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Conglomerate

Reviewed by Annapoorna | Updated on Sep 30, 2020

Catalogue

What Is a Conglomerate?

A conglomerate refers to a corporation that runs several different and seemingly unrelated businesses. One company controls many smaller companies which conduct businesses separately. It is done by holding a controlling stake in these companies.

The biggest conglomerates diversify business risk by engaging in many different markets. Still, some conglomerates, such as mining, choose to participate in a single industry.

Conglomerates Explained

Conglomerates refer to large companies consisting of independent entities that function in multiple industries. Many conglomerates have international operations and are multi-industry corporations. Every subsidiary business of a conglomerate runs independently of the other business divisions. However, the subsidiaries' management report to the higher management of the parent company.

A conglomerate's parent company can reduce the risks by taking part in many different businesses instead of being in a single market. It also helps the holding company to reduce costs and consume fewer resources. However, a company growing too big may lead to inefficiency. So, forming a conglomerate can divest risk.

There are various types of conglomerates across the globe ranging from manufacturing to media to food. A manufacturer may start by manufacturing and selling its products. It may decide to enter into the electronics market, then moving into a different industry like financial services.

A media conglomerate may begin by owning several newspapers, then buy television and radio stations, and book publishing companies.

A food conglomerate may begin by the sale of potato chips. The company may choose to diversify, purchasing a soda pop company, then expand by purchasing other companies that make different food products.

Advantages and Disadvantages of Conglomerates

The advantages of conglomerates are as follows:

  • Choosing to have a wide array of companies in different industries can be a real boon since poorly performing companies or industries can be offset by other sectors.

  • Participating in several unrelated businesses helps the parent corporation to reduce costs by optimum use of resources and diversified business interests. The inherent risks of operating in a single market are reduced.

  • Companies owned by conglomerates can access internal capital markets enabling the greater ability for company's growth. A conglomerate can earmark capital for one of their companies if external capital markets are not offering as kind terms the company wants.

The disadvantages of conglomerates are as follows:

  • The conglomerate's size may hurt the stock value; a condition called conglomerate discount.

  • The total market value of the companies of a conglomerate is usually higher than the conglomerate's stock value by anywhere between 13% to 15%.

  • The combination of a set of different issues relating to financial transparency and management makes conglomerate stock valued at a discount.

Examples of Conglomerates based in India

Here is a well-known list of Conglomerates in India:

  • Aditya Birla Group
  • Hinduja Group
  • ITC Limited
  • JSW Group
  • Bajaj Group
  • Godrej Group
  • United Breweries Group
  • Tata Group
  • Reliance Group

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