You are on page 1of 5

Mergers are business combination transactions involving the combination of two or more companies into a single entity.

Most state laws require that mergers be approved by at least a majority of a company's shareholders if the merger will have a significant impact on either the acquiring or target company.
A conglomerate merger is officially defined as being "any merger that is not horizontal or vertical; in general, it is the combination of firms in different industries or firms operating in different geographic areas". Conglomerate mergers can serve various purposes, including extending corporate territories and extending a product range. One example of a conglomerate merger was the merger between the Walt [1][2] Disney Company and the American Broadcasting Company. Because a conglomerate merger is one between two strategically unrelated firms, it is unlikely that they economic benefits will be generated for the target or the bidder. As such, conglomerate mergers seldom occur today. However, conglomerate mergers were popular in the U.S. in the 1960s and 1970s. Many conglomerate mergers are divested shortly after they are completed

Definition of 'Conglomerate Merger'


A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

Types of Conglomerate Mergers


There are two main types of conglomerate mergers the pure conglomerate merger and the mixed conglomerate merger. The pure conglomerate merger is one where the merging companies are doing businesses that are totally unrelated to each other. The mixed conglomerate mergers are ones where the companies that are merging with each other are doing so with the main purpose of gaining access to a wider market and client base or for expanding the range of products and services that are being provided by them There are also some other subdivisions of conglomerate mergers like the financial conglomerates, the concentric companies, and the managerial conglomerates.

Reasons of Conglomerate Mergers


There are several reasons as to why a company may go for a conglomerate merger. Among the more common reasons are adding to the share of the market that is owned by the company and indulging in cross selling. The companies also look to add to their overall synergy and productivity by adopting the method of conglomerate mergers.

Benefits of Conglomerate Mergers


There are several advantages of the conglomerate mergers. One of the major benefits is that conglomerate mergers assist the companies to diversify. As a result of conglomerate mergers the merging companies can also bring down the levels of their exposure to risks.

Implications of Conglomerate Mergers


There are several implications of conglomerate mergers. It has often been seen that companies are going for conglomerate mergers in order to increase their sizes. However, this also, at times, has adverse effects on the functioning of the new company. It has normally been observed that these companies are not able to perform like they used to before the merger took place.

This was evident in the 1960s when the conglomerate mergers were the general trend. The term conglomerate mergers also implies that the two companies that are merging do not even have the same customer base as they are in totally different businesses. It has normally been seen that a lot of companies that go for conglomerate mergers are able to manage a wide variety of activities in a particular market. For example, these companies can carry out research activities and applied engineering processes. They are also able to add to their production as well as strengthen the marketing area that ensures better profitability. It has been seen from case studies that conglomerate mergers do not affect the structures of the industries. However, there might be significant impact if the acquiring company happens to be a leading company of its market that is not concentrated and has a large number of entry barriers.

Conglomerate merger When two companies have no common business but decide to pool resources for some other reason, the deal is called a conglomerate merger. Procter & Gamble (NYSE:PG), a consumer goods company, engaged in just such a transaction with its 2005 merger with Gillette. At the time, Procter & Gamble was largely absent from the men's personal care market, a sector led by Gillette. The companies' product portfolios were complimentary, however, and the merger created one of the world's biggest consumer product companies.

onglomerate MergerA merger between firms that are involved in totally unrelated business activities. Two types of conglomerate mergers:Pure conglomerate mergers involve firms with nothing in common.2. Mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

Company.

18. Example of Conglomerate MergerWalt Disney Company and the American Broadcasting

19. Concentric MergerA merger of firms which are into similar type of business. 20. Example of Concentric MergerNextlink is a competitive local exchange carrier offering services in 57 cities and building a nationwide IP network. Concentric, a national ISP, offers dedicated and dial-up Internet access, high-speed DSL and VPN services across the U.S. and overseas.

23. Pac-Man defenseScare off by purchasing large amounts of the acquiring company's stock.Resisting company may even sell off non-vital assets to procure enough assets to buy out the acquirer. Example Attempted acquisition of Martin Marietta by Bendix Corporation in 1982 : Martin Marietta's management responded to takeover attempt by selling non-core businesses in order to attempt a takeover of its own - of Bendix Corporation. In the endBendixCorporation was bought by Allied Corporation

Conglomerate
A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions. Example A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting company is faced with the same competition in each of its two markets after the merger as the individual firms were before the merger. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company.

conglomerate merger arises when two or more firms in different markets producing unrelated goods join together to form a single firm. An example of a conglomerate merger is that between an athletic shoe company and a soft drink company. The firms are not competitors producing similar products (which would make it a horizontal merger) nor do they have an input-output relation (which would make it a vertical merger).

