Conglomerate (company)

A conglomerate is the 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,^[1] ITT Corporation,^[1] Litton Industries,^[1] Textron,^[1] Teledyne,^[1] 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 and 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.^[2] 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. 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 (especially index 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 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 (or Swire Pacific) controls a wide range of businesses, including property (Swire Properties), aviation (i.e. Cathay Pacific and Dragonair), beverages (bottler of Coca Cola), shipping and trading. Jardine Matheson operates businesses in the fields of property (Hongkong Land), finance (Jardine Lloyd Thompson), trading, retail (Dairy Farm) and hotels (i.e. Mandarin Oriental).

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 is 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.^[3]

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 (1947–1990) 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.

In New Zealand, Fletcher Challenge was formed in 1981 from the merger of Fletcher 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.

Advantages and disadvantages

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.^[4]

Disadvantages

• The extra layers of management increase costs.^[5]
• 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.^[6][7]
• Inertia prevents development of innovation.^[8]
• Lack of focus, and inability to manage unrelated businesses equally well.^[9]
• Brand dilution where the brand loses its brand associations with a market segment, product area, or quality, price or cachet.

Some cite the decreased cost of conglomerate stock (a phenomenon known as conglomerate discount) as evidential of these disadvantages, while other traders believe this tendency to be a market inefficiency, which undervalues the true strength of these stocks.^[10]

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 (allegedly, sometimes, coupled with the threat of blacklisting) 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, such as Alphabet, Google's parent company^[11] 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 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

• List of conglomerates
• Media conglomerate
• Consolidation (business)
• Conglomerate discount
• Holding company
• Subsidiary
• Associate company
• Chaebol
• Keiretsu
• Zaibatsu
• Concern (business)
• Multi-divisional form
• Mergers and acquisitions
• ITT: The Management of Opportunity

Notes

1. Holland 1989, pp. 57–64, 81–86.
2. Hitachi, Ltd. - Company Profile, Information, Business Description, History, Background Information on Hitachi, Ltd.-Source-Reference for Business » Company History Index » Conglomerates
3. Tsui, Enid (24 June 2012). "China conglomerate Fosun to scour for deals with $1bn fund". Financial Times.
4. Conglomerates: Cash Cows or Corporate Chaos?
5. Dearbail Jordan and Robin Pagnamenta (September 25, 2007). "BP to strip out four layers of management". The Times.
6. "Culture clash: The risks of mergers". BBC News. 17 January 2000.
7. Michelle C. Bligh (2006). "Surviving Post-merger ‘Culture Clash’: Can Cultural Leadership Lessen the Casualties?". Leadership 2 (4): 395–426. doi:10.1177/1742715006068937.
8. "Innovation and Inertia". Stanford University's Entrepreneurship Center.
9. Definition of Conglomerate
10. Conglomerate discount
11. http://googleblog.blogspot.com/2015/08/google-alphabet.html

Bibliography

• Holland, Max (1989), 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 (2010), 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