A conglomerate () is a multi-industry company – i.e., a combination of multiple
business entities operating in entirely different industries under one
corporate group, usually involving a
parent company
A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...
and many
subsidiaries
A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that either belong to the same parent company or having a sa ...
. Conglomerates are often large and
multinational.
United States
The conglomerate fad of the 1960s
During the 1960s, the United States was caught up in a "conglomerate
fad" which turned out to be a form of
speculative mania.
Due to a combination of low interest rates and a repeating
bear-bull market, conglomerates were able to buy smaller companies in
leveraged buyouts (sometimes at temporarily deflated values).
Famous examples from the 1960s include
Ling-Temco-Vought,
[.] ITT Corporation
ITT Inc., formerly ITT Corporation, is an American worldwide manufacturing company based in Stamford, Connecticut. The company produces specialty components for the aerospace, transportation, energy and industrial markets. ITT's three businesses ...
,
Litton Industries,
Textron,
and
Teledyne.
The trick was to look for acquisition targets with solid earnings and much lower
price–earnings ratio
The price-earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company's share (stock) price to the company's earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or under ...
s than the acquirer.
The conglomerate would make a
tender 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, like
debentures,
bonds,
warrants
Warrant may refer to:
* Warrant (law), a form of specific authorization
** Arrest warrant, authorizing the arrest and detention of an individual
** Search warrant, a court order issued that authorizes law enforcement to conduct a search for eviden ...
or
convertible debentures (issuing the latter two would effectively dilute its own shareholders down the road, but many shareholders at the time were not thinking that far ahead).
The conglomerate would then add the target's earnings to its own earnings, thereby increasing the conglomerate's overall
earnings per share
Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company. It is a key measure of corporate profitability and is commonly used to price stocks.
In the United States, the Financial Accounting ...
.
In finance jargon, the transaction was "
accretive to earnings."
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.
In turn, the price of the conglomerate's own stock would go up, thereby re-establishing its previous price-earnings ratio, and then it could repeat the whole process again with a new target.
In plain English, conglomerates were using rapid acquisitions to create the illusion of rapid growth.
In 1968, the peak year of the conglomerate fad, U.S. corporations completed a record number of mergers: approximately 4,500.
In that year, at least 26 of the country's 500 largest corporations were acquired, of which 12 had assets in excess of $250 million.
All this complex
financial engineering 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 immediately
laid off found themselves at the mercy of the conglomerate's executives in some other distant city.
Most conglomerates' headquarters were located on the
West Coast West Coast or west coast may refer to:
Geography Australia
* Western Australia
*Regions of South Australia#Weather forecasting, West Coast of South Australia
* West Coast, Tasmania
**West Coast Range, mountain range in the region
Canada
* Britis ...
or
East Coast
East Coast may refer to:
Entertainment
* East Coast hip hop, a subgenre of hip hop
* East Coast (ASAP Ferg song), "East Coast" (ASAP Ferg song), 2017
* East Coast (Saves the Day song), "East Coast" (Saves the Day song), 2004
* East Coast FM, a ra ...
, while many of their acquisitions were located in the country's interior.
Many interior cities were devastated by repeatedly losing headquarters of corporations to mergers, in which independent ventures were reduced to subsidiaries of conglomerates based in New York or Los Angeles.
Pittsburgh, for example, lost about a dozen.
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.
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.
It would take two more years before it was clear that the conglomerate fad was on its way out.
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
—and their descent "put the lie to the claim that diversification allowed them to ride out a downturn."
A major selloff of conglomerate shares ensued.
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. The conglomerate fad was subsequently replaced by newer ideas like focusing on a company's
core competency and unlocking
shareholder value (which often translate into
spin-off
Spin-off may refer to:
*Spin-off (media), a media work derived from an existing work
*Corporate spin-off, a type of corporate action that forms a new company or entity
* Government spin-off, civilian goods which are the result of military or gove ...
s).
Genuine diversification
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
Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...
, 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.
United Technologies was also a successful conglomerate until it was dismantled in the late 2010s.
Mutual funds
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 businesses across a variety of industries.
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 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 include
Jardine Matheson (AD1824),
Swire Group (AD1816), (British companies, one Scottish one English; companies that have a history of over 150 years and have business interests that span across four continents with a focus in Asia.)
