conglomerate

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A conglomerate is a combination of two or more companies engaged in entirely different businesses together into one overarching company. Conglomerates are often large pieces.^[1] The term may also refer to a multi-industry company.

Origins

The Dutch East India Company is considered to be one of the earliest conglomerate groups after the British East India Company (the first); originally a trade enterprise established to ship goods from the Far East to the Dutch Republic, the East India Company grew into a powerful economic entity embracing economic ventures focused on commerce and manufacturing, and a political force in India.

Modernization

The end of the First World War caused a brief economic crisis in Weimar Germany, permitting entrepreneurs to buy up varied 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 an assortment of other economic enterprises.

Conglomerates were popular in the 1960s due to a combination of low interest rate(s) 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, ITT Corporation, Litton Industries, Textron, Teledyne, and Gulf and Western Industries. As long as the target company had profits greater than the interest on the loans, the overall return on investment (ROI) of the conglomerate appeared to grow.

For many years this was enough to make the company's stock price rise, as companies were often valued largely on their ROI. 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. As soon as interest rates started to rise in order to offset inflation, the profits of the conglomerates fell. Investors also noticed that the companies inside the conglomerate were growing no faster than they had before they were purchased, whereas the rationale for buying a company was often that "synergies" would lead to more efficiency. By the late 1960s they were frowned on by the market, and a major sell off of their shares ensued. In order to keep the companies going, many conglomerates were forced to shed the industries they had purchased recently, and by the mid-1970s most had been reduced to shells.^{[citation needed]} 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 the above manipulation of paper ROI. Companies with this orientation would only make acquisitions or start new branches in other sectors when they believe this will increase profitability or stability. 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 also owns a majority of NBC Universal, which owns the NBC television network and several 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, as it was often less expensive to lease from GE than buy new equipment using loans. United Technologies has also proven to be an extremely successful example of a conglomerate.

Another example of a successful conglomerate is Warren Buffet's Berkshire Hathaway, a holding company which used its insurance surplus to invest in a variety of manufacturing and service businesses.

International

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 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 South Korea, Chaebol is 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 well-known Korean chaebols are Samsung, LG and Hyundai Kia Automotive Group.

The era of Licence Raj (1947–1990) in India created some of Asia's largest conglomerates, such as the Tata Group, Kirloskar Group, Reliance Industries and the Aditya Birla Group.

Conglomerates also exist in Turkey. Koç Holding and Sabancı Holding are Turkey's two largest 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. In other words, if Berkshire Hathaway's construction materials business has a bad year, the loss might be offset by a good year in its insurance business. This advantage is enhanced by the fact that the business cycle affects industries in different ways.

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.^[2]

Disadvantages

• Synergies are illusory.
• The extra layers of management increases costs.^[3]
• Accounting disclosure is less useful information, many numbers are disclosed grouped, rather than separately for each business. The complexity of a conglomerates' accounts make them harder for investors and regulators to analyse, and makes it easier for management to hide things.
• Culture clashes can destroy value.^[4][5]
• Inertia prevents development of innovation.^[6]
• Lack of focus, and inability to manage unrelated businesses equally well are the reasons to criticize conglomerates.^[7]

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.^[8]

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 synergies between them:

• Time Warner includes a series of tenuously linked business including internet access and content, film, and cable systems and television. Their diverse portfolio of assets allow cross-promotion and economies of scale.
• Clear Channel Communications, a quoted 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 spin-off of Live Nation, and in 2007 the company spun off their television stations to other companies, some which Clear Channel holds a small interest in. Live Nation owns the events and concert venues previously owned by Clear Channel Communications.

See also

• List of conglomerates
• Media conglomerate
• Holding company
• Subsidiary
• Associate company
• Chaebol
• Keiretsu
• Zaibatsu
• Concern (business)

Notes

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External links

• Conglomerate Monkeyshines, An example of how conglomerates were used in the 1960s to manufacture earnings growth