A number of major U.S. corporations have expanded their activities over the years through conglomerate mergers. General Electric provides an excellent real world example. In the hypothetical world of Shady Valley, OmniComglomerate, Inc. offers an example of how a firm can expand through conglomerate mergers. Beginning its existence as OmniMotors, it focused exclusively on the production of automobiles. However, it expanded and diversified through conglomerate mergers with such firms as The Acme Sundial Company, which manufactured sundials; Tasty Cola Drinks, which produced soft drinks; Bank of the World, which offered banking services; and Mobility-Plus, which provided wireless telephone services. Conglomerate mergers are considered relatively harmless when it comes to inefficiencies that result from market control. Because a conglomerate merger is between two firms in different industries, the degree ofcompetition within EACH industry is largely unaffected. Suppose, for example, that The Master Foot Company, a leading manufacturer of athletic shoes, merges with Juice-up, a soft drink firm. The resulting company (call it Juicy Foot) is faced with the same competition in each of its two markets after the merger as the individual firms were before the merger. The Master Foot division of Juicy Foot must still compete with its arch rival OmniRun. And the Juice-Up division of Juicy Foot must still compete with OmniCola, King Caffeine, Frosty Grape, and others in the soft drink market. While conglomerate mergers tend to be relatively harmless, they can set the stage for problems. If several different markets are dominated by divisions owned by two large conglomerates, the potential for collusion is greater. Suppose, for example, that OmniConglomerate, Inc. controls OmniRun in the athletic shoe market, OmniCola in the soft drink market, OmniCell in the wireless telephone market, and OmniMotors in the automobile market. Also suppose that another conglomerate, Juicy Foot, controls Digital Distance in the wireless telephone, market and Mega Mobile in the automobile market, in addition to Juice-Up in the soft drink market and Master Foot in the athletic shoe market.
With so much competition between Juicy Foot and OmniConglomerate in several different markets, the incentive to cooperate rather than compete is much greater.

CONGLOMERATE MERGERS Why do firms engage in conglomerate mergers? When can conglomerate mergers harm competition? What are conglomerate mergers? Combine firms which are neither direct competitors nor buyer-sellers. Subcategories Market extension mergers Product extension mergers Pure conglomerate mergers

Market extension mergers Firms produce similar products in different markets. Possible motivation: economies of scope, cost savings from large scale production. (Similar to horizontal mergers.)

Examples of market extension mergers Bank of America and NationsBank (1998). New AT&T (including SBC) and BellSouth (2006). Pure conglomerate mergers Firms have no obvious relationship. Possible motivations: Better Better allocation of capital allocation of capital.. Internal Internal management may have better information than external capital markets. Replace inefficient management at acquired firm. Acquiring firm can replace board of directors and inefficient top management. Examples of pure conglomerate mergers RJR Reynolds and Burmah Oil and Gas. International Telephone & Telegraph (IT&T). Began as a telecommunication equipment manufacturer and telephone system operator. Acquired Hartford Fire Insurance, Continental Baking, Sheraton Hotels, etc. Has since spun off most businesses.

Anticompetitive effects of conglomerate mergers Possibly facilitate anticompetitive practices such as reciprocal dealing and predatory p g ( pricing (to be discussed later in course). Possibly eliminate potential competition in an already highly concentrated market. Threat of potential competition (new entry) may be only force keeping price low.

FTC v Procter and Gamble (1967) P&G, a very large company, was largest producer of soaps and detergents. Clorox Clorox was largest producer of household was largest producer of household liquid beach. 49% market share. HHI > ___________. P&G tried to acquire Clorox. Treatment of conglomerate mergers under the Non-Horizontal Merger Guidelines Conglomerate mergers will be challenged if Industry Industry is already highly concentrated is already highly concentrated. Acquired firm has large market share. Merger eliminates potential competition. Entry by other firms is difficult.

Adveantages: Efficiency

Since a conglomerate is made up of many different business units, it can use the cash the business generates to the most efficient use. If different business units come up with different business plans for the use of the firm's capital, the management will award the cash to the use that gets the best return. This makes for efficient use of the firm's capital. Not only that, the business can also deploy managers as the need arises, making the most efficient use of human capital too.

Diversification

By acquiring firms in different markets, businesses are able to diversify away their risks. If a firm has exposure to market products, it is not subject to changes in demand for any one product. For instance, if a firm sells both lawn mowers and snowblowers, it does not experience a dip in sales during the winter, when lawn mower sales tend to be down. During the winter, the sales of snowblowers, which tend to be up, make up for the dip in lawn mower sales.
Sponsored Links

Free Billing & Invoicing


Free online invoicing & Billing Free management solutions by SohoOs www.sohoos.com

Economies of Scale

Another benefit that businesses see in conglomerate merger is they anticipate economies of scale. Since the business uses the same managers to oversee a number of businesses, its cost of management per unit goes down by operating on a larger scale. Costs of advertising, research and development, and computer support are also spread out across a larger number of business units. This means the business derives the benefits of lower costs per unit of output.

Synergies

A conglomerate merger is also likely to produce synergies for the combining entities. Synergy is a situation in which the sum of the combined unit is more than the sum of each individual unit. This situation comes about as a result of increased sales and earnings for the combined business each business would not have obtained on its own. This synergistic effect comes about as a result of all the efficiencies a large conglomerate enjoys.