When two companies involved in completely unrelated business activities merge, you’ve got a conglomerate merger on your hands. Like most types of merger, conglomerate mergers have plenty of nuance within that broad definition, and there are even a few different subtypes of these once-dominant mergers – pure and mixed – that shake things up a bit.
From way back in the past to hot on the heels of the record-setting M&A trends in recent years, we’ve got plenty of conglomerate merger examples to help us understand the ins and outs along the way.
Understanding Conglomerate Mergers
Before we get into the different types of conglomerate mergers, let’s get thoroughly familiar with the foundation of the thing. If you read the intro, you already know that a conglomerate merger is a merger of two companies in two totally different sectors of business, industry or service.
Similarly, a conglomerate merger can also be a merger of companies or firms that are significantly separated in straight-up geographical terms. A company in America merging with one headquartered in Japan? That’s a conglomerate merger example right there.
Pure vs. Mixed Conglomerate Mergers
Breaking it down a little further, conglomerate mergers usually fall into two distinct types: pure and mixed. In a pure conglomerate merger, the merged entity basically carries carry on much like the pre-merger businesses, continuing to operate in their own customer base as before. On the flip side, mixed conglomerate mergers usually see the companies leverage the merger as an opportunity to extend their market reach, expand their product line, or the like. Here, the acquiring company’s identity experiences more change.
The Key Components of Conglomerate Mergers
From basic characteristics to motivations to results, the key factors of conglomerate mergers really have to be viewed through the lens of the two main types of those mergers. Speaking broadly, here’s why and how mixed and pure conglomerate mergers go down.
The Characteristics of Pure Conglomerate Mergers
Not only does a conglomerate merger typically mean that the businesses in question don’t share an industry, a pure conglomerate merger means that they don’t even share common business strategies. Pure conglomerate mergers are characterized by a lack of overlap across many facets, from the merger’s motivations to how business continues post-merger – which is to say, independently and in separate end markets.
…and Motivations of Mixed Conglomerate Mergers
Make no mistake, the companies involved in a mixed merger are still two very distinct, very different beasts. That’s what makes it a successful conglomerate merger in the first place. However, these mixed mergers see the Venn diagram overlap in a variety of areas, interests or strats. For instance, two functionally different companies in a mixed conglomerate merger might both have the desire to diversify their offerings or significantly expand their market reach
Advantages and Challenges of Conglomerate Mergers
The Big Benefits of Diversification
Among the potential advantages of conglomerate mergers, diversification is far and away the most pronounced, and is largely the key motivating factor for these mergers even being on the table at all. As elsewhere, diversification in this case means a varied, healthily assorted portfolio, which can include a mix of product or service offerings or investment vehicles. The benefit here is twofold: diversification can lead to better long-term returns while mitigating risk, as both profit and risk are spread across a wider variety of assets.
On top of that all-powerful diversification, conglomerate mergers can also expand the consumer reach for both companies and create the opportunity to cross-sell products. Both of those factors, of course, can lead to more revenue. In the best case, the merged groups also benefit from streamlining and sharing best practices, which can result in overall more efficient operations.
As the FTC itself says, “Mergers that combine complements may allow additional benefits. For example, a merged entity that controlled the production and distribution of complements may be able to create innovative benefits from using the products together in ways that would have been hard to achieve through arm’s-length contracts. As compared to arm’s-length contracting, an integrated firm making complementary products may more readily internalize pricing externalities, or realize lower costs or improved quality.”
Very Real Risks
In that synergy-obsessed landscape where – for better or worse – vertical mergers are all the rage, conglomerate mergers are less and less common in the contemporary M&A world. And that reality comes with good reason.
As much as diversification can change the face of a business for the better, it’s not without risks of its own. By moving resources and manpower from core business operations, the diversification that comes with conglomerate mergers can find the resulting new business spread too thin, or ultimately unfocused, and that can damage both efficiency and margins.
Likewise, if one company is a stronger performer across departments, it might inherit the inefficiencies or bad habits of the acquired company, like ineffective pricing structures, problematic workforces, or shaky governance policies.
