A conglomerate merger is a combination of companies that work in different industries and are engaged in different types of activities that are not related to each other.
Conglomerate acquisitions range from short-term joint ventures to full mergers. Firms may belong to different industries or different geographical areas.
The acquisition of a soft drink company by a shoe company is an example of a conglomerate acquisition.
What Is Conglomerate Merger?
A merger is a corporate combination that involves combining two or more businesses into a new legal entity. A conglomerate merger is defined as the combination of two or more companies engaged in completely different activities.
These types of mergers are often undertaken to diversify the company’s business holdings and thus reduce the overall risk of the company’s portfolio.
For example, a company that makes widgets might merge with a company that sells gizmos. The new company would then have two different product lines and be able to sell its products to two different customer groups.
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How Does It Work?
A conglomerate acquisition provides an opportunity to reduce capital expenditures and overhead costs while achieving other efficiencies.
Since the two firms involved operate in different markets, there is no direct impact on competition. Instead, this type of acquisition reduces the possibility of future competition.
There is asset sharing, cross selling and diversification leading to reduced risk. Existing large firms become dominant with significant competitive advantages. However, a firm may become too large and performance may suffer if it cannot successfully combine two diverse businesses.
Companies engaged in the acquisition of conglomerates must be able to manage a variety of activities. They need to increase production and strengthen their merchandise area to ensure better profitability.
A small firm could strengthen its competitive position by taking advantage of the retained earnings of a large firm. The obvious advantage of conglomerate mergers is the exponential increase in coverage and the distribution of risk among more factors.
The positive economic contribution of a conglomerate acquisition includes the revitalization of sluggish and inefficient firms and more objective resource allocation decisions. However, this can have a negative psychological effect on competition.
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Conglomerate Merger Example
eBay and PayPal Merger – In 2002, eBay bought PayPal, providing a simplified payment process for its products.
The merger combined the vendor talent represented by eBay’s product platform with PayPal’s streamlined electronic payment processing platform, which was already popular with consumers.
The two companies parted ways in 2015 due to pressure from shareholders and a rapidly changing business environment in both commerce and payments, but they signed a five-year deal that guaranteed reliable revenue for PayPal while it successfully expanded its platform for other competing retailers and finance companies.
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A Conglomerate Merger Will
In a conglomerate merger, the activities of the two companies are different, and neither of them competes with the other in the market. But for business reasons, companies allow joining their business.
Such reasons can be an increase in the total market share, business diversification, the possibility of cross-selling. Business opportunities can be tracked in the same way as financial planning, marketing, R&D utilization, product distribution, or any other area.
As with any merger, the combined company will be more efficient than having two separate companies for stakeholders.
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Benefits of Conglomerate Merger
Business diversification
A conglomerate merger allows a company to diversify its business. This helps to overcome the risks associated with a volatile market.
If one sector of the business declines, the business has the opportunity to overcome the adverse situation by showing good results in another diversified sector. It is also called conglomerate diversification strategy.
Getting the synergy
A combined organization always performs better than each individual organization. This provides synergies, increasing the combined entity’s sales and revenues.
Use of excess cash
When a business has excess cash but does not have enough opportunities to expand in its sector, then the business invests the excess cash in another company in another sector to use the idle funds.
Improves customer base
With this type of merger, a company can cross-sell its products to another company’s customers. This helps to create a wider customer base. This, in turn, helps increase sales and profits.
Use of human resources
The company has the ability to attract managers from different sectors to its business when the need arises. This leads to the best utilization of human resources.
Economies of scale
This helps businesses achieve economies of scale. Various business expenses, such as research and development expenses, advertising expenses, etc., are distributed among numerous business units. This helps to reduce the cost of production per unit and helps to achieve economies of scale.
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Disadvantages
No work experience in another field
A conglomerate merger can be dangerous for a bidder in this deal because the company’s management is unlikely to have any direct experience in the industry in which its facility operates.
Therefore, the acquiring company may not be able to successfully exploit the potential benefits of the merger, such as expanding product lines. A lack of relevant industry experience may even result in a reduced performance of the target company after the merger.
Shifting focus in business operations
In the case of a conglomerate merger, the bidder may shift its focus, at least temporarily, from its own core business to the target company’s core business.
However, there is a high probability that the target company’s new management will not be able to improve or possibly even maintain the target company’s performance.
Meanwhile, a change in focus can negatively impact the buyer’s core business. Thus, a shift in focus can harm the conglomerate as a whole.
It is difficult to combine cultural values
For companies operating in different industries, it is often difficult to successfully combine the cultural values of the companies. A company’s business culture includes its business values and mission statement, its corporate vision, and the management and work style of its employees.
The corporate culture of a business is important because it affects all of the company’s activities, from production and sales to accounting and to broad strategic decisions.
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Conclusion
There are two types of conglomerate mergers: pure and mixed. Pure conglomerates operate in completely unrelated industries, such as the example above. Mixed conglomerates, on the other hand, are companies that operate in related industries.
For example, a company that makes widgets might merge with a company that makes parts for widgets. In this case, the two companies will have some degree of overlap in their product lines and can potentially benefit from economies of scale.
Conglomerate mergers can be beneficial for companies because they provide a way to diversify business holdings and reduce risk. However, these types of mergers can also be difficult to execute, as the two companies may operate in completely different industries with different cultures and processes. Thus, it is important to carefully consider whether a conglomerate merger is the right move for the company before proceeding with it.
Conglomerate Merger FAQs
What Is A Pure Merger And How Does It Work?
A pure merger is an acquisition where the buyer and seller are in completely different businesses with no strategic overlap. This type of merger is less common than other mergers such as horizontal or vertical mergers.
This can be a way for a buyer to quickly enter a new market or business. A pure conglomerate merger is often viewed as a riskier type of transaction than other mergers because there is usually less strategic overlap between the two companies, making it difficult to realize cost synergies and other benefits.
What Is A Mixed Merger And How Does It Work?
A mixed merger is a type of corporate consolidation that occurs when two firms combine to increase the number of their markets, products, and/or services. This type of merger is usually characterized by the merger of firms in different industries, but with some commonality, such as a shared customer base.
Mixed conglomerate mergers are less common than other mergers, such as horizontal or vertical, because businesses that do not belong to the same industry or sector have very different cultures, operating procedures, and goals.
How Does Product-Extension Mergers Work?
A product merger is a merger of companies that sell related products or services and operate in the same market. By applying a product expansion merger, the combined company can group its products together and gain access to a larger number of consumers.
It is important to note that the products and services of both companies are not the same, but they are related. The key is that they use similar distribution channels and common or related production processes or supply chains.
What Is Market-Extension Mergers And How Does It Work?
A market-extension merger is a merger of companies that sell the same products or services but operate in different markets. The purpose of a market expansion merger is to gain access to a larger market and therefore a larger customer base.
