What is a conglomerate? Definition and examples
A Conglomerate is a number of different businesses that form one corporate group. A large parent company, with subsidiaries in several different sectors, is a conglomerate.
In the vast majority of cases, conglomerates are huge multinational corporations.
Most conglomerates got that way as a result of mergers and acquisitions. They supply diverse goods and/or services.
Cambridge Dictionary defines a conglomerate as “a company that owns several smaller businesses whose products or services are usually very different.”
The corporation might not completely own the companies, but it will have an important or majority interest in them. Each company it controls conducts business separately. If one company has a majority interest or controling interest over another, it means that it owns more than 50% of its shares.
Such a structure allows conglomerates to leverage cross-industry expertise and innovation, fostering synergy among varied business units.
Conglomerate subsidiaries run independently
Each subsidiary operates as if it were its own boss. However, the subsidiaries’ senior management report to the senior management or Board of Directors of the holding company.
A holding company is a company that buys and owns shares in other companies. By ‘holding’ those shares it can control them. The holding company is the parent company.
Diversifying risk
A conglomerate’s main purpose of having controlling interests in different industries or sectors is to diversify risk. Therefore, when there are financial setbacks, the group suffers less than a company that specializes exclusively in one sector.
It is possible to optimize the use of management and company resources if there are many different business entities.
Too much diversity is risky
Conglomerates run the risk of becoming too diversified, i.e., spreading themselves too thin. Running several different businesses that have very little in common is a huge undertaking.
The parent company’s senior managers need to have a good understanding of all the sectors in which their subsidiaries operate.
If the Directors are busy running all the companies simultaneously, saving a failing one might take a very long time.
SmallBusiness.Chron.com says the following about becoming too diverse:
“If one company is failing, it can take a great deal of time and effort to save that company. This is a difficult job for a corporation’s top executives, considering that they are busy overseeing other companies at the same time.”
An example of a conglomerate
Berkshire Hathaway, based in Omaha, Nebraska, USA, which Warren Buffet heads, is an example of an extremely successful conglomerate.
Berkshire Hathaway wholly owns: Fruit of the Loom, Long & Foster, FlightSafety International, Pampered Chef, NetJets, Dairy Queen, BNSF, Lubrizol, Duracell, and GEICO.
It owns 26.7% of the Kraft Heinz Company, 80% of Pilot Flying J, 18.8% of American Express, 11.9% of Bank of America, 9.9% of the Coca-Cola Company, and 5.57% of Apple.
Berkshire Hathaway also acquired a $2.6 billion stake in Paramount Global during the first quarter of 2022.
The conglomerate has averaged a yearly growth in book value of 19% to its stockholders since 1965. The S&P 500 shareholder dividends, for example, grew by 9.7% annually over the same period.
Warren Buffett
Warren Buffett, Chairman and CEO of Berkshire Hathaway, is one of the world’s most successful investors. In September 2023, he had an estimated net worth of $124 billion. Your net worth is everything you own minus everything you owe.
Regarding investing, Mr. Buffett once said:
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Conglomerates like Berkshire Hathaway often have significant influence on market trends and investment strategies due to their substantial capital reserves and diversified interests.
Conglomerate – vocabulary and concepts
In the world of business, there are many compound nouns containing the word “conglomerate.” Compound nouns are terms consisting of at least two words. Let’s have a look at some of them, their meanings, and how we use them in a sentence:
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Conglomerate Merger
A type of merger where two companies that operate in different industries combine resources.
Example: “The conglomerate merger between the technology firm and the food chain was unexpected but strategically aimed at diversification.”
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Conglomerate Discount
A phenomenon where the market values a diversified group of businesses and assets less than if they were separate.
Example: “Analysts suggested that the stocks were trading at a conglomerate discount due to the company’s expansive and diverse portfolio.”
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Conglomerate Expansion
The process by which a conglomerate grows by acquiring companies in different industries.
Example: “The conglomerate expansion strategy has taken the company into new and profitable sectors, beyond its original scope.”
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Conglomerate Subsidiary
A company that is at least partly owned by a larger conglomerate but operates independently.
Example: “The conglomerate subsidiary was able to leverage the parent company’s resources while maintaining its own brand identity.”
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Conglomerate Diversification
The strategy of a company increasing its range of products or markets by acquiring or establishing firms in different industries.
Example: “Conglomerate diversification has helped the company stabilize its revenue streams against market fluctuations.”
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Conglomerate Corporation
A large corporation that consists of a collection of smaller companies with different business focuses.
Example: “The conglomerate corporation was renowned for its holdings in industries ranging from entertainment to aerospace.”
Video – What is a Conglomerate?
This interesting video, from our sister channel on YouTube – Marketing Business Network, explains what a ‘Conglomerate’ is using simple and easy-to-understand language and examples.