A conglomerate is a large company that is composed of smaller companies acquired over the years. A conglomerate merger is a merger that involves two firms from unrelated business industries and activities. Though conglomerates are less popular today they were popular in the 1960s and 1970s. It is seen as a valuable move if the value of the two companies that are combined is more than they are valued separately which is expressed as 2+2 =5 equation.
What are the advantages and disadvantages of a conglomerate merger?
Usually, a conglomerate is meant to make both entities stronger than they would be individually and it occurs between the two large scale companies. These types of merges have their advantages and disadvantages too.
Here are the advantages:
- Diversifying the business
- Lower investment risk due to diversification
- Financial benefits- especially the pure conglomerate mergers
- Potential to capture synergies
- Access to new personnel and networking
- Entry for intellectual property.
- Cultural differences and clashes caused indifference in backgrounds and industries
- Improper management and costs to keep the larger entity smoothly
- Governance conflicts
- Possible tax benefit loss
- Reduced market efficiency
Understanding the Conglomerate mergers
There are two types of conglomerate mergers: Pure and Mixed mergers. A pure conglomerate merger involves the companies having nothing in common between them. A mixed conglomerate merger involves the companies that aim for business expansion such as the extension of products to different geographical locations or development products.
In a conglomerate merger, the operating of two companies are different and neither of them competes with the other in the market. But for business reasons companies allow the joining of their businesses. These reasons can be increasing overall market share, diversification of business, enabling cross-selling. Business opportunities can be as traced as financial planning marketing, leveraging the R&D, product distribution or any other area. Like in the case of any merger is that merged entity will perform better than having two separate companies for the stakeholders.
Best practices for a successful conglomerate merger
- Ensure that the acquirer has the resources for overseeing and carrying out many diverse activities once the deal takes place.
- The time spent on integration planning to avoid the governance and the cultural clashes, integration planning to avoid governance and the cultural clashes; integration planning helps in capturing synergies and avoids destroying value.
- Assess and plan to leverage the newly acquired talent and intellectual property.
- Stay focused on the strategic goal.
For a successful conglomerate merger, the acquirer is required to have a clear strategy, sample resource and a good platform to support the deal. Though conglomerate mergers have not been popular after the 1960s and the 1970s there are larger companies with resources that diversify the dipping in the new market through the mergers and acquisition activities.
Conglomerate mergers can be challenging for companies coming from diverse backgrounds and cultures. There can also be a mismatch in the size and the management. So the merging companies must develop a post-merger strategy to carry on the business. This strategy can include developing a new corporate culture, new vision and mission of the merged entity which is the success of the company and in the interest of the stakeholders.