What Is a Conglomerate Merger?

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Conglomerate mergers involve a partnership between two large firms that are unrelated and with different customer bases. These partnerships have allowed numerous American and international companies to expand and grow their net worth. One of the major benefits of conglomerate mergers is to help companies diversify and reduce a company's risk exposure. Other benefits include being able to manage a wider array of activities in the marketplace.

Background

  • Conglomerate mergers grew rapidly during 1960 as a response to stiff antitrust restrictions that prevented mergers and partnerships between companies that had similar products and services. Antitrust policies were erected to prevent companies from monopolizing the marketplace. Since the 1960s, antitrust laws have gone through significant changes. Corporate diversification has become a dominant form of business strategy. Company executives find that mergers between two unrelated companies can result in increased efficiency. A drawback of conglomerate mergers is the inability of a company to function as it had in the past.

Types

  • Businesses may consider three types of mergers: horizontal, vertical and conglomerate. Horizontal mergers are partnerships formed between two or more companies with similar or interchangeable products. A vertical merger takes place between two related companies, such as a supplier of products and a buyer. Conglomerate mergers are neither horizontal nor vertical. The U.S. Supreme Court defines conglomerate mergers as partnerships in which there can be no economical relationship between the acquiring and acquired firms, according to University of Maryland Law School professor Timothy Hurley in the "Journal of Business and Technology Law."

Purpose

  • Companies that are driven by "capital efficiency" initiate conglomerate mergers. Corporations with significant sums of revenue find it useful to invest in a new business to absorb surplus income. Executive firms find conglomerate mergers to be ideal ventures for managing their excess capital, according to Hurley. Moreover, combining several types of operations under a single entity allows a firm to generate a common pool of assets that can be distributed throughout the various divisions of a company.

Benefits

  • Company executives believe that conglomerate mergers not only increase assets and company efficiency but also help to reduce any risks associated with the operation of a business. Conglomerate firms provide investors with a wide array of portfolio options that may be more stable than those offered by specialized markets. Supporters of conglomerate mergers argue that companies that diversify their products do not have to depend on a single product line or a single market share. Specialized markets are more vulnerable to competitors and the movement of the market, whereas conglomerates can spread themselves out into multiple markets.

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