Updated July 21, 2023
Definition of Conglomerate
Conglomerate means a mixture of two or more things to make one single thing. This can happen between items, things, materials, or companies.
Some small companies can also conglomerate and form large organizations. These are very popular nowadays, and also it is very beneficial. The companies form one parent company and many subsidiary companies, and they share the holding and minority interests in those companies.
Explanation
It is a combination of multiple things to achieve one single object. Many different and diverse companies can help each other on this journey. This is done to encourage investors to invest. It is a myth that small companies merge with large organizations, and the process is called a Conglomerate. Rather, the process of combining their businesses to grow economically is the real sense and meaning of a Conglomerate. This can also help in building the rate of return to the investors because when a company is combined then, many expenses are adjusted and reduced. Thus it helps in the minimization of the cost to the company. The company, after the conglomerate, witnesses various activities and changes in their company, and the experts should bring out the positive changes and should try to reduce the negative changes to make the most utilization.
Examples of Conglomerate
The United States and many developing countries have witnessed several successful conglomerates, and the combined group company is now world-famous. They are into several businesses with one head i.e. one parent company along with many subsidiaries.
- Honeywell: This is one of the famous examples. This company has diversified businesses such as Oil & Gas, Security and Alarm alert equipment, Scanning equipment, Thermostats, Vehicles, Apartments, etc.
- The Walt Disney Company: The Company is also into several businesses like Media, entertainment, parks resorts, consumer products, etc.
- Tata Group: One of the best examples in South Asia is the Tata group of companies. They deal with Cars, information and technologies, consumer agricultural products, hotels, resorts, Steel, defense, Media, telecom, financial services, etc.
- Samsung Group: It is another big multinational conglomerate group of companies. They are into consumer electronics, materials used in ships, Mobile phones, chemicals, home appliances, medical instruments, financial services, advertising, information, and technology.
- Johnson & Johnson: It is one classic example of a conglomerate; the Company is very famous because of its baby products but it is a conglomerate and works with diversified companies and also deals in medicines, medical instruments, parks, trusts, etc.
- Berkshire Hathaway Inc: This company is a multinational conglomerate and deals in Electric, Newspaper, Retail, Consumer Products, Vacuum cleaners, etc. This company never pays its investors dividends. They are famous for buying entire companies if that suits their requirements, and by following this, they are now on the top and are now the world’s biggest conglomerate.
Reasons for Creating Conglomerate
- This can provide a better platform for businesses.
- This is important because it helps in the growth of businesses.
- It is due to the conglomerate the companies can gain investors’ value and the investor’s trust.
- Diversification can also help the parent company to reduce its cost to a certain level.
- The conglomerate helps to provide many other business opportunities to small companies.
- The risk is also being shared in the case of the conglomerate.
- The conglomerate is done to understand the interest of the management as well because it can be possible that a particular company is doing very well after the conglomerate.
Advantages and Disadvantages of Conglomerate
Below are the advantages and disadvantages:
Advantages
- Everyone wants some extra revenue if they are exposed to risk. This is the advantage of conglomerates the extra benefit is always there in case it is a successful conglomerate.
- The risk gets divided amongst the companies. Therefore, investors can be encouraged to invest in the companies.
- Large organizations can also get a fair chance to check their interest, and this is possible only when diversification is allowed in the business. Thus, the conglomerate plays a vital role here.
- This can help grow the capital market for the group of companies because the investors will build trust in the business and its products.
- This helps to rapidly grow in terms of business valuation and investors.
- Large organizations can function even better when some small yet good subsidiaries form a part of them.
- The service sectors are also managed by the companies. In the case of a conglomerate, if one of the service sector companies merges with a large company, then it can provide better opportunities for the group company. The resources can be easily managed with the subsidiary, and thus, the business will be done very efficiently.
Disadvantages
- As the company becomes larger, the resources will also have to be increased, and thus it is sometimes challenging to manage the employees and their costs.
- It can be sometimes very difficult to come to any conclusion because when several minds are involved in some simple decisions, then it can become very difficult to come to any conclusion.
- If any of the businesses doesn’t do justice to the entire group, then it can reduce the brand value of the parent company or the subsidiary company.
- The experts of the subsidiary may have to suffer because of the inequality given to the smaller section.
- Less focus and less innovation can also be witnessed with the conglomerate are not successful.
- The entire business can get a negative report because of one of its subsidiaries.
- The chances of default and defalcation are also very common in big conglomerate companies because it is not possible to check every aspect, and thus, it is a big disadvantage.
Conclusion
The conglomerate is a very popular term and is associated with big companies with large net worth. The companies to find better opportunities and to attempt the diversification of their business involve themselves in the conglomerate. There are several successful examples of conglomerates across the globe. Still, the conglomerate should be done very carefully because if it does not work out, then the losses can be huge.
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