Conglomerate

Conglomerate Meaning

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.

Understanding Conglomerates

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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.read more 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.read more 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.read more.

How Does a Company Expand?

MergerMergerA merger is a voluntary fusion of two existing entities equal in size, operations, and customers deciding to amalgamate to form a new entity, expand its reach into new territories, lower operational costs, increase revenues, and earn greater control over market share.read more or acquisitionAcquisitionAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. read more 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) refers to that business entity whose headquarter is in one country, and its branches or subsidiaries extend across the globe in two or more nations. The MNCs aim at maximum revenue generation by spreading business worldwide.read more 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 acquisitions.

Example of Conglomerates in Business

1. 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) is long-term finance extended to startups with high-growth potential to help them succeed exponentially. The investors are venture capitalists who bear the excessive financial risk and provide guidance to startups to attain their objectives.read more, 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.read more 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.

Sector	Name
Insurance	Tata AIG
Finance	Tata Capital
E-commerce	Tata Cliq
Communications	Tata Communications
IT	Tata Consultancy Services
Consumer	Tata Global Beverages
A subsidiary of Tata Global Beverages	Tetley
Automobile	Tata Motors
Automobile	Jaguar Land Rover
Consumer	Tata Starbucks
Jewellery	Tanishq
Watch Making	Titan
Retail	Trent
Airline	Vistara
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.

Asian Dominance

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.

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