Conglomerate Merger

What Is a Conglomerate Merger?

A conglomerate merger is a merger between firms that are engaged with absolutely unrelated business activities. These mergers commonly happen between firms inside various industries or firms situated in various geographical areas.

There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers include firms with nothing in common, while mixed conglomerate mergers include firms that are searching for product extensions or market extensions.

Grasping a Conglomerate Merger

A conglomerate merger comprises of two companies that don't share anything for all intents and purpose. Their businesses don't overlap nor are they contenders of each other; nonetheless, they really do accept that there are benefits in joining their firms.

There are many explanations behind conglomerate mergers, for example, increased market share, synergy, and cross-selling opportunities. These could take form in advertising, financial planning, research and development (R&D), production, or some other area. The overall conviction, with any merger, is that the recently formed company will be better than the two separate companies for all stakeholders.

Firms likewise converge to reduce the risk of loss through diversification. Notwithstanding, on the off chance that a conglomerate turns out to be too large from acquisitions, the firm's performance can endure. During the 1960s and 1970s, conglomerate mergers were well known and generally ample. Today, they are uncommon as a result of the limited financial benefits.

There are a huge number to conglomerate mergers who accept that they carry less proficiency to the marketplace. They fundamentally accept this happens when larger firms acquire smaller firms, which permits larger firms to get more market power as they "eat up" and consolidate certain industries. The banking industry has been an illustration of this, where large national or regional banks have, generally, acquired small, nearby banks, and consolidated the banking industry under their influence.

A few renowned conglomerate mergers of recent times incorporate Amazon and Whole Foods, eBay and PayPal, and Disney and Pixar.

Advantages and Disadvantages of a Conglomerate Merger

Advantages

Regardless of its unique case, conglomerate mergers enjoy several benefits: diversification, an expanded customer base, and increased effectiveness. Through diversification, the risk of loss diminishes. Assuming that one business sector performs poorly, other, better-performing business units can make up for the losses. This can likewise be seen as an investment opportunity for a company.

The merger likewise permits the firm to access another pool of customers, subsequently extending its customer base. This new opportunity permits the firm to market and cross-sell new products, leading to increased incomes. For instance, Company A, having some expertise in manufacturing radios, converges with Company B, which has practical experience in manufacturing watches, to form Company C. Company C presently approaches a large customer base to which it can market its products to (e.g., Company A's product to Company B's customers, and vice versa).

Notwithstanding increased sales from a larger market, the new firm benefits with increased efficiencies when each merged company contributes best practices and competencies that empower the firm to ideally operate.

Disadvantages

In spite of the fact that diversification is frequently associated with reward, it additionally conveys risks. Diversification can shift concentration and resources from core operations, adding to poor performance. In the event that the gaining firm is deficiently knowledgeable about the industry of the acquired firm, the new firm is probably going to create insufficient corporate governance policies, poor pricing structures, and an unpracticed, underperforming labor force.

Likewise, it very well may be trying for firms inside various industries or with fluctuating business models to effectively foster another corporate culture in which the ways of behaving and values line up with the mission and vision of the new firm. Fostering a new corporate culture isn't predicated on dissolving pre-existing cultures. Rather, an effective merger of cultures includes a consensus on operating processes, values, and principles that advance the outcome of the firm and its partners.

Features

• Rivals of conglomerate mergers accept that they can lead to a lack of market proficiency when large companies consolidate the industry by procuring smaller firms.
• There are two types of conglomerate mergers: pure, where the two firms keep on operating in their own markets, and mixed, where the firms look for product and market extensions.
• Two firms would go into a conglomerate merger to increase their market share, differentiate their businesses, cross-sell their products, and to exploit collaborations.
• The downside to a conglomerate merger can bring about loss of proficiency, conflicting of cultures, and a shift away from the core businesses.
• A conglomerate merger is a merger of two firms that have totally unrelated business activities.