What Is Conglomeration?

Conglomeration describes the process by which a conglomerate is created, as when a parent company begins to acquire subsidiaries. Sometimes conglomeration can refer to a time period when many conglomerates are formed simultaneously. One of the chief advantages of conglomeration is the immunity that it provides the parent company from potential takeovers.

Understanding Conglomeration

Conglomeration became an increasingly common and popular process in the 1950s because it is a convenient way for parent companies to operate several related or complementary firms in conjunction with each other.

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

Conglomeration provides a way for two or more companies to diversify into other lines of business.

Special Considerations

In theory, conglomerates offer economies of scale through greater access to capital markets and a cheaper source of funding. Conglomeration was popular in the 1960s due to a combination of low interest rates and a repeating bear-bull market, which allowed the conglomerates to buy companies in leveraged buyouts, sometimes at temporarily depressed values.

Classic business combination during this period includes Ling-Temco-Vought, ITT Corporation, Litton Industries, Textron, and Teledyne. During the 1980s, General Electric (GE) came to represent the conglomerate archetype after a series of vertical and horizontal acquisitions.

As mutual funds have come to dominate investment portfolios, diversification has been achieved far cheaper than with corporate M&A, thus weakening the need for conglomerate business models. The common criticism of conglomeration center on the added layers of management, lack of transparency, corporate culture issues, mixed brand messaging, and moral hazard brought on by too big to fail businesses.

Although a relatively new development, internet and network conglomerates, such as Alphabet, Google's parent company, and the social media behemoth, Facebook, belong to the modern media conglomerate group and play a major role in overlapping industries.

One of the main motivations for conglomeration is creating something new from the combined energies of multiple companies to produce independent goods and services under one parent company’s management. Another reason for conglomeration is executing on the concept of diversification by combining two smaller firms. The union allows the larger, newly formed parent company to diversify its product offering, which helps it reach a new and wider base of customers. Ultimately, it all comes down to productivity and revenue.

Key Takeaways

  • Conglomeration describes the process by which a conglomerate is created, as when a parent company begins to acquire subsidiaries.
  • Conglomeration often results in a new company that is a large multi-industry, multinational company.

Disadvantages of Conglomeration

One of the main knocks on conglomeration is the potential vulnerability that comes with possibly being spread too thin. When multiple companies are all independently producing goods and services that must then be bundled and distributed by one parent company, one weak link in the system can bring a conglomerate down.

Ultimately, the management team is responsible for making sure this doesn't happen. Moreover, it is essential for management to prove to investors, shareholders, and the financial world at large that several diverse companies operating under one umbrella are better than they would be if they continued on as separate entities.