What Is a Conglomerate? Definition, Benefits and Types

By Indeed Editorial Team

Published December 14, 2021

Forming a conglomerate may provide a successful business opportunity for your company. A conglomerate is a combination of multiple businesses and may provide stability and new opportunities for an organization. Learning about conglomerates can help you determine if it's an option worth pursuing for your business. In this article, we explain what a conglomerate is, the benefits it provides and the two types of conglomerates, along with examples to show how they operate.

What is a conglomerate?

A conglomerate is an organization in which a business owns several smaller businesses in different fields. The businesses that the parent company owns in a conglomerate may be entirely unrelated or may be in different sectors of the same field. Forming a conglomerate may allow a company to create partnerships between businesses it owns to improve performance throughout the organization.

Benefits of a conglomerate

Creating a conglomerate can provide several benefits to a company, such as:

Diversification

Incorporating a new business into your conglomerate from a field in which your conglomerate doesn't currently have a business can help to diversify the financial value of the conglomerate company. If a company's full worth is in a single industry, its value may vary significantly based on upward or downward movement in the field's market. A diverse market interest where the value of a company splits across multiple industries makes it less susceptible to a slow market hurting its value.

Related: What Is Strategy Diversification?

Income smoothing

Income smoothing involves distributing revenue and expenses among different reporting periods to make it seem as though a business has steady earnings. In a conglomerate, some of the more consistent businesses can compensate for a lack of performance in other businesses. This may be useful in instances where some businesses do better than others during different periods of the year and there's generally a cycle of high and low performances. This allows the businesses that provide steady income all year to compensate during slow periods for seasonal businesses, while also benefiting from the higher profitability during busy periods.

Cooperation

When two businesses share a parent company, it can create a natural alliance between them. This allows a conglomerate owner to facilitate cooperation between businesses within its control. For example, a conglomerate that owns both a computer manufacturing company and a shipping company may allow the computing company to gain a competitive advantage over its peers by offering improved shipping rates through the shipping company the conglomerate owns. This may allow you to make all companies within your conglomerate more financially efficient and improve your value generation.

Related: What It Means To Merge Companies and How It Works

Collaborative learning

Owning multiple companies provides you with access to more financial and market information. You may use this information to make more informed business decisions throughout the organizations within your conglomerate. By sharing important data between companies, you may provide resources to individuals running each company in a more cost-efficient method than having each company perform its own market research and data analysis on the same markets. Possessing information across multiple industries may also help you identify broad trends that a company focusing on a single market may overlook.

Related: 10 Benefits of Collaborative Learning

Capital allocation

Running a conglomerate may allow you to provide funding opportunities to businesses your parent company owns which they would otherwise not be able to access. Because a conglomerate contains multiple businesses, each with its own streams of revenue, it provides the option to use income generated at one business to fund projects or expansion at another. This may allow you to seek funding for a company that otherwise would not receive it or do so in terms that are more favorable to your financial performance.

Related: 9 Types of Capital and Examples

Types of conglomerates

When forming a conglomerate, there are two classifications you may use depending on the type of businesses included within your conglomerate, which are:

Pure

A pure conglomerate is one in which the businesses share no common field. Each business added to the conglomerate serves its own market and has minimal relation to any of the markets associated with the other businesses. This can also create more opportunities for businesses to support each other, as the companies serving different purposes increases the potential for one company to provide a unique value to another.

Example: An online retailer grows to the point where senior executives feel that financial investment in purchasing new companies would be beneficial to the business. The company opts to form a pure conglomerate, purchasing businesses in unrelated industries. The company makes purchases that include a newspaper, an online gaming platform and a social media network.

Because the businesses within the conglomerate all serve significantly different markets, they don't have any competition with each other, but the information they gather may be less applicable to other businesses within the conglomerate than in a mixed conglomerate. The parent company primarily benefits from the diversification that the new purchases provide, spreading its income generation across multiple industries. The company may also work to form collaborative agreements between companies, such as organizing integrations between the online gaming platform on the social media network.

Mixed

A mixed conglomerate is one in which businesses share some market similarities. Although companies do not compete with each other directly, there may be elements of the markets they serve which correlate together. This can provide an excellent opportunity for information sharing between businesses within the conglomerate, as their markets are more aligned than in a pure conglomerate.

Example: A broadcast news organization opts to form a conglomerate, choosing a mixed conglomerate with a focus on the media. The company purchases other news organizations in different forms of media. In addition to the existing broadcast company, they purchase print media, online media, and social media news platforms.

By purchasing news companies in a variety of media formats, the conglomerate diversifies its interest within the news industry. Because all the companies within the conglomerate are still in the news business, they may also have many shared areas of interest. This allows market research performed at one company to be partially or wholly applicable to others within the conglomerate as well.

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