomerate company that consists of a range of autonomous businesses which share the Mitsubishi brand, trademark and legacy...
is one of Japan's best known keiretsu, reaching from automobile manufacturing to the production of electronics such as televisions.
In South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...
, Chaebol
Chaebol
Chaebol refers to a South Korean form of business conglomerate. They are global multinationals owning numerous international enterprises. The term is often used in a context similar to that of the English word "conglomerate"...
is a type of conglomerate owned and operated by a family. A chaebol is also inheritable, as most of current presidents of chaebols succeeded their fathers or grandfathers. Some of the well-known Korean chaebols are Samsung
Samsung
The Samsung Group is a South Korean multinational conglomerate corporation headquartered in Samsung Town, Seoul, South Korea...
, LG
LG Group
LG Corp. is the second-largest South Korean conglomerate company following Samsung, and it is headquartered in the LG Twin Towers in Yeouido-dong, Yeongdeungpo-gu, Seoul. LG produces electronics, chemicals, and telecommunications products and operates subsidiaries like LG Electronics, LG Display,...
and Hyundai Kia Automotive Group
Hyundai Kia Automotive Group
The Hyundai Kia Automotive Group is South Korea's largest automobile manufacturer, the second largest automaker in Asia after Toyota and the world's fourth largest automaker after Toyota, GM, and Volkswagen as of the end of 2010...
.
The era of Licence Raj
Licence Raj
Licence Raj, the Permit Raj, refers to the elaborate licenses, regulations and accompanying red tape that were required to set up and run businesses in India between 1947 and 1990....
(1947–1990) in India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
created some of Asia's largest conglomerates, such as the Tata Group
Tata Group
Tata Group is an Indian multinational conglomerate company headquartered in Mumbai, Maharashtra, India. Tata Group is one of the largest companies in India by market capitalization and revenue. It has interests in communications and information technology, engineering, materials, services, energy,...
, Kirloskar Group
Kirloskar Group
The Kirloskar Group is India's largest Engineering and Construction Conglomerate with sales exceeding $3.5 billion...
, Larsen & Toubro
Larsen & Toubro
Larsen & Toubro Limited is an Indian multinational conglomerate company headquartered in Mumbai, India. The company has four main business sectors: technology, engineering, construction and manufacturing. L&T has an international presence, with a global spread of offices and factories, further...
, Mahindra Group
Mahindra Group
The Mahindra Group is an Indian multinational conglomerate company headquartered at Mahindra Towers in Mumbai, India, with operations in over 100 countries across the globe...
, Sahara India, ITC Limited, Essar Group
Essar Group
The Essar Group is a multinational conglomerate corporation in the sectors of Steel, Energy, Power, Communications, Shipping Ports & Logistics as well as Construction head quartered at Mumbai, India...
, Reliance ADA Group
Reliance Anil Dhirubhai Ambani Group
Reliance Anil Dhirubhai Ambani Group is one of India's largest conglomerates, headquartered in Navi Mumbai, India. The company, which was formed after Dhirubhai Ambani's business empire was divided up, is headed by his younger son Anil Ambani. It has a market capitalization of US$ 15 billion,...
, Reliance Industries, Aditya Birla Group
Aditya Birla Group
The Aditya Birla Group is an Indian multinational conglomerate corporation headquartered in Mumbai, India. It operates in 33 countries with more than 133,000 employees worldwide...
and the Bharti Enterprises
Bharti Enterprises
Bharti Enterprises is an Indian business conglomerate headquartered in New Delhi, India, operating primarily across India and in some other countries like Sri Lanka, Bangladesh, Jersey, Guernsey and Seychelles with expanding operations across Africa in Burkina Faso, Chad, Congo Brazzaville,...
.
Advantages
- Diversification results in a reduction of investment risk. A downturn suffered by one subsidiary, for instance, can be counterbalanced by stability, or even expansion, in another division. For example, if Berkshire Hathaway's construction materials business has a bad year, the loss might be offset by a good year in its insurance business. This advantage is enhanced by the fact that the business cycle affects industries in different ways. Financial Conglomerates have very different compliance requirements from insurance or reinsurance solo entities or groups. There are very important opportunities that can be exploited, to increase shareholder value.
- A conglomerate creates an internal capital marketCapital marketA capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
if the external one is not developed enough. Through the internal market, different parts of conglomerate allocate capital more effectively. - A conglomerate can show earnings growth, by acquiring companies whose shares are more discounted than its own. In fact, TeledyneTeledyneTeledyne Technologies Incorporated is an industrial conglomerate primarily based in the United States but with global operations. It was founded in 1960, as Teledyne, Inc., by Henry Singleton and George Kozmetsky....
, GEGeneral ElectricGeneral Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...
, and Berkshire HathawayBerkshire HathawayBerkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States, that oversees and manages a number of subsidiary companies. The company averaged an annual growth in book value of 20.3% to its shareholders for the last 44 years,...
have delivered high earnings growth for a time.
Disadvantages
- The extra layers of management increase costs.
- Accounting disclosure is less useful information, many numbers are disclosed grouped, rather than separately for each business. The complexity of a conglomerate's accounts make them harder for managers, investors and regulators to analyze, and makes it easier for management to hide things.
- Conglomerates can trade at a discount to the overall individual value of their businesses because investors can achieve diversification on their own simply by purchasing multiple stocks. The whole is often worth less than the sum of its parts.
