A conglomerate merger is a merger between companies that are involved in completely unrelated business activities. These mergers typically occur between companies within different but perhaps related industries or firms located in different geographical locations or that serve different customer groups.
There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product or market extensions.
The Case for a Conglomerate Merger
Though a conglomerate merger unites companies with seemingly nothing or very little in common, the senior management and the investors of the respective companies believe that there are benefits in joining their firms.
There are many reasons for conglomerate mergers, such as increased market share and the opportunity to cross-sell products and services. As with any merger, the belief is that the newly formed company will be stronger than the two separate companies for all stakeholders. Firms also merge for diversification: Spreading risk can reduce loss from other operating units. However, when expertise and oversight are spread too thin, the overall company’s performance can suffer.
During the 1960s and 1970s, conglomerate mergers were much more popular than they are today. They have fallen out of favor because of limited financial benefits. Some famous conglomerate mergers of recent times include Amazon and Whole Foods, eBay and PayPal, and Disney and Pixar.
Advantages of a Conglomerate Merger
With new products and services, and even new divisions of the company, each with its own balance sheet, the risk of loss is reduced. If one product line or division performs poorly, other, better-performing business units can compensate for the losses. Just as individual investors diversify their portfolios with different asset classes that carry different risk profiles, diversification via a conglomerate merger can be seen as an investment by the acquiring company.
New Customers and Markets
The conglomerate merger also brings ready-made customers, allowing the combined firm to market and cross-sell products and services. For example, the merger of Amazon and Whole Foods naturally allowed Amazon to promote its Prime free delivery, video, and discount promotions services to in-store shoppers at Whole Foods.
In addition to increased sales from a combined, larger market, the new company can benefit from increased efficiencies when redundant corporate services can be eliminated. For example, excess office or warehouse space can be eliminated, and paid services, such as those related to accounting or marketing, can be united.
Disadvantages of a Conglomerate Merger
The much larger, combined company can carry more risk because there are more resources and assets to oversee. Executives can become distracted and shift their focus away from core operations, contributing to poor corporate performance. If the acquiring firm lacks experience in the industry of the acquired firm, the newly combined firm could develop ineffective corporate governance policies, poor products and pricing, and an inexperienced workforce.
Poor Corporate Culture
Companies from different industries, with different business models, products and customer profiles, might not so easily blend with the acquired company. The new corporate culture might not be a newly developed one but rather one from the acquiring company “crammed” onto the new entity, and so the mission and values might not work for everyone. Consensus is needed on operations, processes and values, that have all stakeholders, including employees and customers, on board. This is one of the many reasons why having a clear integration strategy is key when approaching any kind of merger or acquisition.
Best Practices to Simplify a Conglomerate Merger
Document management is essential for a successful conglomerate merger, but can it truly be simplified?
One of the strongest tools to have in place for a merger is a virtual data room (VDR). While both organizations may have a secure, cloud-based, document hosting solution for their employees, including those in the legal, financial and senior management teams involved in a transaction, a regular document hosting solution is not strong enough.
Further, there might be dozens of outside consultants and advisors involved in the M&A transaction who need access, and simply permissioning these professionals into the organization’s Google Docs or Microsoft OneDrive instances does not provide the level of security and encryption needed for large-scale complex transactions.
Further, sensitive documents should be kept separate from regular business documents.
However, aside from the higher levels of security needed, the VDR also provides a platform that is simple, intuitive and navigable for all parties involved. Ease of use prevents bottlenecks that can slow down the merger transaction.
VDR Features That Enable a Successful Conglomerate Merger
- Multiple personas: Designated administrators can create a base structure that would include all of the documents, but create different views and access levels/rights for the different individuals evaluating the documents. Content is tailored and unique for each individual.
- Read-only access: Be sure that no document can be altered, copied, shared or printed without your permission. If an investor or other participant needs a different level of access, find out why and seek a solution that respects both parties’ need for privacy.
- Tracking measures: The data room should provide a mechanism to track who has accessed which document at what time and for how long. Any unusual activity, such as attempts to send or share a document to an unauthorized individual, can avert an issue quickly and appropriate measures can be taken.
- Simplicity: The data room should enable you or other administrators to easily make updates, such as removing or adding documents or permissioning certain individuals, without much hassle.
- Communication: Commenting or annotation should be built into the data room. This facilitates the review process and doesn’t force investors or partners to leave the platform in order to send a message or make a comment if needed. For conglomerate mergers, you’ll want to look for a VDR that offers a dedicated and robust Q&A feature, which can vastly improve the efficiency of the due diligence phase of the deal by streamlining communication/
The Best Solution for Virtual Data Rooms for Conglomerate Mergers
As a platform delivering the highest level of security, encryption and privacy, a VDR should be engaged and maintained to facilitate the often-complex merger process. A VDR solution such as Caplinked will be an important resource for managers seeking an extra level of privacy, security and encryption apart from the organization’s regular cloud-based document hosting solution. Begin your free trial today to see how Caplinked’s powerful features can make your conglomerate merger as simple as possible.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
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