A conglomerate is a combination of two or more corporations engaged in entirely different
businesses that fall under one corporate group, usually involving a parent company and many
subsidiaries. Often, a conglomerate is a multi-industry company. Conglomerates are often large and
multinational.
Modernization Conglomerates were popular in the 1960s due
to a combination of low interest rates and a repeating bear/bull market, which allowed
the conglomerates to buy companies in leveraged buyouts, sometimes at temporarily deflated
values. Famous examples from the 1960s include Ling-Temco-Vought, ITT Corporation, Litton
Industries, Textron, Teledyne, Gulf+Western, AT&T, and Transamerica. As long as the target
company had profits greater than the interest on the loans, the overall return on investment
of the conglomerate appeared to grow. Also, the conglomerate had a better ability to borrow
in the money market, or capital market, than the smaller firm at their community bank.
For many years this was enough to make the company's stock price rise, as companies were
often valued largely on their return on investment. The aggressive nature of the conglomerators
themselves was enough to make many investors, who saw a "powerful" and seemingly unstoppable
force in business, buy their stock. High stock prices allowed them to raise more loans, based
on the value of their stock, and thereby buy even more companies. This led to a chain reaction,
which allowed them to grow very rapidly. However, all of this growth was somewhat illusory.
When interest rates rose to offset inflation, conglomerate profits fell. Investors noticed
that the companies inside the conglomerate were growing no faster than before they were
purchased, whereas the rationale for buying a company was that "synergies" would provide
efficiency. By the late 1960s they were shunned by the market, and a major sell-off of their
shares ensued. To keep the companies going, many conglomerates were forced to shed the
industries they had recently purchased, and by the mid-1970s most had been reduced to
shells. The conglomerate fad was subsequently replaced by newer ideas like focusing on a
company's core competency. In other cases, conglomerates are formed for genuine interests
of diversification 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 and financial services,
which in 2005 accounted for about 45% of the company's net earnings. GE formerly owned
a minority interest in NBCUniversal, which owns the NBC television network and several
other cable networks. In some ways GE is the opposite of the "typical" 1960s conglomerate
in that the company was not highly leveraged, and when interest rates went up they were
able to turn this to their advantage, as it was often less expensive to lease from GE
than buy new equipment using loans. United Technologies has also proven to be a successful
conglomerate. With the spread of mutual funds, 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
is Warren Buffett's Berkshire Hathaway, a holding company which used surplus capital
from its insurance subsidiaries to invest in a variety of manufacturing and service
businesses. International
The end of the First World War caused a brief economic crisis in Weimar 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 was Hanson
plc. It followed a rather different timescale than the US 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, two most well-known conglomerates
are the Swire Group and Jardine Matheson, both are British-owned companies that have
a history of over 100 years and have business interests that span across four continents
with a focus in Asia. Swire Group controls a wide range of businesses, including property,
aviation, beverages, shipping and trading. Jardine Matheson operates businesses in the
fields of property, finance, trading, retail and hotel.
In Japan, a different model of conglomerate, the keiretsu, 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. Mitsubishi is one of Japan's best known keiretsu, reaching from
automobile manufacturing to the production of electronics such as televisions.
In China, many of country's conglomerates are state-owned enterprises, but there are
a substantial number of private conglomerates. Notable conglomerates include Legend Holdings,
Dalian Wanda Group, China Poly Group, Beijing Enterprises, and Fosun International. Fosun
is currently China's largest privately owned conglomerate by revenue.
In South Korea, the chaebol are a type of conglomerate owned and operated by a family.
A chaebol is also inheritable, as most of current presidents of chaebols succeeded their
fathers or grandfathers. Some of the largest and most well-known Korean chaebols are Samsung,
LG, Hyundai Kia and SK. The era of Licence Raj in India created some
of Asia's largest conglomerates, such as the Tata Group, Kirloskar Group, Larsen & Toubro,
Mahindra Group, Sahara India, ITC Limited, Essar Group, Reliance ADA Group, Reliance
Industries, Aditya Birla Group and the Bharti Enterprises.
