Conglomerate mergers take place among companies that are in virtually unrelated business activities. Conglomerate mergers can either be pure or mixed. While pure conglomerate mergers are by and between companies with nothing in common, mixed conglomerate mergers involve corporations embarking into product extensions or market extensions.
Regardless of whether a conglomerate merger is pure, geographical or a product line extension, it involves companies that operate in different markets. So a conglomerate merger is not usually in violation of the competition or anti trust laws.
A conglomerate company is made up of a number of different, unrelated, semi autonomous businesses divisions. In a conglomerate, the parent company owns a controlling stake in the subsidiary companies, each of which runs business separately. These subsidiary businesses operate independently of the other business divisions, though they report to the parent company.
Conglomerate type of diversification can be achieved mainly by external acquisition and mergers and is not generally possible through internal development. Companies operating in different geographic locations also opt for conglomerate mergers.
Conglomerates involve the union of two or more companies that do not have the same competitors and do not source inputs and raw materials from common suppliers or vendors.
The main advantage of conglomerate mergers is spreading over of risk through portfolio diversification across different industries and markets. By virtue of the existence of several unrelated businesses under its common fold, the conglomerate is able to reduce overhead costs by using fewer resources. Utilization of combined resource base fortifies the position of each division within their respective fields of business. Moreover, the shock of slowdown in one division could be absorbed by buoyancy in another. All these factors result in corporate synergy.
However, if a conglomerate becomes too large as a result of acquisitions, it may become unwieldy with diseconomies of scale setting in. In that event divestment or spin off of divisions may be a solution.
