While a conglomerate merger is still considered one of the more common types of mergers, these types of deals have waned in popularity after peaking in the 1960s and 1970s; this is perhaps in part because there are varying views on the true value of conglomerate mergers. Of course, the examples of Amazon and Whole Foods, and Disney and Pixar, challenge this premise.
What Is a Conglomerate Merger?
A conglomerate is defined as a number of different parts that are grouped together to form a whole, but remain distinct entities. With this premise in mind, a conglomerate merger is a merger of companies and firms from different industries (or from different geographic areas). The smaller merged companies make up the larger company, aka the conglomerate. Conglomerate mergers are often represented by the metaphorical equation 2 + 2 = 5, meaning the companies are worth more together than they are apart.
More specifically, there are two types of conglomerate mergers: pure and mixed. In a pure conglomerate the two companies or firms continue to function in their own industries. On the other hand, in a mixed conglomerate, the companies are trying to increase and expand their markets and/or products, also known as market and product extension. This means, in a mixed conglomerate, the companies may eventually cross paths and no longer operate in different divisions.
Benefits of Conglomerate Mergers:
- Diversification and opportunity for inorganic growth outside one’s industry
- Potential merger of best practices
- Gain synergies
- Expansion of customer base
- Economies of scale
Disadvantages of Conglomerate Mergers:
- Potential culture clashes or problems during post merger integration (PMI)
- Lack of experience in new industry
- Potential governance issues and oversights
Current Conglomerate Trends:
Conglomerates appear to be less popular today perhaps because there seems to be a movement to trim down complex companies. Harold de Bruijn, Partner at KPMG Netherlands, points to the example of the Philips DA (Domestic Appliance) deal, which was done with the objective to trim down the conglomerate of Philips to allow focus on Healthcare. To be a top player in a specific market today, companies need the money, resources, and time to invest in that specific area.
This trend toward companies focusing on key markets stems from the reality that the world and competition are moving faster than ever before, and companies need to focus time and resources on successfully growing market share. Conglomerates are under the microscope in this area…they need to continually show profits. While smaller competitor companies may have the luxury of using seed money to establish a market position and can withstand initial profit losses, conglomerates are expected to be regularly profitable.
In addition, conglomerates traditionally offered a hedge against differing market trends (for example, a shoe sales company merged with a steel manufacturing company might suggest a platform that would offer advantages of contrary market movements), but this advantage seems less relevant today, making conglomerates more susceptible to overall negative market movements.
While conglomerate mergers are not as common as they once were, there are still major companies that you cross paths with on a daily basis that have successfully taken advantage of these types of mergers. Today there is increased risk associated with conglomerate mergers given the expanded federal oversight afforded them and the ever-changing market conditions associated with merging smaller companies into one large conglomerate that may preclude the large conglomerate from operating in the agile and innovative manner necessary to assure overall business success.