how conglomerates come to exist
companies can become conglomerates can be created in a variety of ways and sometimes in a combination of ways the most common way is via acquisitions simply buying other companies if a target firm is big enough it might not become a mere subsidiary instead it and the acquiring company might actually merge combining their talent assets resources and personnel into one new legal entity a conglomerate merger occurred when the walt disney company merged with the american broadcasting company abc in 1995 for example 1another approach is that of organic expansion this strategy is more of corporate restructuring and reorganization and sometimes the creation of a parent company to own various smaller ones for example in 2015 google inc restructured the corporate parent became known as alphabet and google became a separate subsidiary within it in a move intended to separate the company s core business the well known search engine from a rapidly increasing array of other business ventures that alphabet was developing or acquiring 2yet another approach is that of an expansion of a family business or a historic one sector business into new industries or areas berkshire hathaway see real world examples of conglomerates below can be considered an example of this the company sprang from two 19th century massachusetts cotton mills that merged in 1955 3 when warren buffett gained control of it in 1965 he took it out of the textile business and turned berkshire hathaway into a holding company one that existed to invest in other businesses rather than manufacture products or provide services on its own 4of course there can be overlap among these approaches and some conglomerates are the result of all three case in point mo t hennessy louis vuitton lvmuy commonly referred to as lvmh this french luxury conglomerate began as a family business in 1854 a luggage and leather goods maker named after louis vuitton after its founder lvmh came into being over a century later the result of a merger between vuitton and wine spirits company mo t hennessy 5lvmh itself acts as the holding company for 75 different subsidiaries or houses as it calls them in six different sectors the original louis vuitton mo t chandon and hennessy the latter two owned by mo t hennessy are three of those houses most of the others have been bought by lvmh and while they all tend to be producers of upscale discretionary consumer goods their fields range from jewelry tiffany co and cosmetics givenchy parfums to publications le parisien and designer clothing fendi 6benefits of conglomeratesfor the management team of a conglomerate a wide array of companies in different industries can be a real boon for their bottom line poorly performing companies or industries can be offset by other sectors and cyclical companies can be balanced by counter cyclical or noncyclicals by participating in several unrelated businesses the parent corporation is able to reduce costs by utilizing fewer inputs that may be shared across subsidiaries and by diversifying business interests as a result the risks inherent in operating in a single market are mitigated in addition companies owned by conglomerates have access to internal capital markets enabling greater ability to grow as a company a conglomerate can allocate capital for one of their companies if external capital markets aren t offering as kind terms the company wants one additional advantage of conglomeration is that it can provide immunity from the takeover of the parent company as it grows ever larger disadvantages of conglomerateseconomists have discovered that the size of conglomerates can hurt the value of their stock a phenomenon known as the conglomerate discount the sum of the values of the individual companies held by a conglomerate tends to be greater than the value of the conglomerate s stock up to 15 7history has shown that conglomerates can become so vastly diversified and complicated that they grow too challenging to manage efficiently layers of management add to the overhead of their businesses and depending on how wide ranging a conglomerate s interests are management s attention can be drawn thin the financial health of a conglomerate is difficult to discern by investors analysts and regulators because the numbers are usually announced in a group making it hard to discern the performance of any individual company held by a conglomerate this lack of transparency may also dissuade some investors since the height of their popularity from the 1960s to the 1980s many conglomerates have reduced the number of businesses under their management to a few choice subsidiaries through divestiture and spinoffs the peak year of the conglomeration trend in the united states according to the book the go go years the drama and crashing finale of wall street s bullish 60s around 4 500 mergers occurred in that year and 10 of the country s 200 largest companies were conglomerates by that time 8examples of conglomeratesas mentioned above warren buffett s berkshire hathaway brk a is a well known conglomerate that has successfully managed companies involved in everything from plane manufacturing and textiles to insurance and real estate berkshire is well respected and has become one of the world s largest and most influential companies buffett s approach is to manage the capital allocation and allow companies near total discretion when managing the operations of their own business berkshire hathaway has a majority stake in over 50 companies and minority holdings in dozens more 9 still the company has only a small headquarters office staffed with a relatively small number of people another example is general electric ge initially founded by renowned inventor thomas edison as an electronics company and innovation lab the company has expanded to own firms working in energy real estate finance media and healthcare the company comprises several distinct arms that operate independently but are all interlinked this inter linkage lends itself to ge s initial mandate of extensive research and development r d on technologies that can be applied to a broad range of products conglomerates in the 1960sthe first significant conglomerate boom occurred in the 1960s and these early conglomerates were initially deemed as overvalued by the market interest rates were low at the time so leveraged buyouts were easier for managers of big companies to justify because the money came relatively cheap as long as company profits were more than the interest to be paid on loans the conglomerate could be ensured a return on investment roi banks and capital markets were willing to lend companies money for these buyouts because they were generally seen as safe investments at the same time the theory of synergy was becoming fashionable in business management and economic circles the idea that the cross combining of companies products and markets can enhance efficiency and profitability this the whole is greater than the sum of its parts concept helped justify mergers and acquisitions even if the target firms were pretty far from the parent company s core business this optimism kept stock prices high and allowed companies to guarantee loans the glow wore off of big conglomerates as interest rates were adjusted as a response to steadily rising inflation that ended up peaking in 1980 10it also became clear that the purchased companies weren t necessarily improving their performance which disproved the popularly held idea that they would become more efficient after being acquired in fact mismanaged and misunderstood by the parent they often performed worse and dragged down the entire corporation s bottom line so much for synergy in response to falling profits the majority of conglomerates began divesting the companies they bought downsizing and returning to their core businesses a few continued on as shell corporations foreign conglomeratesconglomerate companies take on slightly different forms in different countries many conglomerates in china are state owned 11japan s conglomerate is called keiretsu where companies own small shares in one another and are centered around a core bank in some ways this business structure is a defensive one protecting companies from wild rises and falls in the stock market and hostile takeovers mitsubishi is an excellent example of a company engaged in a keiretsu model 12south korea s corollary when it comes to conglomerates is called chaebol a type of family owned company where the position of president is inherited by family members who ultimately have more control over the company than shareholders or members of the board well known chaebol companies include samsung hyundai and lg 13