Conglomerate (company)

A conglomerate is a multi-industry company – i.e., a combination of

multiple business entities operating in entirely different industries under one
corporate group, usually involving a parent company and many subsidiaries.
Conglomerates are often large and multinational.

Contents
History
United States fad
Fad
Genuine diversification
Mutual funds
International
Advantages and disadvantages of conglomerates
Advantages
Disadvantages
Media conglomerates
Internet conglomerates
Food conglomerates
See also
Notes
Bibliography
External links

History
The United East India Company, founded 1602, was, in fact, a multinational
conglomerate that operated various commercial and industrial activities, such
as, international trade, shipbuilding, spice production and trade,[1] the
sugarcane industry,[2][3] and wine production.[4][5][6]
United States fad

Fad
Conglomerates were popular in the United States, in the 1960s, due to a
combination of low interest rates, and a repeating bear-bull market, which
allowed the conglomerates to buy companies in leveraged buyouts, sometimes
at temporarily deflated values.[7] Famous examples from the 1960s include
Ling-Temco-Vought,[8] ITT Corporation,[8] Litton Industries,[8] Textron,[8]
Teledyne.[8] Because of low interest on the loans, the overall return on
investment of the conglomerate appeared to grow. In addition, the
conglomerate had a better ability to borrow in the money market, or capital
market, than the smaller firm at their community bank.

For many years this was enough to make the company's stock price rise, as
companies were often valued largely on their return on investment. The
aggressive nature of the conglomerators themselves was enough to make many
investors, who saw a "powerful" and seemingly unstoppable force in business,
buy their stock. High stock prices allowed them to raise more loans, based on
the value of their stock, and thereby buy even more companies. This led to a
chain reaction, which allowed them to grow very rapidly.

However, all of this growth was somewhat illusory and when interest rates rose
to offset inflation, conglomerate profits fell. Investors noticed that the
companies inside the conglomerate were growing no faster than before they
were purchased, whereas the rationale for buying a company was that
"synergies" would provide efficiency. By the late 1960s they were shunned by
the market, and a major sell-off of their shares ensued. To keep the companies
going, many conglomerates were forced to shed the industries they had recently
purchased, and by the mid-1970s most had been reduced to shells.[9] The
conglomerate fad was subsequently replaced by newer ideas like focusing on a
company's core competency.

Genuine diversification
In other cases, conglomerates are formed for genuine interests of diversification
rather than manipulation of paper return on investment. Companies with this
orientation would only make acquisitions or start new branches in other sectors
when they believed this would increase profitability or stability by sharing risks.
Flush with cash during the 1980s, General Electric also moved into financing
and financial services, which in 2005 accounted for about 45% of the company's
net earnings. GE formerly owned a minority interest in NBCUniversal, which
owns the NBC television network and several other cable networks. In some
ways GE is the opposite of the "typical" 1960s conglomerate in that the
company was not highly leveraged, and when interest rates rose GE was able to
turn this to its advantage. It was often less expensive to lease from GE than buy
new equipment using loans. United Technologies has also proven to be a
successful conglomerate.

Mutual funds
With the spread of mutual funds (especially index funds since 1976), investors
could more easily obtain diversification by owning a small slice of many
companies in a fund rather than owning shares in a conglomerate. Another
example of a successful conglomerate is Warren Buffett's Berkshire Hathaway, a
holding company which used surplus capital from its insurance subsidiaries to
invest in businesses across a variety of industries.

International
The end of the First World War caused a brief economic crisis in Weimar
Germany, permitting entrepreneurs to buy businesses at rock-bottom prices.
The most successful, Hugo Stinnes, established the most powerful private
economic conglomerate in 1920s Europe – Stinnes Enterprises – which
embraced sectors as diverse as manufacturing, mining, shipbuilding, hotels,
newspapers, and other enterprises.

The best known British conglomerate was Hanson plc. It followed a rather
different timescale than the U.S. examples mentioned above, as it was founded
in 1964 and ceased to be a conglomerate when it split itself into four separate
listed companies between 1995 and 1997.

In Hong Kong, some of the well-known conglomerates include Jardine

Matheson (AD1824), Swire Group (AD1816), (British companies, one Scottish
one English; companies that have a history of over 150 years and have business
interests that span across four continents with a focus in Asia.) C K Hutchison
Whampoa (now CK Hutchison Holdings), Sino Group, (both Asian-owned
companies specialize business such as real estate and hospitality with a focus in
Asia.)

