Conglomerate (company)
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A conglomerate is the term used to describe a large company that consists of seemingly unrelated business sections. This term may also be referred to as a multi-industry company.
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[edit] Potential advantages
To modern business analysts, the best argument for conglomerate organizational form is that it may allow capital to be allocated in a more efficient way. For example, a hypothetical conglomerate consists of a candy store and an internet website. Suppose the candy store has high cash flow, but very few profitable investment opportunities. The website has low cash flow, but lots of good investment projects. By combining the businesses together, the cash from the candy store can be used to make profitable investments that would otherwise not be made in the web site. The main question associated with this strategy is why this improves upon a market-based allocation of capital. That is, if the entities were standalone, then presumably the investors in the candy store could receive dividends, and then reinvest those dividends in the startup. If this market-based mechanism works well, then all profitable internet startup investments can be made without having the two entities be under common ownership. Research suggests that financial markets may not always operate efficiently due to the presence of transaction costs and asymmetric information. If this problem is severe, then the common ownership of the assets might yield a more efficient allocation of capital.[1]
[edit] Potential disadvantages
Lack of focus and inability to manage unrelated businesses equally well are the reasons to criticize conglomerates. Conglomerates' stocks are usually penalized by the market. This phenomenon is called conglomerate discount.[2]
[edit] Media conglomerates
In her 1999 book No Logo, Naomi Klein provides several examples of mergers and acquisitions between media companies designed to create conglomerates for the purposes of creating synergies between them:
- Time Warner (now merged with AOL) have a series of tenuously linked business including internet access, internet content provision and music, film and traditional publishing. Their diverse portfolio of assets allow cross-promotion and economies of scale. (However, Time Warner has since divested its music and book publishing interests, and there is growing pressure to spin off its Time Warner Cable and AOL units.)
- Clear Channel Communications, a quoted company, at one point owned a variety of TV and radio stations, together with a large number of concert venues, across the U.S. and a diverse portfolio of assets in the UK and other countries around the world. The concentration of bargaining power in this one entity allowed it to gain better deals for all of its business units. For example, the promise of playlisting (allegedly, sometimes, coupled with the threat of blacklisting) on its radio stations was used to secure better deals from artists performing in events organized by the entertainment division. These policies have been attacked as unfair and even monopolistic, but are a clear advantage of the conglomerate strategy. On December 21, 2005, Clear Channel completed the spin-off of Live Nation. Live Nation owns the events and concert venues previously owned by Clear Channel Communications.
[edit] See also
[edit] References
- ^ David Besanko, David Dranove, Mark Shanley and Scott Schaefer: "Economics of Strategy". Chapter 5 ("Diversification")
- ^ Conglomerate discount
[edit] External links
- Conglomerate Monkeyshines, An example of how conglomerates were used in the 1960s to manufacture earnings growth
