Conglomerate (company)

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A conglomerate is a combination of two or more corporations engaged in entirely different businesses that fall under one corporate structure (a corporate group), usually involving a parent company and several (or many) subsidiaries. Often, a conglomerate is a multi-industry company. Conglomerates are often large and multinational.

Contents

Modernization

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,[1] ITT Corporation,[1] Litton Industries,[1] Textron,[1] Teledyne,[1] Gulf+Western,[1], AT&T, and Transamerica. 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. Also, the conglomerate had a better ability to borrow in the money market, or capital market, than the smaller firm at their community bank.

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. When interest rates rose to offset inflation, the profits of the conglomerates fell. Investors noticed that the companies inside the conglomerate were growing no faster than before they were purchased, whereas the rationale for buying a company was that "synergies" would provide efficiency. By the late 1960s they were shunned by the market, and a major sell-off of their shares ensued. 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.[2] 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 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 by sharing risks. 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 minority interest in 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 a successful conglomerate.

With the spread of mutual funds (especially index funds since 1976), investors could more easily obtain diversification by owning a small slice of many companies in a fund rather than owning shares in a conglomerate.

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

International

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

The best known British conglomerate was Hanson plc. It followed a rather different timescale than the US 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 Hong Kong, two most well-known conglomerates are the Swire Group and Jardine Matheson, both are British-owned companies that have a history of over 100 years and have business interests that span across four continents with a focus in Asia. Swire Group (or Swire Pacific) controls a wide range of businesses, including property (Swire Properties), aviation (i.e. Cathay Pacific and Dragonair), beverages (bottler of Coca Cola), shipping and trading. Jardine Matheson operates businesses in the fields of property, finance, trading, retail and hotel (i.e. Mandarin Oriental).

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, the chaebol are 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 largest and most well-known Korean chaebols are Samsung, LG, Hyundai Kia and SK.

The era of Licence Raj (1947–1990) in India created some of Asia's largest conglomerates, such as the Tata Group, Kirloskar Group, Larsen & Toubro, Mahindra Group, Sahara India, ITC Limited, Essar Group, Reliance ADA Group, Reliance Industries, Aditya Birla Group and the Bharti Enterprises.

Advantages

Disadvantages

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.[9]

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:

Food conglomerates

Similar to other industries there are many companies that can be termed as conglomerates.

See also

Notes

  1. ^ a b c d e f Holland 1989, pp. 57–64, 81–86.
  2. ^ [1] Hitachi, Ltd. - Company Profile, Information, Business Description, History, Background Information on Hitachi, Ltd.-Source-Reference for Business » Company History Index » Conglomerates
  3. ^ [2] Conglomerates: Cash Cows or Corporate Chaos?
  4. ^ Dearbail Jordan and Robin Pagnamenta (September 25, 2007). "BP to strip out four layers of management". The Times. http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article2527470.ece. 
  5. ^ "Culture clash: The risks of mergers". BBC News. 17 January 2000. http://news.bbc.co.uk/2/hi/business/607338.stm. 
  6. ^ Michelle C. Bligh (2006). "Surviving Post-merger ‘Culture Clash’: Can Cultural Leadership Lessen the Casualties?". Leadership 2 (4): 395–426. doi:10.1177/1742715006068937. http://lea.sagepub.com/cgi/content/abstract/2/4/395. 
  7. ^ "Innovation and Inertia". Stanford University's Entrepreneurship Center. http://ecorner.stanford.edu/authorMaterialInfo.html?mid=1319. 
  8. ^ [3] Definition of Conglomerate
  9. ^ [4] Conglomerate discount

Bibliography

McDonald, Paul and Wasko, Janet (2010), The Contemporary Hollywood Film Industry, Blackwell Publishing Ltd. ISBN 978-1-4051-3388-3

External links