Conglomerate

In simple terms, conglomerate is a combination of two or more corporations in a single corporate structure. This forms a group of companies that usually involves a single parent company and different subsidiaries. However, in a conglomerate, diversification of the business in the companies is normal practice, and usually these companies depict a multi-industry corporate structure. These corporate structures are often multinational.

History of conglomerate

In 1960s, conglomerates were popular as the very concept of a corporate structure was the symbol of the power. This allowed these conglomerates to buy other businesses at leveraged rates. In that time, the only method to measure the real value of a company was its return on investment (ROI). Due to this, if the target company had the profits for a period larger than its interest paid on the loans, it was considered to grow. Due to their impact, conglomerate also had an improved aptitude in borrowing than a smaller firm in money market and capital market. This allowed the conglomerates to raise their stock value for many years as these were considered the giants in the business. Many investors considered it secure to invest in these corporate structures. Since the stock permitted them to raise money, these conglomerates could take out loans and buy more companies.

Advantages:

• Due to diversification, conglomerates can reduce their investment risk
• These structures can create a capital market within the group to allow growth of the conglomerate
• A conglomerate can grow by acquiring companies, whose shares are more discounted, thereby showing growth in earnings.

Disadvantages:

• Management costs increases due to size of the group
• Conglomerates have to face many accounting-related problems, for example, consolidation and group disclosures, etc.
• Taxation of group structure reduces the taxation benefits
• There is no development of the innovation due to inertia
• Focus is lost, and it is difficult to manage unrelated and well-diversified business effectively
• Due to multinational business, conglomerates often contact cultural difference due to which values are destroyed

The popularity of the conglomerates has decreased with the spread of mutual funds. If the invest into mutual funds, investors can diversify their investments without having to invest all the money in one place, i.e. conglomerate.