What Is a Conglomerate?
A conglomerate refers to a corporation that runs several different and seemingly unrelated businesses. One company controls many smaller companies which conduct businesses separately. It is done by holding a controlling stake in these companies.
The biggest conglomerates diversify business risk by engaging in many different markets. Still, some conglomerates, such as mining, choose to participate in a single industry.
Conglomerates Explained
Conglomerates refer to large companies consisting of independent entities that function in multiple industries. Many conglomerates have international operations and are multi-industry corporations. Every subsidiary business of a conglomerate runs independently of the other business divisions. However, the subsidiaries' management report to the higher management of the parent company.
A conglomerate's parent company can reduce the risks by taking part in many different businesses instead of being in a single market. It also helps the holding company to reduce costs and consume fewer resources. However, a company growing too big may lead to inefficiency. So, forming a conglomerate can divest risk.
There are various types of conglomerates across the globe ranging from manufacturing to media to food. A manufacturer may start by manufacturing and selling its products. It may decide to enter into the electronics market, then moving into a different industry like financial services.
A media conglomerate may begin by owning several newspapers, then buy television and radio stations, and book publishing companies.
A food conglomerate may begin by the sale of potato chips. The company may choose to diversify, purchasing a soda pop company, then expand by purchasing other companies that make different food products.
Advantages and Disadvantages of Conglomerates
The advantages of conglomerates are as follows:
Choosing to have a wide array of companies in different industries can be a real boon since poorly performing companies or industries can be offset by other sectors.
Participating in several unrelated businesses helps the parent corporation to reduce costs by optimum use of resources and diversified business interests. The inherent risks of operating in a single market are reduced.
Companies owned by conglomerates can access internal capital markets enabling the greater ability for company's growth. A conglomerate can earmark capital for one of their companies if external capital markets are not offering as kind terms the company wants.
The disadvantages of conglomerates are as follows:
The conglomerate's size may hurt the stock value; a condition called conglomerate discount.
The total market value of the companies of a conglomerate is usually higher than the conglomerate's stock value by anywhere between 13% to 15%.
The combination of a set of different issues relating to financial transparency and management makes conglomerate stock valued at a discount.
Examples of Conglomerates based in India
Here is a well-known list of Conglomerates in India:
- Aditya Birla Group
- Hinduja Group
- ITC Limited
- JSW Group
- Bajaj Group
- Godrej Group
- United Breweries Group
- Tata Group
- Reliance Group
