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The world has seen over 500,000 merger and acquisition (M&A) deals completed globally since 2010. And even though the global economic downturn and the pandemic decreased M&A activity in 2020, it still bounced back in 2021. Understanding the differences between types of mergers helps to tie up deals faster and more efficiently. Today M&A Community shares what every executive needs to know about a conglomerate merger. What are the advantages of conglomerate mergers? Are there any drawbacks? What are the types of conglomerate mergers? The guide below will provide the answers. What is a conglomerate merger?A conglomerate merger involves companies active in totally unrelated business activities or operating in different geographical locations. An airline company acquiring a newspaper is a good example of a conglomerate merger. Conglomerate mergers first appeared in the United States and were quite popular in the 1960s, and 1970s. But they’re not as popular today. According to the OECD Competition Committee, just a few authorities have challenged a conglomerate merger in recent years. Even though it doesn’t seem like a conglomerate merger will become a more frequent phenomenon soon, we still witness mergers of companies that want to diversify and capture new markets through the M&A process. In many cases, companies are worth much more together than separately. The metaphorical equation 2 + 2 = 5 perfectly describes one of the main conglomerate merger advantages. Types of conglomerate mergersThere are basically two types of conglomerate mergers — pure and mixed. Pure conglomerate mergersA pure conglomerate merger happens when the buying and selling companies have nothing in common; they specialize in completely different industries, and their strategies don’t overlap. A good example of a pure conglomerate merger is W.R. Grace, a chemical business that acquired over 150 different companies. The list included retail outlets, food chains, construction, gas, oil, agriculture, etc. Pure conglomerate mergers are beneficial in many ways. First, they’re great for entering a new market fast. Second, they can significantly boost the merged company’s finances, ultimately attracting investors. They also result in a more diversified customer base. On the other hand, when compared to conglomerate acquisitions, a pure conglomerate is often considered a riskier type. The merging firms have many differences; their shareholders might not agree to the merger in the first place, and even if they do, different merging companies may become very difficult to manage and develop. Mixed conglomerate mergersMixed conglomerate mergers occur between two companies from different industries that still have something in common, for example, a customer database. Typically, market or product extensions are the goals of a mixed conglomerate merger. Walt Disney Company acquiring the American Broadcasting Company is a great illustration of a mixed conglomerate merger. It is also a great example of how two firms, when merged, can grow and succeed faster together. Disney became the first media company with a major presence in four distribution systems: films, television, broadcasting, and telephone wires. Nevertheless, mixed conglomerate mergers are quite rare. Few companies do that because of the differences in corporate culture, product lines, business operations, financial planning, etc. The process is so complex and challenging, that not everyone can manage its proper execution. Additionally, mixed mergers require lots of financial resources, which appears to be another significant drawback. Three best conglomerate merger examplesLet’s see how two separate companies from different industries successfully merge and become conglomerates. Amazon and Whole FoodsIn 2017, Amazon acquired Whole Foods Market, the largest American supermarket chain, for $13,7 billion. This merger increased the total value of the two companies up to $14,3 billion. Why were companies combined? Amazon wanted to learn more about the grocery business operations. Its strategy was to get into brick-and-mortar stores and expand its grocery business. It also helped to extend its product range and corporate territories, which is often the main goal of a conglomerate merger. eBay and PayPaleBay and PayPal are great examples of successful business combinations; two companies from different industries underwent a triumphant merger in 2002. As a trading platform, eBay needed a secure and reliable online payment system. So when those two firms united, buyers and sellers could trade more easily and safely. Even though the integration was effective and advantageous for both firms, eBay dropped PayPal in 2018 and replaced it with a new company from the Netherlands called Adyen. One of the reasons for such a decision was a desire to have a checkout process customized to the local habits of buyers. Disney and PixarDisney and Pixar merged back in 2006. It’s still considered the greatest conglomerate merger example as the union became truly powerful. Yet, when Disney bought Pixar for $7,4 billion, many skeptics did not believe in the deal’s success, even though the two companies came from the same industry. Now Bob Iger, CEO of the Walt Disney Company, says the merger was his “proudest decision.” It ultimately led to the Disney animation rebirth and attracted more investments. By the way, such a successful integration proved to other studios they wouldn’t lose their legacy. That’s why, in a while, Marvel and Lucasfilm joined Disney as well, forming a much larger company. A merger between different business organizations has several advantages and disadvantages. Let’s learn the main ones. Advantages of conglomerate mergersHere are the potential advantages of merging companies:
Disadvantages of conglomerate mergersThe drawbacks of a conglomerate merger are the following:
Best practices for a successful conglomerate mergerA conglomerate merger is one of the most challenging processes for businesses. You must keep in mind many dependencies, rules, and potential issues. Let’s look at what other firms do to successfully navigate mergers.
Key takeawaysEven though conglomerate mergers haven’t been so popular since the 1960s and 1970s, companies still unite frequently to grow together faster. Here are the main takeaways from the guide:
What are some reasons why companies merge to form conglomerates?There are many reasons for conglomerate mergers, such as increased market share, synergy, and cross-selling opportunities. These could take form in advertising, financial planning, research and development (R&D), production, or any other area.
What is the main reason for conglomerate?One of the main reasons for conglomeration is creating something new from the combined energies of multiple companies to produce independent goods and services under one parent company's management. Another reason for conglomeration is executing on the concept of diversification by combining two smaller firms.
What are the 5 reasons companies merge?The most common motives for mergers include the following:. Value creation. Two companies may undertake a merger to increase the wealth of their shareholders. ... . Diversification. ... . Acquisition of assets. ... . Increase in financial capacity. ... . Tax purposes. ... . Incentives for managers.. What are the benefits of a conglomerate?A conglomerate benefits the subsidiaries and the parent company by reducing business risks, sharing the resources and increasing its market share in several industries. In a conglomerate, it is vital to set up efficient systems to ensure productivity across subsidiaries to maintain productivity and profits.
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