Advantages Diversification results in a reduction of
investment risk. A downturn suffered by one subsidiary, for instance, can be counterbalanced
by stability, or even expansion, in another division. For example, if Berkshire Hathaway's
construction materials business has a good year, the profit might be offset by a bad
year in its insurance business. This advantage is enhanced by the fact that the business
cycle affects industries in different ways. Financial Conglomerates have very different
compliance requirements from insurance or reinsurance solo entities or groups. There
are very important opportunities that can be exploited, to increase shareholder value.
A conglomerate creates an internal capital market if the external one is not developed
enough. Through the internal market, different parts of conglomerate allocate capital more
effectively. A conglomerate can show earnings growth, by
acquiring companies whose shares are more discounted than its own. In fact, Teledyne,
GE, and Berkshire Hathaway have delivered high earnings growth for a time.
Disadvantages The extra layers of management increase costs.
Accounting disclosure is less useful information, many numbers are disclosed grouped, rather
than separately for each business. The complexity of a conglomerate's accounts make them harder
for managers, investors and regulators to analyze, and makes it easier for management
to hide things. Conglomerates can trade at a discount to the
overall individual value of their businesses because investors can achieve diversification
on their own simply by purchasing multiple stocks. The whole is often worth less than
the sum of its parts. Culture clashes can destroy value.
Inertia prevents development of innovation. Lack of focus, and inability to manage unrelated
businesses equally well. Some cite the decreased cost of conglomerate
stock as evidential of these disadvantages, while other traders believe this tendency
to be a market inefficiency, which undervalues the true strength of these stocks.
Media conglomerates
In her 1999 book No Logo, Naomi Klein provides several examples of mergers and acquisitions
between media companies designed to create conglomerates for the purposes of creating
synergy between them: Time Warner included several tenuously linked
businesses during the 1990s and 2000s, including Internet access, content, film, cable systems
and television. Their diverse portfolio of assets allowed for cross-promotion and economies
of scale. However, the company has sold or spun off many of these businesses – including
Warner Music Group, Warner Books, AOL, Time Warner Cable, and Time Inc. – since 2004.
Clear Channel Communications, a public company, at one point owned a variety of TV and radio
stations and billboard operations, together with a large number of concert venues, across
the U.S. and a diverse portfolio of assets in the UK and other countries around the world.
The concentration of bargaining power in this one entity allowed it to gain better deals
for all of its business units. For example, the promise of playlisting on its radio stations
was used to secure better deals from artists performing in events organized by the entertainment
division. These policies have been attacked as unfair and even monopolistic, but are a
clear advantage of the conglomerate strategy. On December 21, 2005, Clear Channel completed
the divestiture of Live Nation, and in 2007 the company divested their television stations
to other firms, some which Clear Channel holds a small interest in. Live Nation owns the
events and concert venues previously owned by Clear Channel Communications.
Quebecor Media, a Canadian company controlling a subset of TV and radio stations, print magazines
and newspaper, software company and a 4-play telecom company
Internet conglomerates Although a relatively new development, Internet
conglomerates belong to the modern media conglomerate group, and play a major role within various
industries, such as brand management. In most cases Internet conglomerates consist of corporations
who own several medium-sized online or hybrid online-offline projects. In many cases, newly
joined corporations get higher returns on investment, access to better business contacts,
and better rates on loans from various banks. Food conglomerates
Similar to other industries there are many companies that can be termed as conglomerates.
The Phillip Morris group, which once was the parent company of Altria group, Phillip Morris
International, and Kraft Foods had annual combined turnover of $80 bn.
See also
Notes
Bibliography Holland, Max, When the Machine Stopped: A
Cautionary Tale from Industrial America, Boston: Harvard Business School Press, ISBN 978-0-87584-208-0,
OCLC 246343673. McDonald, Paul and Wasko, Janet, The Contemporary
Hollywood Film Industry, Blackwell Publishing Ltd. ISBN 978-1-4051-3388-3
External links "Conglomerate". Encyclopædia Britannica.
2007. Encyclopædia Britannica Online. 17 November 2007.
Conglomerate Monkeyshines, An example of how conglomerates were used in the 1960s to manufacture
earnings growth