A conglomerate in business terminology is a company that owns a group of subsidiaries conducting business separately, often in distinct industries. It reflects diversification of operations, product line and market to allow business expansion.
For example, tech giant Samsung is a globally renowned South Korean conglomerate that offers many electronic goods. However, Samsung is also efficiently conducting business across unrelated sectors such as heavy industry, construction, insurance, advertising, etc.
- A conglomerate is defined as a company that owns many smaller businesses operating in unrelated industries such as food, medicine, clothing, technology, etc. It helps in lowering business risksBusiness RisksBusiness risk is associated with running a business. The risk can be higher or lower from time to time. But it will be there as long as you run a business or want to operate and expand. by reducing reliance on single products or market.
- Each business functions independently with separate CEOs who are responsible for profits. Usually, they all report to the parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies. that owns them all.
- Expansions typically arise out of acquisitions, and mergers. Many family businesses turned into a conglomerate with mergers and acquisitions as well as by establishing seperate businesses.
- Conglomerates were a rage in 1960s, slowly losing popularity to antitrust laws, mismanagements arising out lack of focused growth and high overhead costsOverhead CostsOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.. Some oldest business groups that have survived the changing course of popularity are Berkshire Hathaway General Electric, Siemens, and Samsung among others.
Conglomerates imply business expansion by diversification to avoid relying on a single product for income. For example, suppose a company started as a cement provider and gradually expanded into sectors such as home décor, electronics and education industry. Inevitably, it became a conglomerate by diversifying from its core business of cement generation towards many unrelated businesses. Some companies expand within the same industry.
Each business functions independently with separate CEOs who are responsible for profits. It allows specialization of business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation. by employing a specialized workforce and knowledge. Usually, subsidiariesSubsidiariesA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company. report to the parent company that owns them all. Subsidiaries must act in line with the parent company’s reputation. Some business empires hold over 50 companies, many of which are listed separately. Their individual earning reports are consolidated with the parent company’s SEC filingsSEC FilingsSEC filings are formal documents submitted to the Securities and Exchange Commission in the United States that contain financial information about the company as well as any other relevant information about recent or upcoming activities..
How Does a Company Expand?
MergerMergerMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm. or acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion. is perhaps the most widely used methodology to become a conglomerate. It will take years for a firm if it starts from scratch. As such, established entities often acquire smaller businesses with a considerable customer base to enter a new market or industry for a strong footing.
Many multinational companiesMultinational CompaniesA multinational company (MNC) is defined as a business entity that operates in its country of origin and also has a branch abroad. The headquarter usually remains in one country, controlling and coordinating all the international branches. are conglomerates. Acquisitions brought them new markets, lower risks and joined profits. Additionally, a company can also become a conglomerate by splitting itself to diversify seperate business plans. It allows a company to launch itself into distinct industries by establishing new businesses without any mergers/acquisitions.
In simple terms, this can be understood as splitting the company into various divisions based on distinct business lines with independent CEOs. Many family businesses have expanded their empire using a combination of organic expansion, mergers and acquisitionsMergers And AcquisitionsA merger and acquisitions (M&A) agreement refers to an agreement between two existing companies to merge into a new company, or the purchase of one company by another, which is done generally to benefit from the synergy between the companies, expand research capacity, expand operations into new segments, and increase shareholder value, among other things..
Example of Conglomerates in Business
- Expansion by Acquisition
Berkshire Hathaway, America’s one of the oldest conglomerates, was originally a part of a textile business. Then, in 1965, legendary investor Warren Buffet overtook its reins by acquiring major stocks of the firm. Today, it is a $632 billion company after Buffet invested heavily in many stocks under Hathaway.
The company owns more than 60 companies. Its subsidiaries are prospering in unrelated businesses across sectors such as insurance, energy, utility, manufacturing, freight rail transportation, retailing, etc. In addition, Berkshire holds substantial stakes in Apple, Coca Cola, American Express, Bank of America, etc.
2. Organic expansion
Google’s corporate restructuring made it a part of a conglomerate not by integration but when it split itself from its other businesses. In 2015, Google’s co-founder Larry Page announced that Google would become a subsidiary of Alphabet.