- Culture clashes can destroy value.
- Inertia prevents development of innovation.
- Lack of focus, and inability to manage unrelated businesses equally well.
Some cite the decreased cost of conglomerate stock (a phenomenon known as conglomerate discount) as evidential of these disadvantages, while other traders believe this tendency to be a market inefficiency, which undervalues the true strength of these stocks.
Media conglomerates
In her 1999 book No LogoNo Logo
No Logo: Taking Aim at the Brand Bullies is a book by Canadian author Naomi Klein. First published by Knopf Canada in January 2000, shortly after the 1999 WTO Ministerial Conference protests in Seattle had generated media attention around such issues, it became one of the most influential books...
, Naomi Klein
Naomi Klein
Naomi Klein is a Canadian author and social activist known for her political analyses and criticism of corporate globalization.-Family:...
provides several examples of mergers and acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
between media companies designed to create conglomerates for the purposes of creating synergies
Synergy
Synergy may be defined as two or more things functioning together to produce a result not independently obtainable.The term synergy comes from the Greek word from , , meaning "working together".-Definitions and usages:...
between them:
- Time WarnerTime WarnerTime Warner is one of the world's largest media companies, headquartered in the Time Warner Center in New York City. Formerly two separate companies, Warner Communications, Inc...
includes a several tenuously linked businesses, including internet access, content, film, cable systems and television. Their diverse portfolio of assets allow cross-promotion and economies of scale. - Clear Channel CommunicationsClear Channel CommunicationsClear Channel Communications, Inc. is an American media conglomerate company headquartered in San Antonio, Texas. It was founded in 1972 by Lowry Mays and Red McCombs, and was taken private by Bain Capital LLC and Thomas H. Lee Partners LP in a leveraged buyout in 2008...
, a quoted company, at one point owned a variety of TV and radio stations and billboardBillboardBillboard is a weekly American magazine devoted to the music industry, and is one of the oldest trade magazines in the world. It maintains several internationally recognized music charts that track the most popular songs and albums in various categories on a weekly basis...
operations, together with a large number of concert venues, across the U.S.United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
and a diverse portfolio of assets in the UKUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
and other countries around the world. The concentration of bargaining powerBargaining powerBargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched...
in this one entity allowed it to gain better deals for all of its business units. For example, the promise of playlisting (allegedly, sometimes, coupled with the threat of blacklisting) on its radio stations was used to secure better deals from artists performing in events organized by the entertainment division. These policies have been attacked as unfair and even monopolistic, but are a clear advantage of the conglomerate strategy. On December 21, 2005, Clear Channel completed the divestiture of Live NationLive NationLive Nation is a live-events company based in Beverly Hills, California, focused on concert promotions. Live Nation formed in 2005 as a spin-off from Clear Channel Communications, which then merged with Ticketmaster in 2010 to become Live Nation Entertainment....
, and in 2007 the company divested their television stations to other firms, some which Clear Channel holds a small interest in. Live Nation owns the events and concert venues previously owned by Clear Channel Communications.
Food conglomerates
Similar to other industries there are many companies that can be termed as conglomerates.- Phillip MorrisAltria GroupAltria Group, Inc. is based in Henrico County, Virginia, and is the parent company of Philip Morris USA, John Middleton, Inc., U.S. Smokeless Tobacco Company, Inc., Philip Morris Capital Corporation, and Chateau Ste. Michelle Wine Estates. It is one of the world's largest tobacco corporations...
group—the Phillip Morris group which once was the parent company of Altria group, Phillip Morris International and Kraft FoodsKraft FoodsKraft Foods Inc. is an American confectionery, food and beverage conglomerate. It markets many brands in more than 170 countries. 12 of its brands annually earn more than $1 billion worldwide: Cadbury, Jacobs, Kraft, LU, Maxwell House, Milka, Nabisco, Oscar Mayer, Philadelphia, Trident, Tang...
had annual combined turnover of $80 bn.
See also
- List of conglomerates
- Media conglomerateMedia conglomerateA media conglomerate, media group or media institution is a company that owns large numbers of companies in various mass media such as television, radio, publishing, movies, and the Internet...
- Holding companyHolding companyA holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
- SubsidiarySubsidiaryA subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
- Associate companyAssociate companyAn associate company in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial statements. Ownership of over 50% creates a subsidiary, with its...
- ChaebolChaebolChaebol refers to a South Korean form of business conglomerate. They are global multinationals owning numerous international enterprises. The term is often used in a context similar to that of the English word "conglomerate"...
- KeiretsuKeiretsuA is a set of companies with interlocking business relationships and shareholdings. It is a type of business group. The keiretsu has maintained dominance over the Japanese economy for the greater half of the twentieth century....
- ZaibatsuZaibatsuis a Japanese term referring to industrial and financial business conglomerates in the Empire of Japan, whose influence and size allowed for control over significant parts of the Japanese economy from the Meiji period until the end of World War II.-Terminology:...
- Concern (business)Concern (business)A concern is a German type of business group. It results from the merger of several legally independent companies an economic entity under unified management. These associated companies called "Group" companies....
External links
- "Conglomerate". Encyclopædia Britannica. 2007. Encyclopædia Britannica Online. 17 November 2007.
- Conglomerate Monkeyshines, An example of how conglomerates were used in the 1960s to manufacture earnings growth