Swire Group (AD1816) (or Swire Pacific) Started by Liverpool natives the
 Swire family, which controls a wide range of businesses, including property
(Swire Properties), aviation (i.e. Cathay Pacific and Dragonair), beverages
(bottler of Coca-Cola), shipping and trading.
Jardine Matheson (AD1824) operates businesses in the fields of property
(Hongkong Land), finance (Jardine Lloyd Thompson), trading, retail (Dairy
Farm) and hotels (i.e. Mandarin Oriental).
CK Hutchison Holdings Limited: Telecoms, Infrastructure, Ports, Health and
Beauty Retail. Energy, Finance
Sino Group: Kerry Logistics, Universal Studios Singapore, Shangri-La

In Japan, a different model of conglomerate, the keiretsu, evolved. Whereas the

Western model of conglomerate consists of a single corporation with multiple
subsidiaries controlled by that corporation, the companies in a keiretsu are
linked by interlocking shareholdings and a central role of a bank. Mitsui,
Mitsubishi, Sumitomo are some of Japan's best known keiretsu, reaching from
automobile manufacturing to the production of electronics such as televisions.
While not a keiretsu, Sony is an example of a modern Japanese conglomerate
with operations in consumer electronics, video games, the music industry,
television and film production and distribution, financial services, and
telecommunications.

In China, many of the country's conglomerates are state-owned enterprises, but

there is a substantial number of private conglomerates. Notable conglomerates
include BYD, CIMC, China Merchants Bank, Huawei, JXD, Ping An Insurance,
TCL Corporation, Tencent, TP-Link, ZTE, Legend Holdings, Dalian Wanda
Group, China Poly Group, Beijing Enterprises, and Fosun International. Fosun
is currently China's largest civilian-run conglomerate by revenue.[10]

In South Korea, the chaebol are a type of conglomerate owned and operated by
a family. A chaebol is also inheritable, as most of current presidents of chaebols
succeeded their fathers or grandfathers. Some of the largest and most well-
known Korean chaebols are Samsung, LG, Hyundai Kia and SK.

The era of Licence Raj (1947–1990) in India created some of Asia's largest
conglomerates, such as the Tata Group, Kirloskar Group, Larsen & Toubro,
Mahindra Group, Sahara India, ITC Limited, Essar Group, Reliance ADA
Group, Reliance Industries, Aditya Birla Group and the Bharti Enterprises.

In Brazil the most important conglomerates are J&F Investimentos, Odebrecht,

Itaúsa, Camargo Corrêa, Votorantim Group, Andrade Gutierrez, and Queiroz
Galvão.
In New Zealand, Fletcher Challenge was formed in 1981 from the merger of
Fletcher Holdings, Challenge Corporation, and Tasman Pulp & Paper, in an
attempt to create a New Zealand-based multi-national company. At the time,
the newly merged company dealt in construction, building supplies, pulp and
paper mills, forestry, and oil & gas. Following a series of bungled investments,
the company demerged in the early 2000s to concentrate on building and
construction.

In the Philippines, the largest conglomerate of the country is the Ayala

Corporation which focuses on malls, bank, real estate development, and
telecommunications. The other big conglomerates in the Philippines included
JG Summit Holdings, Lopez Group of Companies, SM Investments
Corporation, Metro Pacific Investments Corporation and San Miguel
Corporation.

In United States, some of the examples are The Walt Disney Company,
WarnerMedia (see below).

In Canada, one of the examples is Hudson's Bay Company.

Advantages and disadvantages of

conglomerates

Advantages
Diversification results in a reduction of investment risk. A downturn suffered
by one subsidiary, for instance, can be counterbalanced by stability, or even
expansion, in another division. For example, if Berkshire Hathaway's
construction materials business has a good year, the profit might be offset
by a bad year in its insurance business. This advantage is enhanced by the
fact that the business cycle affects industries in different ways. Financial
Conglomerates have very different compliance requirements from insurance
or reinsurance solo entities or groups. There are very important
opportunities that can be exploited, to increase shareholder value.
A conglomerate creates an internal capital market if the external one is not
developed enough. Through the internal market, different parts of
conglomerate allocate capital more effectively.
A conglomerate can show earnings growth, by acquiring companies whose
shares are more discounted than its own. In fact, Teledyne, GE, and
Berkshire Hathaway have delivered high earnings growth for a time.[11]
Disadvantages
The extra layers of management increase costs.[12]
Accounting disclosure is less useful information, many numbers are
disclosed grouped, rather than separately for each business. The
complexity of a conglomerate's accounts make them harder for managers,
investors and regulators to analyze, and makes it easier for management to
hide issues.
Conglomerates can trade at a discount to the overall individual value of their
businesses because investors can achieve diversification on their own
simply by purchasing multiple stocks. The whole is often worth less than the
sum of its parts.
Culture clashes can destroy value.[13][14]
Inertia prevents development of innovation.[15]
Lack of focus, and inability to manage unrelated businesses equally well.[16]
Brand dilution where the brand loses its brand associations with a market
segment, product area, or quality, price or cachet.
Conglomerates more easily run the risk of being too big to fail.

