You've probably heard that when discussing business organisations, there is often one parent organisation in charge of a number of little enterprises that run independent operations. The parent firm frequently achieves this by owning sizable holdings in the lesser businesses. The term "conglomerate" is frequently used to describe this parent organisation or business. There are several reasons why firms create conglomerates, and these conglomerates each have their own benefits and drawbacks. Let's go over the definitions of conglomerate's fundamental ideas in order to comprehend these reasons and become more familiar with the phrase.
Did you know? Reliance Industries, with a ₹22620 crores of market value, is the largest conglomerate in the world.
Conglomerate Meaning and Working
A corporation that manages multiple distinct and apparently unconnected enterprises is referred to as a conglomerate. The fundamental idea behind a conglomerate is that one large organisation oversees numerous other organisations that manage independent enterprises. The primary business—or parent organisation, as it is more frequently known—acquires control of these small businesses.
The development of a conglomerate serves a variety of purposes, and the largest conglomerates reduce business risk by participating in a wide range of marketplaces. However, certain conglomerates decide to focus on a specific industry. Conglomerates are huge businesses made up of separate organisations that operate in many industries. Conglomerates are frequently multi-industry businesses with global reach. Each tiny business under the conglomerate's ownership operates separately from the others. These tiny businesses—or subsidiaries, as they are more frequently known, report on all of their commercial activities to the conglomerate or parent firm.
In a conglomerate, the parent firm is crucial and can lower business risk by investing in various small businesses rather than focusing on a single market. This action also benefits the holding business, enabling it to save expenses and use fewer resources. One of the primary justifications for creating a conglomerate is the possibility of inefficiency brought on by an excessively large single firm.
Globally, there are many different kinds of conglomerates, including those in the media, manufacturing, food, and many other industries. These people participate in different business activities and profit from investments in various markets. For example, a manufacturer starts by producing and selling items and products. The corporation might then decide to venture into a different market and launch a new business sector, like financing. A media conglomerate typically begins by holding newspapers before expanding to include radio stations, television stations, and even the book publishing sector. A food conglomerate may begin by selling snacks or other basic food items before expanding by purchasing a major food or drink firm.
Why is a Conglomerate Formed?
Now that we've seen the fundamental idea behind a conglomerate and the way it functions in the business world let's try to comprehend the factors that lead to the formation of a conglomerate in the first place. Many factors could influence a corporation's decision to create a conglomerate. Here is a list of some of these causes:
- The desire to engage in business that is unrelated to the company's primary focus or primary business operation is one of the primary motivations for building a conglomerate.
- Another motive for the creation of a conglomerate, as was already mentioned before, is the need to diversify in an attempt to decrease market risks and with the hope that the revenues or profits may balance a failure in one company to the other.
- A conglomerate may also be created with the intention of moving a business into a different sector.
- After the conglomerate is formed, the business or corporation may look for lucrative profits, either previous or anticipated, from the potential subsidiary.
- In order to safeguard against the risk involved with the subsidiary business, conglomerates are frequently created.
For the reasons listed above, many big businesses have chosen to create conglomerates by owning a controlling interest in their subsidiary companies. The second firm might be called an associate or an affiliate company when a conglomerate controls less than a controlling share of the voting stock of the first.
How do Corporations Come to be Conglomerates?
The dangers of running a corporation increase as companies gain power and wealth. Diversifying a business can help it expand and prevent stagnation. The following is a list of several business combinations that a parent firm may pursue:
When two businesses agree to a transaction known as an acquisition, one business buys the majority of the shares in the other business. A conglomerate will result if the buying company permits the other company to carry on with business as usual. The difference between an acquisition and a merger is that during a merger, the acquiring business often absorbs the whole employees, infrastructure, and assets of the target company. Acquisitions might involve businesses from the same industry or outside it, whereas mergers typically involve companies from the same industry.
Conglomerates created through acquisitions may have a networked corporate structure where several subsidiaries can assist the parent firm by providing their goods and services to boost output. Businesses that become conglomerates through acquisition can enlist the services of talented businesses that can provide raw materials, machines, services, or goods. This can reduce the amount of time, effort, and money needed to buy those things.
A huge firm can create a conglomerate when it expands into numerous subsidiaries and restructures. By dividing the systems, personnel, and money into different organisations, a corporation may reorganise in an effort to boost efficiency. Within the larger conglomerate, the smaller subsidiaries may develop into specialised businesses that offer goods and services that differ greatly from those of the main company.
The extension is a different kind of corporate expansion that frequently happens in companies well-known for manufacturing goods in one sector and seeking to expand to other industries. As the parent business enters new industries, this could result in a higher return on investment (ROI). You could think of a business extension as a natural way for businesses to grow.
Examples of Conglomerates
- The well-known conglomerate Berkshire Hathaway (BRK.A), run by Warren Buffet, has effectively conducted businesses in a variety of industries, including real estate, insurance, and the production of planes and textiles. One of the biggest and most powerful companies in the world, Berkshire has earned respect. Buffett's strategy is to control capital allocation while giving businesses almost complete leeway over how to run their own operations. The company has a majority stake in more than fifty companies and minor holdings in dozen others. Still, the corporation only has a tiny headquarters office that is only moderately staffed.
Also read: Upcoming Business Ideas in India for 2023
- General Electric is another illustration. Thomas Edison, a well-known inventor, created the company originally as an electronics corporation and research lab. Since then, it has grown to own power, real estate, banking, media, and healthcare businesses. The business is divided into a number of separate arms that each function independently but are connected. This interconnection makes it easier for GE to fulfil its original goal of doing in-depth research and development (R&D) on technologies that may be used in a variety of products.
Here is a list of some famous Indian conglomerates:
- Aditya Birla Group
- Hinduja Group
- ITC Limited
- JSW Group
- Bajaj Group
- Godrej Group
- United Breweries Group
- Tata Group
- Reliance Group
Benefits and Drawbacks of Conglomerates
Businesses that add subsidiaries to their organisation give it stability and diversity, but managing vast conglomerates may be challenging. Parent firms may try to add extra management layers as conglomerates expand to give structure. The following is a list of the benefits and drawbacks of conglomerates:
- As having a wide range of companies in various industries is one of a conglomerate's distinguishing characteristics, this may be advantageous for the parent firm as underperforming businesses and industries can be compensated by other sectors or companies that are performing much better and generating significant profits and gains.
- By making the best use of its resources and diversifying its business interests, the parent firm or organisation reduces expenses by participating in a number of minor, unconnected businesses. This lowers the risks involved in making investments or conducting business in a single market.
- All the conglomerates' owned businesses have access to internal capital markets, increasing their capacity for business expansion if the external capital markets are not providing the parameters that the employer needs, a conglomerate can mark the capital of the companies.
Even though we've seen a number of benefits associated with conglomerate formation, there are also certain drawbacks that firms must be mindful of before deciding whether to form a conglomerate.
- The stick value may suffer due to the conglomerate's size. Conglomerate discount is a term used to describe this circumstance.
- Conglomerate discount is a term used to describe this circumstance.
- A conglomerate's stock value is 13% to 15% lower than the combined market value of its constituent companies.
- In addition to the drawbacks above, there are other problems with financial transparency and administration that cause the company shares to be valued at a discount.
A conglomerate comprises two or more corporations involved in various business endeavours but falls under the same corporate organisation. Typically, this involves a parent company and numerous branches.
The term "conglomerate" is quite common and refers to enormous businesses with high net worth. The companies join the conglomerate in an effort to diversify their company and seek out better chances. There are many successful conglomerate instances worldwide, but conglomerates should be done extremely carefully since the damages might be enormous if they fail.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.