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What Is A Conglomerate Merger
A conglomerate merger refers to a type of merger where the merging entities operate in different industries and have different types of business.
In other words, a conglomerate merger is the merger of businesses in different industries.
The most common reason why certain companies engage in conglomerate mergers is to diversify their businesses or to take advantage of potential synergies.
For example, a company operating in financial services may acquire a technology company.
In this context, the conglomerate merger may allow the financial services firm to take advantage of the technology company’s proprietary technology to provide greater value to its customers.
In some cases, the conglomerate merger will involve two companies that are totally different and have nothing in common.
It’s also possible to have a conglomerate merger where the merging entities are in different industries but have some commonalities or shared characteristics.
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Why Conglomerate Mergers Are Important
There are many reasons why companies can decide to engage in conglomerate mergers.
The primary reason is for a company to diversify its business and create a different source of revenue.
For example, a conglomerate operating five different businesses will be more diversified than a company operating in one industry.
A change in one industry will have a smaller impact on the conglomerate’s revenues than the company solely focused on that industry.
Another reason why conglomerate mergers are important is that it allows the merged entity to operate in a greater market.
As such, having a larger customer base can allow the company cross-sell into its own customer base.
There are many other reasons why conglomerate mergers are entertained.
Other common reasons why a company may merge this way is to take advantage of the target’s proprietary technology, know-how, trade secrets, research and development, production capacity, distribution channel, or others.
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Types of Conglomerate Mergers
There are essentially two types of conglomerate mergers: pure conglomerate merger and mixed conglomerate merger.
A pure conglomerate merger is a type of merger where the merging entities are completely in different industries.
For example, imagine that a company in the automobile business acquires a company in the media and entertainment.
These two companies are completely different and operate in entirely different industries.
A pure conglomerate merger is generally considered for diversification of risk and the creation of additional revenue streams.
On the other hand, a mixed conglomerate merger is a type of merger where the merging entities have some points in common or certain similarities.
For example, a media and entertainment company acquires a video streaming software business.
In this example, although the media and entertainment company is different from video streaming software business, they potentially share similar markets or may have some similarities in their products and services.
In this case, the mixed conglomerate merger is typically engaged to expand market share or offer additional products and services.
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Conglomerate Merger Risks
Although conglomerate mergers can have many benefits, there are also risks associated with this type of activity.
The most important risk with a conglomerate merger is that the combined entity will not function as efficiently as it should.
Since the merged entity will need to operate different businesses in completely different industries, it will be harder for the management team to fully understand the dynamics of all their businesses.
As such, the management team may not have the expertise and knowledge to properly operate all the businesses owned by the conglomerate.
Another important risk is that the conglomerate entity is unable to materialize the synergies.
It’s even possible for the merged entity to operate less efficiently than prior to the merger leading to higher operating costs and a greater loss of revenue.
Conglomerates must also find ways to properly manage and motivate their workforce so they all feel part of the same company.
An important risk is that conglomerates are unable to implement a corporate culture that motivates and drives their employees to achieve the overall corporate mission.
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Conglomerate Merger Examples
Let’s look at a few real-life examples of conglomerate mergers to better illustrate the concept.
One famous example of a conglomerate merger is when Amazon purchased Whole Foods.
Amazon is in the e-commerce business whereas Whole Foods is in the grocery business.
By acquiring Whole Foods, Amazon is essentially acquiring a company in a completely different industry having a completely different business model.
Another good example of a conglomerate merger is that of eBay and PayPal.
When eBay acquired PayPayl, the two companies were in different industries.
eBay offered online auction services whereas PayPal was a payment processing application.
However, eBay was able to use PayPal on its platform to facilitate the online payment processing for its auction services.
This merger was designed to allow eBay to provide a better overall user experience to its clients.
A third example of a conglomerate merger is that of Louis Vuitton and Tiffany & Co.
In this case, LVMH Moët Hennessy Louis Vuitton SE acquired the luxury jewelry maker Tiffany & Co.
LVMH is a conglomerate that owns many different brands and the purchase of Tiffany & Co. as jewelry makers add a new business to its portfolio of businesses.
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Takeaways
So there you have it folks!
What is a conglomerate merger?
In a nutshell, a conglomerate merger is a type of merger where a larger company acquires another smaller company operating in an unrelated business.
The idea behind this type of merger is for the company to diversify its revenue streams and potentially take advantage of synergies.
A pure conglomerate merger is when the two merging entities operate in separate and distinct markets.
A mixed conglomerate merger is one where the merger entities share some points in common and their objective is to expand their product lines or target market.
Although conglomerate mergers were highly popular in the 1960s and 1970s, they do not happen as often today but do happen from time to time.
Now that you know what a conglomerate merger means and how it works, good luck with your research!
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