Some cite the decreased cost of conglomerate stock (a phenomenon known as

conglomerate discount) as evidential of these disadvantages, while other traders
believe this tendency to be a market inefficiency, which undervalues the true
strength of these stocks.[17]

Media conglomerates
In her 1999 book No Logo, Naomi Klein provides several examples of mergers
and acquisitions between media companies designed to create conglomerates
for the purposes of creating synergy between them:

Time Warner included several tenuously linked businesses during the 1990s
and 2000s, including Internet access, content, film, cable systems and
television. Their diverse portfolio of assets allowed for cross-promotion and
economies of scale. However, the company has sold or spun off many of
these businesses – including Warner Music Group, Warner Books, AOL,
Time Warner Cable, and Time Inc. – since 2004.
Clear Channel Communications, a public company, at one point owned a
variety of TV and radio stations and billboard operations, together with a
large number of concert venues across the U.S. and a diverse portfolio of
assets in the UK and other countries around the world. The concentration of
bargaining power in this one entity allowed it to gain better deals for all of its
business units. For example, the promise of playlisting (allegedly,
 sometimes, coupled with the threat of blacklisting) on its radio stations was
used to secure better deals from artists performing in events organized by
the entertainment division. These policies have been attacked as unfair and
even monopolistic, but are a clear advantage of the conglomerate strategy.
On December 21, 2005, Clear Channel completed the divestiture of Live
Nation, and in 2007 the company divested their television stations to other
firms, some which Clear Channel holds a small interest in. Live Nation owns
the events and concert venues previously owned by Clear Channel
Communications.
Impact of conglomerates on the media: The five major media
conglomerates in the United States are The Walt Disney Company,
Comcast, Viacom, WarnerMedia and CBS Broadcasting Inc. (CBS). The
Walt Disney Company is linked with the American Broadcasting Company
(ABC), creating the largest media corporation, with revenue equal to roughly
thirty six billion dollars. Since Walt Disney owns ABC, it controls its news
and programming. Walt Disney also acquired most of Fox, for over $70
billion. When General Electric owned NBC, it did not allow negative
reporting against General Electric on air (NBCUniversal is now owned by
Comcast). Viacom's chief executive, Sumner Redstone, considers himself a
“liberal democrat” and most of Viacom's programming has a liberal
perspective.[18]
Media conglomerate impact on journalism: It leads to opinionated
journalism versus traditional journalism. Opinionated journalism is a
journalist adding his or her ideologies on a matter on top of reporting it to
the public. The coverage that conglomerates have of issues, especially
political, is not necessarily objective, and fails to report both sides of an
issue, if not taking a neutral stance.[19] This is known as media bias. Media
bias is ”the intentional or unintentional slanting of news reporting toward one
side due political views or cultural beliefs of journalists, producers or owners
of a media outlet.[18]”

Internet conglomerates
A relatively new development, Internet conglomerates, such as Alphabet,
Google's parent company[20] belong to the modern media conglomerate group
and play a major role within various industries, such as brand management. In
most cases Internet conglomerates consist of corporations who own several
medium-sized online or hybrid online-offline projects. In many cases, newly
joined corporations get higher returns on investment, access to business
contacts, and better rates on loans from various banks.

Food conglomerates
Similar to other industries there are many companies that can be termed as
conglomerates.