C K Hutchison Whampoa (now
CK Hutchison Holdings),
Sino Group, (both Asian-owned companies specialize business such as real estate and hospitality with a focus in Asia.)
*
Swire Group (AD1816) (or Swire Pacific) Started by Liverpool natives the Swire family, which controls a wide range of businesses, including property (
Swire Properties), aviation (i.e.
Cathay Pacific
Cathay Pacific Airways Limited (CPA), more widely known as Cathay Pacific (), is the flag carrier of Hong Kong, with its head office and main hub located at Hong Kong International Airport. The airline's operations and subsidiaries have sc ...
), beverages (bottler of
Coca-Cola), shipping and trading.
*
Jardine Matheson (AD1824) operates businesses in the fields of property (
Hongkong Land
Hongkong Land (HKL) is a property investment, management and development group with commercial and residential property interests across Asia. It owns and manages some 850,000 sq. m. of office and retail property in Asia, principally in Hong K ...
), finance (
Jardine Lloyd Thompson), trading, retail (
Dairy Farm) and hotels (i.e.
Mandarin Oriental).
*
CK Hutchison Holdings Limited: Telecoms, Infrastructure, Ports, Health and Beauty Retail. Energy, Finance
*
Sino Group
In Japan, a different model of conglomerate, the ''
keiretsu
A is a set of companies with interlocking business relationships and shareholdings. In the legal sense, it is a type of informal business group that are loosely organized alliances within the social world of Japan's business community. The ''ke ...
'', 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
The is a group of autonomous Japanese multinational companies in a variety of industries.
Founded by Yatarō Iwasaki in 1870, the Mitsubishi Group historically descended from the Mitsubishi zaibatsu, a unified company which existed from 1870 ...
,
Sumitomo
The is one of the largest Japanese ''keiretsu'', or business groups, founded by Masatomo Sumitomo (1585-1652) around 1615 during the early Edo period.
History
The Sumitomo Group traces its roots to a bookshop in Kyoto founded circa 1615 by Masa ...
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 in
consumer electronics,
video games, the
music industry
The music industry consists of the individuals and organizations that earn money by writing songs and musical compositions, creating and selling recorded music and sheet music, presenting concerts, as well as the organizations that aid, train, ...
,
television and film production and distribution,
financial services
Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...
, and
telecommunications.
In China, many of the country's conglomerates are
state-owned enterprises
A state-owned enterprise (SOE) is a government entity which is established or nationalised by the ''national government'' or ''provincial government'' by an executive order or an act of legislation in order to earn profit for the governmen ...
, but there is a substantial number of private conglomerates. Notable conglomerates include
BYD,
CIMC,
China Merchants Bank,
Huawei,
JXD,
Meizu,
Ping An Insurance,
TCL,
Tencent,
TP-Link,
ZTE,
Legend Holdings
Legend Holdings Corporation () is a Chinese investment holding company with interests in finance, real estate, and information technology, and the controlling shareholder of its better-known associate company, the Lenovo Group. Formed by the Chin ...
,
Dalian Wanda Group,
China Poly Group
China Poly Group Corporation () is a state owned Chinese business group among 102 central state owned enterprises under the supervision of State-owned Assets Supervision and Administration Commission of the State Council (SASAC).
It is both prim ...
,
Beijing Enterprises, and
Fosun International. Fosun is currently China's largest
civilian-run conglomerate by revenue.
In
South Korea, the ''
chaebol
A chaebol (, ; ) is a large industrial South Korean conglomerate run and controlled by an individual or family. A chaebol often consists of multiple diversified affiliates, controlled by a person or group whose power over the group often exc ...
'' 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
Essar Group is an Indian multinational conglomerate company, founded by Shashi Ruia and Ravi Ruia in 1969. As Essar Global Fund Limited (EGFL), the company controls a number of assets across the core sectors of energy (oil refining, oil and ...
,
Reliance ADA Group
Reliance Anil Dhirubhai Ambani Group or popularly known as Reliance ADA Group or simply Reliance Group is an Indian conglomerate, headquartered in Mumbai, India. The company, which was formed after Dhirubhai Ambani's business was divided up, ...
