A
conglomerate is a combination of two or more
companies engaged in entirely different businesses together into
one overarching company . Conglomerates are often large pieces. The
term may also refer to a
multi-industry
company.
History
The
Dutch East India
Company is considered to be one of the earliest conglomerate
groups after the British
East India
Company (the first); originally a trade enterprise established
to ship goods from the
Far East to the
Dutch Republic, the East India
Company grew into a powerful economic entity embracing economic
ventures focused on commerce and manufacturing, and a political
force in India.
The end of
the First World War caused a brief
economic crisis in Weimar
Germany
, permitting entrepreneurs to buy up varied
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 an assortment of
other economic enterprises.
Conglomerates were popular in the 1960s due to a combination of low
interest rate(s) and a repeating bear/bull market, which allowed
the conglomerates to buy companies in
leveraged buyouts, sometimes at temporarily
deflated values. Famous examples from the 1960s include
Ling-Temco-Vought,
ITT Corporation,
Litton Industries,
Textron,
Teledyne, and
Gulf and Western
Industries. As long as the target company had profits greater
than the interest on the loans, the overall
return on investment (ROI) of the
conglomerate appeared to grow.
For many years this was enough to make the company's stock price
rise, as companies were often valued largely on their ROI. The
aggressive nature of the conglomerators themselves was enough to
make many investors, who saw a "powerful" and seemingly unstoppable
force in business, buy their stock. High stock prices allowed them
to raise more loans, based on the value of their stock, and thereby
buy even more companies. This led to a
chain reaction, which allowed them to grow
very rapidly.
However, all of this growth was somewhat illusory. As soon as
interest rates started to rise in order to offset
inflation, the profits of the conglomerates fell.
Investors also noticed that the companies inside the conglomerate
were growing no faster than they had before they were purchased,
whereas the rationale for buying a company was often that
"synergies" would lead to more efficiency. By the late 1960s they
were frowned on by the market, and a major sell off of their shares
ensued. In order to keep the companies going, many conglomerates
were forced to shed the industries they had purchased recently, and
by the mid-1970s most had been reduced to shells. The conglomerate
fad was subsequently replaced by newer ideas
like focusing on a company's core competency.
In other cases, conglomerates are formed for genuine interests of
diversification rather than the above manipulation of paper ROI.
Companies with this orientation would only make acquisitions or
start new branches in other sectors when they believe this will
increase profitability or stability. Flush with cash during the
5555,
General Electric also moved
into
financing and
financial services, which in 2005
accounted for about 45% of the company's net earnings. GE also owns
a majority of
NBC Universal, which
owns the
NBC television network and several
cable networks. In some ways GE is the
opposite of the "typical" 1960s conglomerate in that the company
was not highly
leveraged, and
when
interest rates went up they were
able to turn this to their advantage, as it was often less
expensive to lease from GE than buy new equipment using loans.
United Technologies has also
proven to be an extremely successful example of a
conglomerate.
Another example of a successful conglomerate is
Warren Buffet's
Berkshire Hathaway, a
holding company which used its insurance
surplus to invest in a variety of manufacturing and service
businesses.
International
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 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.
Mitsubishi is one of
Japan's best known keiretsu, reaching from automobile manufacturing
to the production of electronics such as televisions.
In
South
Korea
, Chaebol is 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 well-known
Korean chaebols are
Samsung,
LG and
Hyundai Kia Automotive
Group.
The era of
Licence Raj (1947–1990) in India
created some
of Asia's largest conglomerates, such as the Tata Group, Kirloskar
Group, Reliance
Industries and the Aditya Birla
Group.
Conglomerates also exist in Turkey.
Koç Holding
and Sabancı
Holding are Turkey's two largest conglomerates.
Advantages
Diversification results in a reduction of investment risk. A
downturn suffered by one subsidiary, for instance, can be
counterbalanced by stability, or even expansion, in another
division. In other words, if Berkshire Hathaway's construction
materials business has a bad year, the loss might be offset by a
good year in its insurance business. This advantage is enhanced by
the fact that the business cycle affects industries in different
ways.
A conglomerate can show earnings growth, by acquiring companies
whose shares are more discounted than its own. In fact, Teledyne,
GE, and Berkshire Hathaway have delivered high earnings growth for
a time.
Disadvantages
- Synergies are
illusory.
- The extra layers of management increases costs.
- Accounting disclosure is less useful information, many numbers
are disclosed grouped, rather than separately for each business.
The complexity of a conglomerates' accounts make them harder for
investors and regulators to analyse, and makes it easier for
management to hide things.
- Culture clashes can destroy value.
- Inertia prevents development of innovation.
- Lack of focus, and inability to manage unrelated businesses
equally well are the reasons to criticize conglomerates.
Some cite the decreased cost of conglomerate stock (a phenomenon
known as conglomerate discount) as evidential of these
disadvantages, while other traders believe this tendency to be a
market inefficiency which undervalues the true strength of these
stocks.
Media conglomerates
In her 1999 book
No Logo,
Naomi Klein provides several examples of
mergers and acquisitions
between media companies designed to create
conglomerates for the purposes of creating
synergies between them:
- Time Warner includes a series of
tenuously linked business including internet access and content,
film, and cable systems and television. Their diverse portfolio of
assets allow cross-promotion and economies of scale.
- Clear
Channel Communications, a quoted
company, at one point owned a variety of TV and radio stations
and billboard operations, together with a
large number of concert venues, across the U.S.
and a
diverse portfolio of assets in the UK and other
countries around the world. The concentration of bargaining power in this one entity allowed
it to gain better deals for all of its business units. For example,
the promise of playlisting (allegedly, sometimes, coupled with the
threat of blacklisting) on its radio stations was used to secure
better deals from artists performing in events organized by the
entertainment division. These policies have been attacked as unfair
and even monopolistic, but are a clear
advantage of the conglomerate strategy. On December 21, 2005, Clear
Channel completed the spin-off of Live
Nation, and in 2007 the company spun off their television
stations to other companies, some which Clear Channel holds a small
interest in. Live Nation owns the events and concert venues
previously owned by Clear Channel Communications.
See also
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