A Conglomerate Merger is a union between companies that operate in different industries and are involved in distinct, unrelated business activities.
Conglomerate mergers are divided into pure conglomerate mergers and mixed conglomerate mergers. The first type – the pure merger – is comprised of two companies that operate in separate and distinct markets. The second type – the mixed merger – is one where the merging firms intend to expand their product lines or target markets, so they may eventually no longer only be involved in totally unrelated core businesses.
A wave of conglomerate mergers occurred in the United States in the 1960s and 1970s. However, many new entities were quickly divested. At the present time, conglomerate mergers are quite rare.
Advantages of a Conglomerate Merger
A conglomerate merger provides the merging companies with the advantage of diversification of business operations and target markets. As the merging companies operate in distinct 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, a conglomerate merger may represent a viable investment option. By investing in a company doing business in a different industry, it can reduce its risk exposure, while finding new growth opportunities outside of its own industry.
Disadvantages of a Conglomerate Merger
Despite the advantages, there are some significant potential 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 not likely to have any direct experience in the industry in which its target operates. Therefore, the acquiring company may not be able to successfully leverage the potential advantages of the merger, such as expanding product lines. The lack of “on point” industry experience may even cause the performance of the target company to decline after the merger.
2. Focus shift in business operations
In the case of a conglomerate merger, a bidder may shift its focus, at least temporarily, from its own core business operations to the primary operations of the target company. However, there is a high probability that the new management of the target company will not be able to improve, or possibly even maintain, the performance of the target company. In the meantime, the shift in focus can adversely affect the acquirer’s own core business operations. Thus, the focus shift may be detrimental to the conglomerate as a whole.
3. Hard to merge cultural values
For companies that operate in different industries, it is often difficult to successfully mesh the companies’ cultural values. A company’s business culture incorporates its business values and mission statement, its corporate vision, and the management and working style of its employees. The corporate culture of a business is important because it affects the whole of a company’s operations – from production and sales, to accounting, to broad strategic decisions.
Successfully merging companies with varying corporate cultures is a challenge for any merger. This is even more so the case with a conglomerate merger, where there are likely to be greater significant differences between the companies’ core beliefs and working styles, due to them operating in different industries.
Thank you for reading CFI’s guide to conglomerate mergers. To learn more about the different types of mergers, see the following CFI resources: