Conglomerate (company)
A conglomerate (/kəŋˈɡlɒmərət/) is a type of multi-industry company that consists of several different and unrelated business entities that operate in various industries under one corporate group.[1] A conglomerate usually has a parent company that owns and controls many subsidiaries, which are legally independent but financially and strategically dependent on the parent company. Conglomerates are often large and multinational corporations that have a global presence and a diversified portfolio of products and services. Conglomerates can be formed by merger and acquisitions, spin-offs, or joint ventures.
"Conglomeration" redirects here. For other uses, see Conglomerate.
Conglomerates are common in many countries and sectors, such as media, banking, energy, mining, manufacturing, retail, and transportation. This type of organization aims to achieve economies of scale, market power, risk diversification, and financial synergy. However, they also face challenges such as complexity, bureaucracy, agency problems, and regulation.[1]
The popularity of conglomerates has varied over time and across regions. In the United States, conglomerates became popular in the 1960s as a form of economic bubble driven by low interest rates and leveraged buyouts. However, many of them collapsed or were broken up in the 1980s due to poor performance, accounting scandals, and antitrust regulation.[2] In contrast, conglomerates have remained prevalent in Asia, especially in China, Japan, South Korea, and India. In mainland China, many state-affiliated enterprises have gone through high value mergers and acquisitions, resulting in some of the highest value business transactions of all time. These conglomerates have strong ties with the government and preferential policies and access to capital.[1]
United States[edit]
The conglomerate fad of the 1960s[edit]
During the 1960s, the United States was caught up in a "conglomerate fad" which turned out to be a form of an economic bubble.[3]
Due to a combination of low interest rates and a repeating bear-bull market, conglomerates were able to buy smaller companies in leveraged buyouts (sometimes at temporarily deflated values).[4] Famous examples from the 1960s include Gulf and Western Industries,[5] Ling-Temco-Vought,[5] ITT Corporation,[5] Litton Industries,[5] Textron,[5] and Teledyne.[5] The trick was to look for acquisition targets with solid earnings and much lower price–earnings ratios than the acquirer.[6][7] The conglomerate would make a tender offer to the target's shareholders at a princely premium to the target's current stock price. Upon obtaining shareholder approval, the conglomerate usually settled the transaction in something other than cash, like debentures, bonds, warrants or convertible debentures (issuing the latter two would effectively dilute its own shareholders down the road, but many shareholders at the time were not thinking that far ahead).[8] The conglomerate would then add the target's earnings to its own earnings, thereby increasing the conglomerate's overall earnings per share.[7] In finance jargon, the transaction was "accretive to earnings."[6] The relatively lax accounting standards of the time meant that accountants were often able to get away with creative mathematics in calculating the conglomerate's post-acquisition consolidated earnings numbers.[9] In turn, the price of the conglomerate's own stock would go up, thereby re-establishing its previous price-earnings ratio, and then it could repeat the whole process again with a new target.[7][9] In plain English, conglomerates were using rapid acquisitions to create the illusion of rapid growth.[7]
In 1968, the peak year of the conglomerate fad, U.S. corporations completed a record number of mergers: approximately 4,500.[10] In that year, at least 26 of the country's 500 largest corporations were acquired, of which 12 had assets in excess of $250 million.[10]
All this complex company reorganization had very real consequences for people who worked for companies that were either acquired by conglomerates or were seen as likely to be acquired by them. Acquisitions were a disorienting and demoralizing experience for executives at acquired companies—those who were not immediately laid off found themselves at the mercy of the conglomerate's executives in some other distant city.[11] Most conglomerates' headquarters were located on the West Coast or East Coast, while many of their acquisitions were located in the country's interior.[11] Many interior cities were devastated by repeatedly losing headquarters of corporations to mergers, in which independent ventures were reduced to subsidiaries of conglomerates based in New York or Los Angeles.[11] Pittsburgh, for example, lost about a dozen.[11] The terror instilled by the mere prospect of such harsh consequences for executives and their home cities meant that fending off takeovers, real or imagined, was a constant distraction for executives at all corporations seen as choice acquisition targets during this era.[12]
The chain reaction of rapid-growth-through-acquisitions could not last forever. When interest rates rose to offset rising inflation, conglomerate profits began to fall. The beginning of the end came in January 1968, when Litton shocked Wall Street by announcing a quarterly profit of only 21 cents per share, versus 63 cents for the previous year's quarter.[13] It would take two more years before it was clear that the conglomerate fad was on its way out.[13] The stock market eventually figured out that the conglomerates' bloated and inefficient businesses were as cyclical as any others—indeed, it was that cyclical nature that had caused such businesses to be such undervalued acquisition targets in the first place[6]—and their descent "put the lie to the claim that diversification allowed them to ride out a downturn."[14] A major selloff of conglomerate shares ensued.[15] To keep going, many conglomerates were forced to shed the new businesses they had recently purchased, and by the mid-1970s most conglomerates had been reduced to shells.[16] The conglomerate fad was subsequently replaced by newer ideas like focusing on a company's core competency and unlocking shareholder value (which often translate into spin-offs).
