A conglomerate is a large company that consists of divisions of seemingly
unrelated businesses.
Conglomerates were popular 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. Famous examples of the 1960s conglomerators include Ling-Temco-Vought, ITT, Litton , Textron, Teledyne, and Gulf and Western Industries. As long as the target company had profits greater than the interest on the loans, the overall return on investment (ROI) of the conglomerate appeared to grow.
For many years this was enough to make the company's stock price rise, as companies were often valued largely on their ROI. The aggressive nature of the conglomorators 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. As soon as interest rates started to rise in order to offset inflation, the profits of the conglomerates fell. Investors also noticed that the companies inside the conglomorate were growing no faster than they had before they were purchased, whereas the excuse for buying a company was often that "synergies" would lead to more efficiency. By the late 1960s they were frowned on by the market, and a major sell off of their shares ensued. In order to keep the companies going, many conglomerates were forced to shed the industries they had purchased recently, and by the mid-1970s most had been reduced to shells. The conglomerate fad was subsequently replaced by newer ideas like focusing on a company's core competency.
Most conglomerates have generally proven unsuccessful. One exception is General Electric, whose huge industrial equipment surplus was turned into a successful rental and leasing business. Cash flush during the 1980s, GE also moved into financing and financial services, which today accounts for half of the company's income. In some ways GE is the opposite of the "typical" 1960s conglomerate: the company was not highly leveraged, and when interest rates went up they were able to turn this to their advantage as it was often less expensive to lease from GE than buy new equipment using loans.
Advantages of a Conglomerate
To modern business analysts, at present the essential advantage of a conglomerate is to reallocate capital in a more efficient way. For example, a hypothetical conglomerate consists of a candy store, an internet website, and a construction company. Say the candy store makes a consistent, but not growing level of profit. Lets also say that website is a startup venture which as yet does not make money, but has the potential for quick growth. Most investors for the long term "buy low and sell high", and the main driver of the stock price over the long term is growing earnings. Almost all executives in a company are paid to grow earnings and thus the stock price. Now if the candy store was a standalone business, even though it made a lot of profit, it wouldn't be growing the profits and would thus be under pressure to try and do something potentially risky in its industry to continue to grow profits. On the other hand, a stand alone website startup may have trouble attracting financing because it is so new. In the conglomerate, the steady profits of the candy store could be used to grow the website business.
The other general advantage of a conglomerate is diversification, which is supposed to reduce risk and thus make the stock price less likely to rise and fall very quickly.
Media Conglomerates
In her 1999 book No Logo, Naomi Klein provides several examples in the media sector, of mergers and acquisitions activity designed to create conglomerates for the purposes of creatung synergies between them. For example, Time Warner AOL have a series of tenuously linked business including internet access, and music, film and traditional publishing. Their diverse portfolio of assets allow cross-promotion and economies of scale.
Other notable media conglomerates include:
- News International, owned by Rupert Murdoch, which owns the Sky Broadcasting network in the UK, as well as the daily newspapers The Sun and The Times. Articles in Private Eye have highlighted articles in these newspapers that are ostensibly objective news coverage, but which contain subtle advertisements for Sky. In this way, leveraging assets across the conglomerate results in cheaper and less obvious advertising.
- Clear Channel Entertainments , a quoted company, which owns a variety of TV and radio stations, together with a large number of concert venues, across the US and a diverse portfolio of assets in the UK and other countries around the world. The concentration of bargaining power in this one entity allows 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 is often used to secure better deals from artists performing in events organised by the entertainment division. These policies have been attacked as unfair and even monopolistic, but are a clear advantage of the conglomerate strategy.
See also
Japanese
Korean