,
Reliance Industries
Reliance Industries Limited is an Indian multinational conglomerate company, headquartered in Mumbai. It has diverse businesses including energy, petrochemicals, natural gas, retail, telecommunications, mass media, and textiles. Reliance is ...
,
Aditya Birla Group and the
Bharti Enterprises.
In Brazil the most important conglomerates are
J&F Investimentos
J&F Investimentos SA is a private investment holding company that was founded in 1953 and is based in São Paulo, Brazil. The company is involved in myriad business endeavors, such as agribusiness, manufacturing, marketing and sales, electricit ...
,
Odebrecht,
Itaúsa,
Camargo Corrêa,
Votorantim Group,
Andrade Gutierrez
Andrade Gutierrez is a Brazilian private multinational conglomerate headquartered in Belo Horizonte. The company was founded in 1948 in Belo Horizonte, Minas Gerais by the Andrade and Gutierrez families. As of 2013, Andrade Gutierrez is the secon ...
, and Queiroz Galvão.
In New Zealand,
Fletcher Challenge was formed in 1981 from the merger of
Fletcher Holdings
The Fletcher Construction Company Limited is a New Zealand construction company and a subsidiary of Fletcher Building. Together with Higgins Contractors Ltd it makes up the Construction division of Fletcher Building. Fletcher Construction is wide ...
, 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.
In
Pakistan, some of the examples are
Adamjee Group
Adamjee Group of Companies is a conglomerate company based primarily in Karachi, Pakistan. The group was headed by Sir Adamjee Haji Dawood.
As of 2007, it is unofficially estimated that the owners of Adamjee Group are among the top 40 wealthiest ...
,
Dawood Hercules
Dawood Hercules Corporation Limited ( Urdu1, داؤد ہرکولیس کارپوریشن, DH Corp.) is a publicly listed investment and holding company headquarterd in Karachi, Pakistan. It operates two subsidiaries, Engro Corporation and Empir ...
,
House of Habib,
Lakson Group and
Nishat Group.
In the
Philippines, the largest conglomerate of the country is the
Ayala Corporation which focuses on
malls,
bank,
real estate development, and
telecommunications. The other big conglomerates in the Philippines included
JG Summit Holdings,
Lopez Holdings Corporation,
ABS-CBN Corporation,
GMA Network, Inc.,
MediaQuest Holdings,
TV5 Network, Inc.,
SM Investments Corporation
SM Investments Corporation (SMIC), also known as SM Group, is a Filipino conglomerate with interests in shopping mall development and management, retail, real estate development, banking, and tourism. Founded by Henry Sy, it has become one of ...
,
Metro Pacific Investments Corporation, and
San Miguel Corporation.
In United States, some of the examples are
The Walt Disney Company,
Warner Bros. Discovery and
The Trump Organization (see below).
In Canada, one of the examples is
Hudson's Bay Company. Another such conglomerate is
J.D. Irving, Limited, which controls a large portion of the economic activities as well as media in the
Province of New Brunswick
New Brunswick (french: Nouveau-Brunswick, , locally ) is one of the thirteen provinces and territories of Canada. It is one of the three Maritime provinces and one of the four Atlantic provinces. It is the only province with both English and ...
.
Advantages and disadvantages of conglomerates
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
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...
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 issues.
* 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.
*
Brand dilution
A brand is a name, term, design, symbol or any other feature that distinguishes one seller's good or service from those of other sellers. Brands are used in business, marketing, and advertising for recognition and, importantly, to create an ...
where the brand loses its brand associations with a market segment, product area, or quality, price or cachet.
* Conglomerates more easily run the risk of being
too big to fail.
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
A market anomaly in a financial market is predictability that seems to be inconsistent with (typically risk-based) theories of asset prices. Standard theories include the capital asset pricing model and the Fama-French Three Factor Model, but a l ...
, 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
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
between media companies designed to create conglomerates for the purposes of creating
synergy
Synergy is an interaction or cooperation giving rise to a whole that is greater than the simple sum of its parts. The term ''synergy'' comes from the Attic Greek word συνεργία ' from ', , meaning "working together".
History
In Christia ...
between them:
*
WarnerMedia 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
AOL (stylized as Aol., formerly a company known as AOL Inc. and originally known as America Online) is an American web portal and online service provider based in New York City. It is a brand marketed by the current incarnation of Yahoo (2017 ...
