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Conglomerate (company)
A conglomerate (/kəŋˈɡlɒmərət/) is a type of multi-industry company that consists of several different and unrelated business entities that operate in various industries. A conglomerate usually has a parent company that owns and controls many subsidiaries, which are legally independent but financially and strategically dependent on the parent company. Conglomerates are often large and multinational corporations that have a global presence and a diversified portfolio of products and services. Conglomerates can be formed by merger and acquisitions, spin-offs, or joint ventures.

Conglomerates are common in many countries and sectors, such as media, banking, energy, mining, manufacturing, retail, defense, and transportation. This type of organization aims to achieve economies of scale, market power, risk diversification, and financial synergy. However, they also face challenges such as complexity, bureaucracy, agency problems, and regulation.[1]

The popularity of conglomerates has varied over time and across regions. In the United States, conglomerates became popular in the 1960s as a form of economic bubble driven by low interest rates and leveraged buyouts.[2] However, many of them collapsed or were broken up in the 1980s due to poor performance, accounting scandals, and antitrust regulation.[3] In contrast, conglomerates have remained prevalent in Asia, especially in China, Japan, South Korea, and India. In mainland China, many state-affiliated enterprises have gone through high value mergers and acquisitions, resulting in some of the highest value business transactions of all time. These conglomerates have strong ties with the government and preferential policies and access to capital.[1]

United States

The conglomerate fad of the 1960s

During the 1960s, the United States was caught up in a "conglomerate fad" which turned out to be a form of an economic bubble.[4]

Due to a combination of low interest rates and a repeating bear-bull market, conglomerates were able to buy smaller companies in leveraged buyouts (sometimes at temporarily deflated values).[5] Famous examples from the 1960s include Gulf and Western Industries,[6] Ling-Temco-Vought,[6] ITT Corporation,[6] Litton Industries,[6] Textron,[6] and Teledyne.[6] The trick was to look for acquisition targets with solid earnings and much lower price–earnings ratios than the acquirer.[7][8] The conglomerate would make a tender offer to the target's shareholders at a princely premium to the target's current stock price. Upon obtaining shareholder approval, the conglomerate usually settled the transaction in something other than cash, like debentures, bonds, warrants or convertible debentures (issuing the latter two would effectively dilute its shareholders down the road, but many shareholders at the time were not thinking that far ahead).[9] The conglomerate would then add the target's earnings to its earnings, thereby increasing the conglomerate's overall earnings per share.[8] In finance jargon, the transaction was "accretive to earnings."[7]

The relatively lax accounting standards of the time meant that accountants were often able to get away with creative mathematics in calculating the conglomerate's post-acquisition consolidated earnings numbers.[10] In turn, the price of the conglomerate's stock would go up, thereby re-establishing its previous price-earnings ratio, and then it could repeat the whole process with a new target.[8][10] In plain English, conglomerates were using rapid acquisitions to create the illusion of rapid growth.[8] In 1968, the peak year of the conglomerate fad, U.S. corporations completed a record number of mergers: approximately 4,500.[11] In that year, at least 26 of the country's 500 largest corporations were acquired, of which 12 had assets above $250 million.[11]

All this complex company reorganization had very real consequences for people who worked for companies that were either acquired by conglomerates or were seen as likely to be acquired by them. Acquisitions were a disorienting and demoralizing experience for executives at acquired companies—those who were not immediately laid off found themselves at the mercy of the conglomerate's executives in some other distant city.[12] Most conglomerates' headquarters were located on the West Coast or East Coast, while many of their acquisitions were located in the country's interior.[12] Many interior cities were devastated by repeatedly losing the headquarters of corporations to mergers, in which independent ventures were reduced to subsidiaries of conglomerates based in New York or Los Angeles.[12] Pittsburgh, for example, lost about a dozen.[12] The terror instilled by the mere prospect of such harsh consequences for executives and their home cities meant that fending off takeovers, real or imagined, was a constant distraction for executives at all corporations seen as choice acquisition targets during this era.[13]

The chain reaction of rapid growth through acquisitions could not last forever. When interest rates rose to offset rising inflation, conglomerate profits began to fall. The beginning of the end came in January 1968, when Litton shocked Wall Street by announcing a quarterly profit of only 21 cents per share, versus 63 cents for the previous year's quarter.[14] This was "just a decline in earnings of about 19 percent", not an actual loss or a corporate scandal, and "yet the stock was crushed, plummeting from $90 to $53".[4] It would take two more years before it was clear that the conglomerate fad was on its way out.[14] The stock market eventually figured out that the conglomerates' bloated and inefficient businesses were as cyclical as any others—indeed, it was that cyclical nature that had caused such businesses to be such undervalued acquisition targets in the first place[7]—and their descent put "the lie to the claim that diversification allowed them to ride out a downturn."[15] A major selloff of conglomerate shares ensued.[16] To keep going, many conglomerates were forced to shed the new businesses they had recently purchased, and by the mid-1970s most conglomerates had been reduced to shells.[17] The conglomerate fad was subsequently replaced by newer ideas like focusing on a company's core competency[18] and unlocking shareholder value (which often translate into spin-offs).[19]