The Phillip Morris group, which once was the parent company of Altria
group, Phillip Morris International, and Kraft Foods had annual combined
turnover of $80 bn.
Nestlé

See also
List of conglomerates
Media conglomerate
Consolidation (business)
Conglomerate discount
Holding company
Subsidiary
Associate company
Chaebol
Keiretsu
Zaibatsu
Concern (business)
Multi-divisional form
Mergers and acquisitions
ITT: The Management of Opportunity

Notes
1. Grenville, Stephen (3 November 2017). "The first global supply chain" (https
://www.lowyinstitute.org/the-interpreter/starting-point-first-global-supply-chai
n). Lowy Institute. Retrieved 18 May 2018.
2. Shih, Chih-Ming; Yen, Szu-Yin (2009). The Transformation of the Sugar
Industry and Land Use Policy in Taiwan, in Journal of Asian Architecture
and Building Engineering [8:1], pp. 41–48
3. Tseng, Hua-pi (2016). Sugar Cane and the Environment under Dutch Rule
in Seventeenth Century Taiwan, in Environmental History in the Making, pp.
189–200
4. Estreicher, Stefan K. (2014), 'A Brief History of Wine in South Africa,'.
European Review 22(3): pp. 504–537. doi:10.1017/S1062798714000301 (ht
tps://doi.org/10.1017%2FS1062798714000301)
5. Fourie, Johan; von Fintel, Dieter (2014), 'Settler Skills and Colonial
Development: The Huguenot Wine-Makers in Eighteenth-Century Dutch
 South Africa,'. The Economic History Review 67(4): 932–963.
doi:10.1111/1468-0289.12033 (https://doi.org/10.1111%2F1468-0289.12033)
6. Williams, Gavin (2016), 'Slaves, Workers, and Wine: The ‘Dop System’ in
the History of the Cape Wine Industry, 1658–1894,'. Journal of Southern
African Studies 42(5): 893–909
7. "The Forgotten History of How 1960s Conglomerates Derailed the American
Dream | The Saturday Evening Post" (https://www.saturdayeveningpost.co
m/2018/11/the-forgotten-history-of-how-1960s-conglomerates-derailed-the-a
merican-dream/). www.saturdayeveningpost.com. Retrieved 2020-01-27.
8. Holland 1989, pp. 57–64, 81–86 .
9. "Archived copy" (http://www.referenceforbusiness.com/history2/49/Hitachi-Lt
d.html). Archived (https://web.archive.org/web/20100212035433/http://www.
referenceforbusiness.com/history2/49/Hitachi-Ltd.html) from the original on
2010-02-12. Retrieved 2010-08-25. Hitachi, Ltd. - Company Profile,
Information, Business Description, History, Background Information on
Hitachi, Ltd.-Source-Reference for Business » Company History Index »
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10. Tsui, Enid (24 June 2012). "China conglomerate Fosun to scour for deals
with $1bn fund" (https://www.ft.com/intl/cms/s/0/5d98efb2-bb82-11e1-90e4-
00144feabdc0.html). Financial Times.
11. "Archived copy" (http://www.investopedia.com/articles/basics/06/conglomer
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12. Dearbail Jordan and Robin Pagnamenta (September 25, 2007). "BP to strip
out four layers of management" (http://business.timesonline.co.uk/tol/busine
ss/industry_sectors/natural_resources/article2527470.ece). The Times.
Archived (https://web.archive.org/web/20110612141605/http://business.time
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07338.stm). BBC News. 17 January 2000. Archived (https://web.archive.org
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from the original on 2 June 2009.
14. Michelle C. Bligh (2006). "Surviving Post-merger 'Culture Clash': Can
Cultural Leadership Lessen the Casualties?". Leadership. 2 (4): 395–426.
doi:10.1177/1742715006068937 (https://doi.org/10.1177%2F174271500606
8937).
15. "Innovation and Inertia" (http://ecorner.stanford.edu/authorMaterialInfo.html?
mid=1319). Stanford University's Entrepreneurship Center. Archived (https:/
/web.archive.org/web/20090801221352/http://ecorner.stanford.edu/authorM
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16. "Archived copy" (http://moneyterms.co.uk/conglomerate/). Archived (https://
web.archive.org/web/20090811061808/http://moneyterms.co.uk/conglomera
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Bibliography
Holland, Max (1989), When the Machine Stopped: A Cautionary Tale from
Industrial America, Boston: Harvard Business School Press, ISBN 978-0-
87584-208-0, OCLC 246343673 (https://www.worldcat.org/oclc/246343673).
McDonald, Paul and Wasko, Janet (2010), The Contemporary Hollywood
Film Industry, Blackwell Publishing Ltd. ISBN 978-1-4051-3388-3

External links
"Conglomerate". (http://www.britannica.com/EBchecked/topic/132310/congl
omerate) Encyclopædia Britannica. 2007. Encyclopædia Britannica Online.
17 November 2007.
Conglomerate Monkeyshines (http://luminouslogic.com/conglomerate-earni
ngs-growth.htm), An example of how conglomerates were used in the
1960s to manufacture earnings growth

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