Sometimes two companies of two different business natures decide to get together and merge. When they’ve signed all the necessary papers, they are said to have entered into a conglomerate merger. This can also happen when two companies engaged in similar business join together for purposes of expanding their market shares. A conglomerate merger is mutually agreed on to cause both companies to become stronger, more competitive and more solid (image-wise) than if they were to continue running their businesses separately. Such decisions are usually reached among big-time companies who’d like to become even bigger.
There are many reasons why a company would get into a conglomerate merger. The most common of these are, to ensure dominance of the market with an expanded share and to reduce its business risk as their assets are assimilated and shared. It may happen though, that the risk instead is poised on the merger, especially if the new company gets “too big to handle” or if it is unable to successfully blend the two different businesses.
The Two Types Of Conglomerate Mergers
Conglomerate mergers fall into two categories:
The Pure Conglomerate Merger – This is the type of merger where the two companies are joining and operating businesses together, which are completely unrelated and non-connected to each other.
The Mixed Conglomerate Merger – This is the kind where the two merging companies do so in order to gain access to a much bigger market and customer base or, for widening the range of products and services that are being offered by them.
Advantages And Disadvantages Of Conglomerate Mergers
A Wider Audience Reach – When a company gets into a decision to merge with another company with a similar business, there is automatically an expansion in audience share. It’s a simple case of addition. When a company merges with another company the former necessarily gains access to the other company’s customer base, which could pretty well have been a competitive organization. By getting together and merging, these two business outfits have in essence reached double their size of the market pie prior to the merger. Along the way, it may have even been provided the “muscle” to eliminate competition.
Diversification – Diversifying a company’s holdings spreads the business risk among many more components. This brings down the odds of a company failing as a whole if only one of these components fail to function successfully. While this is frequently an advantage, the flip side could be disadvantageous, if, for instance the company spreads its ad spending too thinly across seven business units coming with the merger, when its funds are just enough to effectively fund four or five.
Homogenization Leads To Fewer Options For The Consumer – After the two companies’ merger, homogenization happens after some time. One company’s core values are superseded and assimilated by the other company’s business culture. As a consequence, this becomes a disadvantage of mergers as it tends to leave the consuming public and the industry with not too many choices in the market. Where one had a previous choice between companies X and Y, one is now left with only company Z.
Depending on how the large-scale companies’ CEOs and Board Chairmen see conglomerate mergers working to their business advantage, these mergers will continue to happen. Many companies have been successful at it but about just as many have not.