In its pure form, a conglomerate merger results in a combined corporation operating in many unrelated business industries.
This article provides a conglomerate merger definition, conglomerate merger examples, conglomerate merger pros and cons, and conglomerate integration best practices tips.
Table of Contents
- What is a Conglomerate Merger?
- When Does a Conglomerate Merger Happen?
- Example of a Conglomerate Merger
- The Conglomerate Effects of Mergers
- Pros & Cons of Conglomerate Mergers
- The 2 Different Types of Conglomerate Mergers
- Conglomerate Merger vs. Horizontal Merger vs. Vertical Merger
- Is Merging Right for Your Business?
- Best Practices for New Conglomerate Mergers
What is a Conglomerate Merger?
A conglomerate merger is a type of M&A transaction for a combination of companies into a holding company with many unrelated businesses in different industries. The conglomerate corporation may structure itself with many companies operating independently with unrelated business activities, belonging to different industry groups, and reporting to the parent company.
When Does a Conglomerate Merger Happen?
A conglomerate merger happens when two companies decide to combine to achieve diversification and cost-saving synergies. When merged companies are in unrelated industries, the cyclicality, seasonality, and economic declines affecting one business may be offset by other businesses within the conglomerate to make revenues and profits more predictable and sustainable.
What are the “right conditions” that typically lead to one?
The “right conditions” typically leading to a conglomerate merger are:
- Desire of newly-merged company to continue to operate independently (as a decentralized subsidiary)
- Diversification opportunity with no significant antitrust issues
- Strong financial position of the larger company in the business combination
- High potential growth rate in an industry or significant cash generation
- Talent, expertise, and intellectual property, including patents
Examples of a Conglomerate Merger
Examples of two corporations well known for their conglomerate merger strategy for holding companies in different industries are Berkshire Hathway and GE (General Electric).
GE announced in a November 2021 press release that it will split its Aviation, Healthcare, and Energy groups into three autonomous public companies in 2023 and 2024. These GE units will go public using tax-free spinoffs. The plan means that GE is discontinuing the long-time conglomerate strategy that its former CEO, Jack Welch, championed. This GE decision highlights changing views of the disadvantages of a conglomerate merger.
Berkshire Hathaway, founded by Warren Buffett, invests in companies through different methods. Berkshire Hathaway’s portfolio strategy includes conglomerate mergers of wholly-owned or controlled companies, minority interests, and publicly-traded equity shares.
Berkshire Hathaway portfolio companies include GEICO, Dairy Queen, NetJets, Pilot Flying J (increasing from 38.6% to 80% control in 2023), Duracell, Fruit of the Loom, several city newspapers, and more. Industries in the Berkshire Hathaway conglomerate merger portfolio are very diverse.
The Conglomerate Effects of Mergers
Conglomerate effects of mergers can reduce market competition in some cases, even if the merged companies don’t have products that are related or serve the same product markets. This requires regulatory agency scrutiny for antitrust issues like “potential for bundling and tying, reduced innovation incentives, and co-ordinated effects,” according to the OECD.
Pros & Cons of Conglomerate Mergers
Conglomerate mergers have pros & cons (advantages & disadvantages), as the following lists show.
Pros of Conglomerate Mergers
Conglomerate merger pros:
- Diversification of business with counter-cyclicality and seasonality reduction
- Synergies, economies of scale, and higher return on investment (ROI)
- Technology sharing and innovation in product lines
- Expansion into new geographic markets
- Increase customer base, product range, and cross-selling of products and services
- Improve market share through market extensions and product extensions
Cons of Conglomerate Mergers
Conglomerate merger cons:
- Different corporate cultures and operating practices in merging firms
- Lack of expertise in new industries
- Risk of losing key employees and talent
- Possible mergers with under-performing companies and missteps
- Need to improve or combine corporate governance practices and operations
- Losing focus and productivity
The conglomerate merger strategy has fans (like Berkshire Hathaway) and haters. Sometimes fans switch sides. Long after a conglomerate merger strategy is implemented, some corporations (like GE) voluntarily decide to unwind conglomerate mergers through tax fee spin-offs of independent companies in the public equity markets or sales of underlying companies to financial buyers like private equity firms.
The 2 Different Types of Conglomerate Mergers
Two different types of conglomerate mergers are pure or mixed mergers. In a pure conglomerate merger, the businesses are unrelated and serve different markets. In a mixed conglomerate merger, companies may be in the same industry but merge to increase revenue and gain market share with a combined offering of new branded products, serving new markets and geographic locations.
Conglomerate Merger vs. Horizontal Integration vs. Vertical Integration
A conglomerate merger of unrelated companies operating in separate industries is different than both horizontal integration and vertical integration. In horizontal vs. vertical integration, horizontal integration is M&A for companies operating in the same industry, whereas vertical integration is M&A with backward integration through the purchase of suppliers in a company’s supply chain.
Is Merging Right for Your Business?
Merging may be right for your business if you’d like to combine it with another strong business to achieve synergies. As a smaller company that’s the target company, with a conglomerate merger, you can diversify by combining with an acquiring company that’s not concentrated in one industry. You’ll focus on growing your business with adequate cash resources from a strong merger partner.
Or, you can choose horizontal or vertical integration through a different type of merger.
If yours is a larger company, you can consider being the acquirer by finding, evaluating, initiating, and negotiating the merger transaction with an equal-sized or attractive small business for a business combination or consolidation with core businesses.
To analyze a potential merger deal, you can use discounted cash flow (DCF) analysis like net present value (NPV), internal rate of return (IRR), market comparables, and return on investment (ROI) projections.
Choosing an IPO vs Merger
Going public through an IPO instead of completing a merger depends on current economic conditions being good for IPOs and other considerations.
If your company prefers the idea of an IPO (initial public offering) instead of a merger, read this IPO readiness checklist. You can decide if an IPO is your best growth strategy and see what preparing for an IPO entails.
Ask yourself some questions:
- Will an IPO distract your company from achieving its performance goals?
- Are you willing to:
- File business financial documents with the SEC?
- Reveal your financial statement results and business strategy to competitors and other stakeholders?
- Undergo public scrutiny and respond to potential shareholder lawsuits?
- Does your company have adequate internal controls and enterprise risk management (ERM)?
- Do you know how to operate, communicate, and report as a public company?
Best Practices for New Conglomerate Mergers
Best practices for new conglomerate mergers and other types of M&A should be applied in the integration process and pursuit of cost synergies from combining the companies. These M&A best practices will help the companies achieve a smooth transition.
Best practices for mergers and acquisitions (M&A) include:
- Adequately communicating with employees in both companies about the M&A transaction and integration plans
- Finding ways to reduce operating costs and administrative expenses, including
- Eliminating functional redundancy that can be provided by a parent company
- Improving product design and reducing component parts
- Using better technologies and systems, including automation
- Negotiating volume discounts and better payment terms from suppliers when possible, lowering costs with better global supplier management
- Making Human Capital decisions, including
- Deciding which employees to retain or layoff
- Offering retention bonuses and stock options, or
- Giving exit interviews, severance pay, outplacement benefits, and COBRA health insurance sign-up forms
- Combining systems, IT operations, and risk management, including
- Implementing strong corporate governance, ERM, internal controls, and ESG policies