DEFINITION of 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.
BREAKING DOWN 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. But conglomeration also provides an avenue for parent firms to diversify into other lines of business.
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.
History of Conglomeration
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.