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.
BREAKING DOWN Conglomerate Merger
There are many reasons for conglomerate mergers, including increased market share, synergy, and cross-selling opportunities. 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.
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 losses. The merger 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 Customer 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.
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.