What Is a Conglomerate Merger?

A conglomerate merger is a merger between firms that are involved in totally unrelated business activities. These mergers typically occur between firms within different industries or firms located in different geographical locations.

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.

Key Takeaways

  • A conglomerate merger is a merger of two firms that have completely unrelated business activities.
  • There are two types of conglomerate mergers: pure, where the two firms continue to operate in their own markets, and mixed, where the firms seek product and market extensions.
  • Two firms would enter into a conglomerate merger to increase their market share, diversify their businesses, cross-sell their products, and to take advantage of synergies.
  • The downside to a conglomerate merger can result in loss of efficiency, clashing of cultures, and a shift away from the core businesses.
  • Opponents of conglomerate mergers believe that they can lead to a lack of market efficiency when large companies consolidate the industry by acquiring smaller firms.

Understanding a Conglomerate Merger

A conglomerate merger consists of two companies that have nothing in common. Their businesses do not overlap nor are they competitors of one another; however, they do believe that there are benefits in joining their firms.

There are many reasons for conglomerate mergers, such as increased market share, synergy, and cross-selling opportunities. These could take form in advertising, financial planning, research and development (R&D), production, or any other area. The overall belief, with any merger, is that the newly formed company will be better than the two separate companies for all stakeholders.

Firms also merge to reduce the risk of loss through diversification. However, if a conglomerate becomes too large from acquisitions, the firm's performance can suffer. During the 1960s and 1970s, conglomerate mergers were popular and most plentiful. Today, they are uncommon because of the limited financial benefits.

There are many opponents to conglomerate mergers who believe that they bring less efficiency to the marketplace. They primarily believe this happens when larger firms acquire smaller firms, which allows larger firms to acquire more market power as they "gobble up" and consolidate certain industries. The banking industry has been an example of this, where large national or regional banks have, for the most part, acquired small, local banks, and consolidated the banking industry under their control.

Some famous conglomerate mergers of recent times include Amazon and Whole Foods, eBay and PayPal, and Disney and Pixar.

Advantages and Disadvantages of a Conglomerate Merger

Advantages

Despite its rarity, conglomerate mergers have several advantages: diversification, an expanded customer base, and increased efficiency. Through diversification, the risk of loss lessens. If one business sector performs poorly, other, better-performing business units can compensate for the losses. This can also be viewed as an investment opportunity for a company.

The merger also allows the firm to access a new pool of customers, thereby expanding its customer base. This new opportunity allows the firm to market and cross-sell new products, leading to increased revenues. For example, Company A, specializing in manufacturing radios, merges with Company B, which specializes in manufacturing watches, to form Company C. Company C now has access to a large customer base to which it can market its products to (e.g., Company A's product to Company B's customers, and vice versa).

In addition to increased sales from a larger market, the new firm benefits with increased efficiencies when each merged company contributes best practices and competencies that enable the firm to operate optimally.

Disadvantages

Although diversification is often associated with reward, it also carries risks. Diversification can shift focus and resources away from core operations, contributing to poor performance. If the acquiring firm is inadequately experienced in the industry of the acquired firm, the new firm is likely to develop ineffective corporate governance policies, poor pricing structures, and an inexperienced, underperforming workforce.

Also, it can be challenging for firms within different industries or with varying business models to successfully develop a new corporate culture in which the behaviors and values align with the mission and vision of the new firm. Developing a new corporate culture is not predicated on dissolving pre-existing cultures. Rather, a successful merger of cultures involves a consensus on operating processes, values, and principles that promote the success of the firm and its stakeholders.