Genuine diversification[edit]
In other cases, conglomerates are formed for genuine interests of diversification rather than manipulation of paper return on investment. Companies with this orientation would only make acquisitions or start new branches in other sectors when they believed this would increase profitability or stability by sharing risks. Flush with cash during the 1980s, General Electric also moved into financing and financial services, which in 2005 accounted for about 45% of the company's net earnings. GE formerly owned a minority interest in NBCUniversal, which owns the NBC television network and several other cable networks. United Technologies was also a successful conglomerate until it was dismantled in the late 2010s.
Mutual funds[edit]
With the spread of mutual funds (especially index funds since 1976), investors could more easily obtain diversification by owning a small slice of many companies in a fund rather than owning shares in a conglomerate. Another example of a successful conglomerate is Warren Buffett's Berkshire Hathaway, a holding company which used surplus capital from its insurance subsidiaries to invest in businesses across a variety of industries.
The end of the First World War caused a brief economic crisis in Weimar Germany, permitting entrepreneurs to buy businesses at rock-bottom prices. The most successful, Hugo Stinnes, established the most powerful private economic conglomerate in 1920s Europe – Stinnes Enterprises – which embraced sectors as diverse as manufacturing, mining, shipbuilding, hotels, newspapers, and other enterprises.
The best known British conglomerate was Hanson plc. It followed a rather different timescale than the U.S. examples mentioned above, as it was founded in 1964 and ceased to be a conglomerate when it split itself into four separate listed companies between 1995 and 1997.
In Hong Kong, some of the well-known conglomerates include Jardine Matheson (AD1824), Swire Group (AD1816), (British companies, one Scottish one English; companies that have a history of over 150 years and have business interests that span across four continents with a focus in Asia.) C K Hutchison Whampoa (now CK Hutchison Holdings), Sino Group, (both Asian-owned companies specialize business such as real estate and hospitality with a focus in Asia.)
In Japan, a different model of conglomerate, the keiretsu, evolved. Whereas the Western model of conglomerate consists of a single corporation with multiple subsidiaries controlled by that corporation, the companies in a keiretsu are linked by interlocking shareholdings and a central role of a bank. Mitsui, Mitsubishi, Sumitomo are some of Japan's best known keiretsu, reaching from automobile manufacturing to the production of electronics such as televisions. While not a keiretsu, Sony is an example of a modern Japanese conglomerate with operations in consumer electronics, video games, the music industry, television and film production and distribution, financial services, and telecommunications.
In China, many of the country's conglomerates are state-owned enterprises, but there is a substantial number of private conglomerates. Notable conglomerates include BYD, CIMC, China Merchants Bank, Huawei, JXD, Meizu, Ping An Insurance, TCL, Tencent, TP-Link, ZTE, Legend Holdings, Dalian Wanda Group, China Poly Group, Beijing Enterprises, and Fosun International. Fosun is currently China's largest civilian-run conglomerate by revenue.[17]
In South Korea, the chaebol are a type of conglomerate owned and operated by a family. A chaebol is also inheritable, as most of current presidents of chaebols succeeded their fathers or grandfathers. Some of the largest and most well-known Korean chaebols are Samsung, LG, Hyundai Kia and SK.
In India, family owned enterprises became some of Asia's largest conglomerates, such as the Aditya Birla Group, Tata Group, Emami, Kirloskar Group, Larsen & Toubro, Mahindra Group, Bajaj Group, ITC Limited, Essar Group, Reliance Industries, Adani Group and the Bharti Enterprises.
In Brazil the most important conglomerates are J&F Investimentos, Odebrecht, Itaúsa, Camargo Corrêa, Votorantim Group, Andrade Gutierrez, and Queiroz Galvão.
In New Zealand, Fletcher Challenge was formed in 1981 from the merger of Fletcher Holdings, Challenge Corporation, and Tasman Pulp & Paper, in an attempt to create a New Zealand-based multi-national company. At the time, the newly merged company dealt in construction, building supplies, pulp and paper mills, forestry, and oil & gas. Following a series of bungled investments, the company demerged in the early 2000s to concentrate on building and construction.
In Pakistan, some of the examples are Adamjee Group, Dawood Hercules, House of Habib, Lakson Group and Nishat Group.
In the Philippines, the largest conglomerate of the country is the Ayala Corporation which focuses on malls, bank, real estate development, and telecommunications. The other big conglomerates in the Philippines included JG Summit Holdings, Lopez Holdings Corporation, ABS-CBN Corporation, GMA Network, Inc., MediaQuest Holdings, TV5 Network, Inc.,
SM Investments Corporation, Metro Pacific Investments Corporation, and San Miguel Corporation.
In United States, some of the examples are The Walt Disney Company, Warner Bros. Discovery and The Trump Organization (see below).
In Canada, one of the examples is Hudson's Bay Company. Another such conglomerate is J.D. Irving, Limited, which controls a large portion of the economic activities as well as media in the Province of New Brunswick.
Similar to other industries there are many companies that can be termed as conglomerates.