The move was intended to separate Google’s core business of search, YouTube, advertising and Android from other business aspirations undertaken by Google. The separation was rooted in the idea of dedicating focused attention to Google’s core business and other initiatives.
As part of other projects under Other Bets, Alphabet has been working towards several ambitious projects such as venture capitalVenture CapitalVenture capital (VC) refers to a type of long-term finance extended to startups with high-growth potential to help them succeed exponentially. , self-driving cars, healthcare plans, etc. Google’s business and revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. expanded over the years. In 2020, Alphabet hit $1 trillion in market capitalization.
3. Expansion of a Family Business
A household name in India is that of the Tata Group. Jamsetji Tata founded it in 1868 as a trading company. The company slowly built itself by establishing new industries and through acquisitions.
For example, in 1945, the Tata group established Tata Motors as Tata Engineering and Locomotive Co. Limited, which is amongst India’s largest automobile firms. It was introduced to manufacture locomotives and many engineering products. In 2002, Tata Group acquired the beloved England beverage brand Tetley which was founded in 1837.
Today, Tata Groups owns 100s of companies in over 100 countries. Many of them are listed with Tata Sons Ltd as the principal holding company of the Tata Group. Some of the subsidiaries and joint ventures of the Tata group, which gives it the stature of a conglomerate, are listed as under.
|IT||Tata Consultancy Services|
|Consumer||Tata Global Beverages|
|A subsidiary of Tata Global Beverages||Tetley|
|Automobile||Jaguar Land Rover|
|Hospitality||Taj Hotels Resorts and Palaces|
Fall and Rise of Conglomerates
Conglomerate structures dominated the United States for several years, from roughly the 1950s. It became easier to multiply profits by buying firms from unrelated businesses. Although, from the 1980s, troubles ensued when investors showed discontent. Companies lacked focused control over subsidiaries, with many falling into a loss.
As per a study by American Sociological Association, antitrust laws eliminated monopoly coming through expansion. Monopoly restricts the entry of new players. As a result, the popularity of conglomerates fell in favor of less diversified focused businesses. Multidivisional structures took over to manage multiple businesses. Only reputed names survived, such as Berkshire Hathaway, General Electric, Disney, etc., by adapting themselves to the changes.
People started to assume business groups were a thing of the past until the world of tech giants unfolded itself. Amazon, Apple, Facebook are referred to as conglomerates by many owing to their diversified business. For example, Amazon has come a long way from delivering books. Apart from an exponential widening of the online delivery business, it offers streaming services, cloud computing, gadgets and payment medium, among others. Moreover, it has acquired many companies to expand its business, with the recent name being MGM Studios.
In Asian countries such as South Korea, India, China, Japan, etc., conglomerates have been thriving for several years. As per a McKinsey Study, in 2013, the sales of these business giants rose to 23% in China and India and 11% in South Korea. Popular names include Tata Group, Mitsubishi, Doosan and Jardine Matheson.
Several pieces of research have been conducted to identify the reason behind their survival. As per Harvard Business Review, diversification, greater involvement of ownership and management, and hiring professionals for managing the family business have helped in the survival of business groups in Asian countries.
German company Siemens AG which was founded in 1847, is one of the largest conglomerates owning several subsidiaries in separate businesses such as healthcare, infrastructure, power generation, chemical industry, digitization, etc., all functioning independently. For example, Siemens Corporation, the US subsidiary of Siemens, employed 50,000 people in 2018 across the state and reported $23.7 billion.
Conglomerate in business is defined as a company that comprises several subsidiaries doing business in often unrelated industries. Usually, subsidiaries are a result of acquisitions or mergers. They are headed by separate CEOs and conduct business independently. It allows specialization due to the specialized workforce and expertise centric to the business. Although, subsidiaries hold answerability to the parent company and act in line with its expectations.
In a way, Amazon, Apple, Facebook, etc., are called a conglomerate by many due to their large-scale diversification from core business. For example, Amazon has come a long way from delivering books.
Apart from an exponential widening of online delivery business, it offers streaming services, cloud computing, gadgets and payment medium, etc. Moreover, it has acquired many companies to expand its business, with the recent name being MGM Studios.
This has been a guide to what are Conglomerates and their meaning. Here we discuss top examples of conglomerates along with a detailed explanation. You can learn more about Financing from the following articles –