Conglomerate Merger

A union between companies that operate in different industries

What is a Conglomerate Merger?

Conglomerate merger is a union between companies that operate in different industries and are involved in unrelated business activities.

There are two types of conglomerate merger: pure and mixed. In a pure conglomerate merger, the merging companies operate in distinctive markets. In a mixed merger, the merging firms intend to expand their product lines or target markets.

A wave of conglomerate mergers occurred in the United States between the 1960s and 1970s. However, many new entities quickly divested. Nowadays, conglomerate mergers are quite rare.

 

Conglomerate Merger

 

Advantages of a Conglomerate Merger

 

1. Diversification

A conglomerate merger provides the merging companies with the advantage of diversification of business operations and target markets. As the merging companies operate in distinctive industries and/or markets, the merged company is less vulnerable to declines in sales in one industry or market. Thus, the company could potentially achieve more stable cash flows relative to its competitors.

 

2. Cross-selling products

If the merging companies are involved in different businesses but with the same target markets, a conglomerate merger may help them to cross-sell their existing products. Cross-selling will eventually lead to higher profits for the new company.

 

3. Investment opportunity

If a company with excess cash is looking for suitable investment opportunities in its own industry, a conglomerate merger can become an option for investment. By investing in the company from a different industry, it can reduce its risk exposure, while finding a new growth opportunity outside its own industry.

 

Disadvantages of a Conglomerate Merger

Despite the advantages, there are some significant drawbacks to this type of merger.

 

1. No experience in other industry

A conglomerate merger can be dangerous for a bidder in this transaction as the company’s management is likely not to have any experience in the industry in which its target operates. It may be a reason that a bidder will not be able to leverage the advantages of the merger such as expanding product lines. On the contrary, it is likely that the performance of the target company will decline after the merger.

 

2. Focus shift in business operations

In case of a conglomerate merger, a bidder may shift its focus from its operations to the operations of a target company. However, there is a high probability that the new management will not be able to improve or even to maintain the performance of the target company. In the meantime, the shift in focus will adversely affect the bidder’s core operation; thus, a focus shift in business operations will be detrimental to the whole company.

 

3. Hard to merge cultural values

For companies that operate in distinctive industries, it will be problematic to combine the cultural values. The ability to merge cultural values is a problem for every type of merger. However, this problem becomes even more critical in a conglomerate merger involving companies with different or event-contrasting cultural values.

 

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