Conglomerate Merger

What is a 'Conglomerate Merger'

A conglomerate merger is a merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

BREAKING DOWN 'Conglomerate Merger'

Conglomerate mergers happen when two companies that offer varying services or are involved in different sectors of business merge together. This type of conglomerate merger can occur when two similar companies are deciding to merge in order to spread themselves better throughout the market. This ensures the two companies as one entity are a stronger company than they would be on their own. When these types of deals occur, it can upset some of the market, because it could allow a monopoly in a certain market. There are both advantages and disadvantages to these types of mergers.

There are many reasons for firms to merge, which include increasing market share, synergy and cross selling. Firms also merge to diversify and reduce their risk exposure. However, if a conglomerate becomes too large as a result of acquisitions, the performance of the entire firm can suffer. This occurred during the conglomerate merger phase of the 1960s.

Advantages

There are a couple concrete examples of benefits for merging. One benefit of a conglomerate merger is that both companies reach a larger target audience. If company Y merges with company Z, both companies share the same market base, letting them spread out their operations. Before the merger, each company was able to target only their own areas of the market, but the two companies combined have twice as much reach, allowing for growth and cross referencing between potential clients and businesses alike. In business and finance alike, diversification is key. There is less risk, as the factors are spread out through different avenues, allowing the company to overcome any potential failures that may arise.

Potential Downfalls

Diversification can sometimes be a downfall for certain companies, because they can spread themselves across too many areas. An example of this is if one conglomerate involved in the merger has an excessively strong hold over the other conglomerate. This type of coalescence can be a detriment, because it limits the newly formed business options in the marketplace. Along with this is the disadvantage of controlling and governing such a large conglomerate entity. When these companies combine, they merge all past customers with differing accounts. The bureaucracy needed to take care of this can be a detriment to the new conglomerate. Regardless, the structure of the company will be changed, creating potential problems along with the advantages.