,
Time Warner Cable, and
Time Inc. – since 2004.
*
Clear Channel Communications
iHeartMedia, Inc., formerly CC Media Holdings, Inc., is an American mass media corporation headquartered in San Antonio, Texas. It is the holding company of iHeartCommunications, Inc. (formerly Clear Channel Communications, Inc.), a company fou ...
, a public company, at one point owned a variety of TV and radio stations and
billboard
A billboard (also called a hoarding in the UK and many other parts of the world) is a large outdoor advertising structure (a billing board), typically found in high-traffic areas such as alongside busy roads. Billboards present large advertise ...
operations, together with many concert venues across the US 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
A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a speci ...
, but are a clear advantage of the conglomerate strategy. On December 21, 2005, Clear Channel completed the divestiture of
Live Nation
Live Nation Entertainment, Inc. is an American global entertainment company and monopoly that was founded in 2010 following the merger of Live Nation and Ticketmaster. The company promotes, operates, and manages ticket sales for live entertainme ...
, 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.
* Impact of conglomerates on the media: The four major media conglomerates in the United States are
The Walt Disney Company,
Comcast
Comcast Corporation (formerly known as American Cable Systems and Comcast Holdings),Before the AT&T merger in 2001, the parent company was Comcast Holdings Corporation. Comcast Holdings Corporation now refers to a subsidiary of Comcast Corpora ...
,
Warner Bros. Discovery and
Paramount Global. The Walt Disney Company is linked with the
American Broadcasting Company (ABC)
The American Broadcasting Company (ABC) is an American commercial broadcast television network. It is the flagship property of the ABC Entertainment Group division of The Walt Disney Company. The network is headquartered in Burbank, Calif ...
, creating the largest media corporation, with revenue equal to roughly thirty six billion dollars. Since Walt Disney owns ABC, it controls its news and programming. Walt Disney also acquired most of Fox, for over $70 billion. When
General Electric owned NBC, it did not allow negative reporting against General Electric on air (
NBCUniversal is now owned by Comcast). Viacom merged with CBS in 2019 as
ViacomCBS (now
Paramount Global) after originally merged in 1999 with Viacom as the surviving company while also Viacom divested CBS in 2005 due to
FCC regulations as the time.
* Media conglomerate impact on journalism: It leads to opinionated journalism versus traditional journalism. Opinionated journalism is a journalist adding his or her ideologies on a matter on top of reporting it to the public. The coverage that conglomerates have of issues, especially political, is not necessarily objective, and fails to report both sides of an issue, if not taking a neutral stance. This is known as media bias. Media bias is "the intentional or unintentional slanting of news reporting toward one side due political views or cultural beliefs of journalists, producers or owners of a media outlet.
”
Internet conglomerates
A relatively new development, Internet conglomerates, such as
Alphabet
An alphabet is a standardized set of basic written graphemes (called letters) that represent the phonemes of certain spoken languages. Not all writing systems represent language in this way; in a syllabary, each character represents a s ...
, Google's parent company
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
In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment, such as interest payments, coupons, cas ...
, 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
Philip Morris group, which once was the parent company of
Altria
Altria Group, Inc. (previously known as Philip Morris Companies, Inc.) is an American corporation and one of the world's largest producers and marketers of tobacco, cigarettes and related products. It operates worldwide and is headquartered in ...
group,
Philip Morris International, and
Kraft Foods had an annual combined turnover of $80 bn. Although Phillip Morris International and Kraft Foods were spun off to independent companies.
*
Nestlé
See also
References
Bibliography
*
* McDonald, Paul and Wasko, Janet (2010), ''The Contemporary Hollywood Film Industry'',
Blackwell Publishing
Wiley-Blackwell is an international scientific, technical, medical, and scholarly publishing business of John Wiley & Sons. It was formed by the merger of John Wiley & Sons Global Scientific, Technical, and Medical business with Blackwell Publish ...
Ltd.
External links
"Conglomerate".Encyclopædia Britannica. 2007. Encyclopædia Britannica Online. November 17, 2007.
An example of how conglomerates were used in the 1960s to manufacture earnings growth
{{DEFAULTSORT:Conglomerate (Company)
Types of business entity