Conglomeration

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

Conglomeration refers to the process of creation of a business conglomerate. The process involves a single company acquiring stakes in different companies which may be carrying on the same or different types of business.

A company may also set up subsidiary companies or acquire stakes through the setting up of intermediary companies. Conglomerates are formed over a medium to a long period.

Understanding Conglomeration

The process of conglomeration gathered momentum during the 1950s and 1960s to set up corporate structures, parent-subsidiary companies and diversify their business.

A business conglomerate operates through several companies in different business segments. Conglomeration also involves cross border investments into companies or setting up a place of business in another country.

Conglomeration generally leads to the creation of an ultimate parent company and several subsidiaries. Many business conglomerates are multinational companies having business presence across the globe.

Conglomeration helps in achieving economies of scale and raising capital for business expansion. Low-interest rates and open economies help build business conglomerates.

During a depression or global economic slowdown, a business conglomerate looks out for buying opportunities at depressed valuations. Conglomerates also benefit from low-interest rates in depressed market conditions.

An example of an Indian business conglomerate is Reliance Industries Limited having different businesses, such as petrochemicals, telecommunication, retail, among others.

The rise of portfolio investments and mutual funds reduce costly mergers and acquisitions. Portfolio investments offer a cheap way to invest in diversified businesses in comparison to mergers and acquisitions.

Portfolio investments also help avoid the management, labour issues, and so on arising from mergers and acquisitions. The management should plan a merger or acquisition, considering the future prospects of the combined businesses.

Conclusion

The purpose behind forming a business conglomerate is not just an investment. It is to combine two or more businesses, acquire a business having strategic assets to enable expansion, or to penetrate new markets for selling good and services.

A merger also helps to achieve synergies arising from the combination of two business entities. A combination is capable of increasing the revenues and profits of the conglomerate as a whole in comparison to independent companies.