Conglomerate Merger

Article byWallstreetmojo Team
Edited byShreeya Jain
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Conglomerate Merger?

A conglomerate merger is a merger or amalgamation of two businesses that are unrelated or different from each other. However, this merger’s primary purpose is to combine different businesses into one and earn a majority share in the market.

Conglomerate Merger

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These mergers usually occur between firms that operate in different industries. In addition, there is a profitable venture created out of it. Also, it increases the customer base and product ranges available. However, cultures and technologies can be overlapping, which might affect productivity. Although the businesses are unrelated, there might be strategic benefits, such as shared resources, technologies, or management expertise.

Key Takeaways

  • A conglomerate merger refers to the union or combination of two firms with different businesses. However, they tend to have similar synergies that create a strong market effect.
  • The two types of conglomerate mergers include pure and mixed. Pure mergers occur when firms have nothing in common. In contrast, mixed mergers do have a purpose.
  • Here, the companies may merge to diversify their business portfolios and reduce dependence on a single industry or market.
  • Such mergers may lose focus as they manage a wide range of unrelated businesses, potentially leading to inefficiencies and a lack of strategic clarity.

Conglomerate Merger Explained

A conglomerate merger refers to a merger that combines a variety of businesses under one umbrella to grow. These companies may operate in different industries, have distinct product lines, and serve diverse markets. Here, the buyer only intends to acquire firms with a strong presence in their respective markets. Companies can perform conglomerate mergers through various methods. Some of them include expansion into a similar field, merging with an uncommon firm, and extension of the parent company by acquiring subsidiaries.

Moreover, the reasons for conglomerate mergers include diversification, market power, and strategic positioning. Furthermore, here, the buyer tries to diversify its presence in different branches to increase its market share. As a result, it sounds attractive to both investors and buyers.

However, there are different factors to consider before approaching a conglomerate merger. Hence, conglomerate merger companies should consider diversifying in only those sectors that have no antitrust issues. As a result, there is cooperation between the management of both firms. In addition, there is a high growth potential. If the seller firm has enormous potential, it will be beneficial in the long run. In addition, there must be strong synergies between them. Therefore, the stronger the cooperation, the wider the combined effect.

However, these mergers are of two types, namely:

#1 – Pure Conglomerate Merger

This type of merger involves companies that have no common business areas. They come together to diversify their business interests and reduce overall risk. For example, a company in the telecommunications sector merges with a company in the food and beverage sector.

#2 – Mixed Conglomerate Merger

It refers to a merger where both firms have something in common. They take advantage of their respective synergies. For instance, a technology company merges with a healthcare company to leverage technology in healthcare solutions.

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Examples

Let us look at the conglomerate merger example to understand the concept better:

Example #1

Suppose Leonard owns a textile group, “Cottage Ltd” of linen clothes. In the past 20 years, they have achieved a total market share of 60% in the United States. However, now, they realize the need to synergize with other firms in different sectors. In contrast, Jerry Foods Ltd. is a well-known food brand with a more extensive consumer base in Gen Z and Gen X.

Therefore, in the next few months, they merged with Jerry Foods. As a result, Leonard’s company saw a massive rise in its market share. It rose from 60% to 85%. Likewise, in the future, they will acquire firms in the telecommunication and technology sectors. Thus, in 5 years, Cottage Ltd became the biggest conglomerate merger.

Example #2

The San Jose-based online auction giant eBay Inc. announced on October 2022 that the conglomerate merger of PayPal Inc. had been completed.

According to eBay, the $1.5 billion stock swap deal was authorized by the owners of nearly 65% of PayPal’s stock in common or more than 99% of the shares that were eligible to vote.

With its Web Accept online payment processing service, PayPal will continue to run as a stand-alone company and serve online retailers. PayPal will gradually discontinue its online gambling business, according to eBay.

The valuation of the $1.5 billion acquisition is based on eBay’s average closing share price over the two days before and after the announcement of the deal, as well as a set exchange ratio of 0.39 eBay shares for each PayPal share, according to eBay. According to eBay, the deal also includes acquisition-related expenses of around $17 million.

Advantages And Disadvantages

Conglomerate Mergers had great importance in the 1960s and 1970s. However, they have certain pros and cons between them. Let us look at them:

AdvantagesDisadvantages
Firms interact and merge with companies from different sectors as part of their business diversification strategy.Buyers often need help handling the other due to their inexperience. 
However, it is difficult to cooperate with two different corporate cultures together.Useful in collaborating with different corporate cultures and personnel.
Increases the synergies with each other.Problems arise following government compliances.
Rise in the market share of the buyer.There is a shift of focus from the main business.
Useful in collaborating different corporate cultures and personnel.There is no scope for internal transformation, and as a result, efficiency is reduced. 
Helps in achieving economies of scale as it reduces advertising, marketing, and other costs. They need more freedom in conducting business operations.
Interaction with the new consumer base.Difficulty while maintaining financial records.
Proper use of excess cash in hand that, in turn, generates cash flow in the future.Chances of possible tax losses.
Helps in reducing risks arising due to uncertainties.Investors and the market may be skeptical about the strategic rationale behind a conglomerate merger, potentially leading to a lower stock valuation.

Frequently Asked Questions (FAQs)

1. What are the methods for conducting conglomerate mergers?

Conglomerate mergers can be performed in numerous ways. However, there are certain ways to conduct them. It includes unrelated products, complementary, and weak or substitute products.

2. What are the three characteristics of conglomerate mergers?

Following are the characteristics or features of conglomerate mergers. Let us look at them:
– They have nothing in common
– Overlapping with their technologies
– Common synergies with each other. 
– High chance of a profitable venture.

3. Can a conglomerate merger result in cost savings?

Yes, a conglomerate merger can result in cost savings through economies of scale and operational efficiencies. However, the extent of cost savings may be less compared to mergers within the same industry, where operational synergies are more apparent.

This article has been a guide to what is Conglomerate Merger. Here, we explain in detail its examples, advantages, and disadvantages. You may also find some useful articles here –

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