Conglomerate is a form of business organization which consists of a combination of two or more companies with separate profiles for various industries and providing all sorts of services resulting from a merger or acquisition, and aimed at achieving higher profitability, production and diversification of sources of income and to reduce financial risk related to economic fluctuations in individual industries.
The main aims of conglomerate are to:
- achieve higher profitability,
- diversification of production and sources of income of owners,
- reduce the risk of financial losses due to fluctuations in individual industries,
- avoid accusations of monopolization of the market by avoidance of legal obstacles,
- increase pressure on common business partners (suppliers, subcontractors, customers, banks, etc.).
At the time of a downturn in one sector and thus increasing losses, other companies prospering in other sectors not affected by the decline, can be profitable and can cover or even exceed that loss. As in the case of mergers of companies from one sector made for direct cost savings, in the case of a conglomerate such reduction of cost is rather impossible, because they combine different organizational forms, and often completely different production profiles. The conglomerate is a way to monopoly production or provision of services, because under one umbrella there are many companies whose profits go to the same owner.
There are no specific decision criteria for creating a conglomerate. The only thing that matters is improving the profitability of capital and the most effective diversification of risk. Example of conglomerate: Indian TATA group, which brings together 98 companies in 7 different sectors: information systems and communications, engineering, materials, services, energy, consumer products and chemicals.
- Mueller, D. C. (1969). A theory of conglomerate mergers. The Quarterly Journal of Economics, 643-659.