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Aconglomerate (/kəŋˈɡlɒmərət/) is a type ofmulti-industry company that consists of several different and unrelatedbusiness entities that operate in various industries. A conglomerate usually is aparent company that owns and controls manysubsidiaries, which are legally independent but financially and strategically dependent on the parent company. Conglomerates are often large andmultinational corporations that have a global presence and a diversified portfolio of products and services. Conglomerates can be formed bymerger and acquisitions,spin-offs, orjoint ventures.
Conglomerates are common in many countries and sectors, such asmedia,banking,energy,mining,manufacturing,retail,defense, andtransportation. This type of organization aims to achieveeconomies of scale, market power,risk diversification, and financial synergy. However, they also face challenges such as complexity,bureaucracy, agency problems, andregulation.[1]
The popularity of conglomerates has varied over time and across regions. In theUnited States, conglomerates became popular in the 1960s as a form ofeconomic bubble driven by low interest rates and leveraged buyouts.[2] However, many of them collapsed or were broken up in the 1980s due to poor performance, accounting scandals, andantitrust regulation.[3] In contrast, conglomerates have remained prevalent in Asia, especially in China, India, Japan, and South Korea. These conglomerates often have strong ties with the government and enjoy preferential policies and access to capital.[citation needed]
During the 1960s, the United States was caught up in a "conglomeratefad" which turned out to be a form of aneconomic bubble.[4]
Due to a combination of low interest rates and a repeatingbear-bull market, conglomerates were able to buy smaller companies inleveraged buyouts (sometimes at temporarily deflated values).[5] Famous examples from the 1960s includeGulf and Western Industries,[6]Ling-Temco-Vought,[6]ITT Corporation,[6]Litton Industries,[6]Textron,[6] andTeledyne.[6] The trick was to look for acquisition targets with solid earnings and much lowerprice–earnings ratios than the acquirer.[7][8] The conglomerate would make atender offer to the target's shareholders at a princely premium to the target's current stock price. Upon obtaining shareholder approval, the conglomerate usually settled the transaction in something other than cash, likedebentures,bonds,warrants orconvertible debentures (issuing the latter two would effectively dilute its shareholders down the road, but many shareholders at the time were not thinking that far ahead).[9] The conglomerate would then add the target's earnings to its earnings, thereby increasing the conglomerate's overallearnings per share.[8] In finance jargon, the transaction was "accretive to earnings."[7]
The relatively lax accounting standards of the time meant that accountants were often able to get away with creative mathematics in calculating the conglomerate's post-acquisition consolidated earnings numbers.[10] In turn, the price of the conglomerate's stock would go up, thereby re-establishing its previous price-earnings ratio, and then it could repeat the whole process with a new target.[8][10] In plain English, conglomerates were using rapid acquisitions to create the illusion of rapid growth.[8] In 1968, the peak year of the conglomerate fad, U.S. corporations completed a record number of mergers: approximately 4,500.[11] In that year, at least 26 of the country's 500 largest corporations were acquired, of which 12 had assets above $250 million.[11]
All this complex company reorganization had very real consequences for people who worked for companies that were either acquired by conglomerates or were seen as likely to be acquired by them. Acquisitions were a disorienting and demoralizing experience for executives at acquired companies—those who were not immediatelylaid off found themselves at the mercy of the conglomerate's executives in some other distant city.[12] Most conglomerates' headquarters were located on theWest Coast orEast Coast, while many of their acquisitions were located in the country's interior.[12] Many interior cities were devastated by repeatedly losing the headquarters of corporations to mergers, in which independent ventures were reduced to subsidiaries of conglomerates based in New York or Los Angeles.[12] Pittsburgh, for example, lost about a dozen.[12] The terror instilled by the mere prospect of such harsh consequences for executives and their home cities meant that fending off takeovers, real or imagined, was a constant distraction for executives at all corporations seen as choice acquisition targets during this era.[13]
The chain reaction of rapid growth through acquisitions could not last forever. When interest rates rose to offset rising inflation, conglomerate profits began to fall. The beginning of the end came in January 1968, when Litton shocked Wall Street by announcing a quarterly profit of only 21 cents per share, versus 63 cents for the previous year's quarter.[14] This was "just a decline in earnings of about 19 percent", not an actual loss or a corporate scandal, and "yet the stock was crushed, plummeting from $90 to $53".[4] It would take two more years before it was clear that the conglomerate fad was on its way out.[14] The stock market eventually figured out that the conglomerates' bloated and inefficient businesses were as cyclical as any others—indeed, it was that cyclical nature that had caused such businesses to be such undervalued acquisition targets in the first place[7]—and their descent put "the lie to the claim that diversification allowed them to ride out a downturn."[15] A major selloff of conglomerate shares ensued.[16] To keep going, many conglomerates were forced to shed the new businesses they had recently purchased, and by the mid-1970s most conglomerates had been reduced to shells.[17] The conglomerate fad was subsequently replaced by newer ideas like focusing on a company'score competency[18] and unlockingshareholder value (which often translates intospin-offs).[19]
In other cases, conglomerates are formed for genuine interests ofdiversification rather than manipulation of paper return on investment. Companies with this orientation would only make acquisitions or start new branches in other sectors when they believed this would increase profitability or stability by sharing risks. Flush with cash during the 1980s,General Electric also moved into financing andfinancial services, which in 2005 accounted for about 45% of the company's net earnings. GE formerly owned a minority interest inNBCUniversal, which owns theNBC television network and several othercable networks.United Technologies was also a successful conglomerate until it was dismantled in the late 2010s.
With the spread ofmutual funds (especiallyindex funds 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 isWarren Buffett'sBerkshire Hathaway, aholding company that used surplus capital from its insurance subsidiaries to invest in businesses across a variety of industries.
The end of theFirst World War caused a brief economic crisis inWeimar Germany, permitting entrepreneurs to buy businesses at rock-bottom prices. The most successful,Hugo Stinnes, 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 wasHanson. It followed a rather different timescale than the U.S. 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, some of the well-known conglomerates such as:
In Japan, a distinct model of conglomerate, known as thekeiretsu, 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.Mitsui,Mitsubishi,Sumitomo are some of Japan's best-known keiretsu, reaching from automobile manufacturing to the production of electronics such as televisions. While not a keiretsu,Sony is an example of a modern Japanese conglomerate with operations inconsumer electronics,video games, themusic industry,television and film production and distribution,financial services, andtelecommunications.
In China, many of the country's conglomerates arestate-owned enterprises, but there is a substantial number of private conglomerates. Notable conglomerates includeBYD,CIMC,China Merchants Bank,Huawei,JXD,Meizu,Ping An Insurance,TCL,Tencent,TP-Link,ZTE,Legend Holdings,Dalian Wanda Group,China Poly Group,Beijing Enterprises, andFosun International. Fosun is currently China's largestcivilian-run conglomerate by revenue.[20]
InSouth Korea, thechaebol is a type of conglomerate owned and operated by a family. A chaebol is also inheritable, as most of the current presidents of chaebols succeeded their fathers or grandfathers. Some of the largest and most well-known Korean chaebols areSamsung,LG,Hyundai Kia andSK.
In India, family-owned enterprises became some of Asia's largest conglomerates, such as theAditya Birla Group,Tata Group,Emami,Kirloskar Group,Larsen & Toubro,Mahindra Group,Bajaj Group,ITC Limited,Essar Group,Reliance Industries,Adani Group and theBharti Enterprises.
In Brazil the largest conglomerates areJ&F Investimentos,Odebrecht,Itaúsa,Camargo Corrêa,Votorantim Group,Andrade Gutierrez, and Queiroz Galvão.
In Turkey the largest conglomerates areKoç Holding,Sabancı Holding,Yıldız Holding,Çukurova Holding,Doğuş Holding andDoğan Holding.
In New Zealand,Fletcher Challenge was formed in 1981 from the merger ofFletcher Holdings, Challenge Corporation, and Tasman Pulp & Paper, in an attempt to create a New Zealand-based multi-national company. At the time, the newly merged company dealt in construction, building supplies, pulp and paper mills, forestry, and oil & gas. Following a series of bungled investments, the company demerged in the early 2000s to concentrate on building and construction.
InPakistan, some of the examples areAdamjee Group,Dawood Hercules,House of Habib,Lakson Group andNishat Group.
In thePhilippines, the largest conglomerate of the country is theAyala Corporation which focuses onmalls,bank,real estate development, andtelecommunications. The other big conglomerates in the Philippines includedJG Summit Holdings,Lopez Holdings Corporation,ABS-CBN Corporation,GMA Network,MediaQuest Holdings,TV5 Network,SM Investments,Metro Pacific Investments, andSan Miguel Corporation.
In the United States, some of the examples are theWalt Disney Company,Warner Bros. Discovery andThe Trump Organization.
In Canada, one of the examples isHudson's Bay Company. Another such conglomerate isJD Irving, which controls a large portion of the economic activities as well as media in theProvince of New Brunswick.
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Some cite the decreased cost of conglomerate stock (a phenomenon known asconglomerate discount) as evidential of these disadvantages, while other traders believe this tendency to be amarket inefficiency, which undervalues the true strength of these stocks.[27]
In her 1999 bookNo Logo,Naomi Klein provides several examples ofmergers and acquisitions between media companies designed to createconglomerates to createsynergy between them:
A relatively new development, Internet conglomerates, such asAlphabet, Google's parent company[29] belong to the modern media conglomerate group and play a major role within various industries, such asbrand management. In most cases, Internet conglomerates consist of corporations that own several medium-sized online or hybrid online-offline projects. In many cases, newly joined corporations get higherreturns on investment, access to business contacts, and better rates on loans from various banks.[30]
Similar to other industries, many food companies can be termed as conglomerates.
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