Conglomerate Merger Examples
While conglomerate mergers have cooled down in the 21st century — largely thanks to the Unicorn-inspired “we need exponential profits forever to please our shareholders” mindset taking hold — we can still look to some household names that don’t just persist because of the conglomerate merger, they absolutely thrive.
Analyzing Successful Merger Stories
- Disney-ABC paved the way for media consolidation: Nowadays, when you think “Disney M&A,” you think Star Wars and Marvel. But in 1995, the Mouse bought ABC, which notably put ESPN, among the biggest names in cable TV at the time, in Mickey’s white-gloved paw. While it’s now hard to imagine the market without Disney and its 347 different Skywalker and superhero TV shows each season (citation needed), this ‘90s conglomerate merger put them in the broadcast and premium TV market for the very first time.
- Microsoft’s acquisition of LinkedIn for $26.2 billion: When Microsoft and LinkedIn mergerd in 2016 was a prime example of a conglomerate merger, where two companies in different industries combine. While Microsoft is a leading technology company with a focus on software development and cloud computing, LinkedIn is a professional networking site. This merger allowed Microsoft to integrate LinkedIn’s extensive professional network with its cloud services and productivity tools, enhancing its offerings in the business and professional market segments.
- AT&T and Time Warner merged at a total value of $85.4 billion: The merger between AT&T and Time Warner, completed in 2018 is an example of vertical integration. AT&T, a telecommunications giant, acquired Time Warner, a major player in content creation and distribution. This merger allowed AT&T to control both content production (through Time Warner’s assets like HBO, Warner Bros., and CNN) and content distribution channels, aiming to create a more diversified and integrated entertainment company.
- Honeywell & Elster gained new market share through acquisition: Honeywell’s 2015 acquisition of Germany company Elster is a conglomerate merger example that reached across geographical borders and was the acquisition of a company in a slightly different industry. Keeping with the theme, that geographical expansion also saw Honeywell first expand into many of the spaces they’re known for today, such as the production of water, gas and electricity meters.
- Amazon rapidly expanded growth opportunities by acquiring Whole Foods: The merger between Amazon and Whole Foods, who was the target company in this instance, in 2020 is a prime example of successful vertical integration in the business world. This vertical merger allowed Amazon, a giant in the online marketplace, to gain a substantial market share in the brick-and-mortar grocery industry. With Whole Foods’ established supply chain and target market of health-conscious consumers, Amazon was able to introduce bundling strategies, offering similar products to their prime members at discounted rates. Through this merger, Amazon further distanced itself from competitors and solidified its dominance across multiple fronts.
Best Practices for Executing Conglomerate Mergers
For every positive conglomerate merger example that’s made its way to the history books, there are countless cases that quietly — or sometimes noisily and messily — fall to the wayside. Especially when you’re dealing with companies that will, by nature, differ on fundamental levels, a great deal of potential complications lie in the culture and governance integration of the companies in question. If you want that Mars-Wrigley-level conglomerate merger, compatibility is key.
Navigating Cultural Integration and Governance
In any M&A process, you can’t head off problems if you don’t have a plan for managing cultural differences and expecting clashes. One way to ease those hiccups from the jump is streamlined, simplified document management — and one of the strongest tools to have in place on that front is a solid virtual data room (VDR).
Even if both merging companies boast local secure document hosting solutions, a conglomerate merger calls for the constant inclusion of the legal, financial and senior management teams involved in the transaction (not to mention the herds of outside consultants and advisors who’ll need quick access to sensitive documents). In this case, your Google Docs and OneDrive just don’t have the necessary security, encryption or support to cut it.
The high-level docs that fly during conglomerate mergers need to be stored separately from day-to-day business files; they need the sort of industry-recognized security credentials that CapLinked offers, but they also need to be readily accessible to the trusted parties of your choice, under your control.
That’s where a simple, intuitive and navigable VDR comes into play. That elegant ease-of-use prevents bottlenecks, which can slow down or even stagnate the entire transaction. CapLinked’s VDR puts you on the path of balancing governance and cost considerations from the first steps of any conglomerate merger.
Factors to Consider Before Pursuing a Conglomerate Merger
Disney, PayPal and Honeywell are far from alone. Conglomerate mergers like Berkshire Hathaway-Precision Castparts and many others have seen well upwards of $20 billion change hands and – in some cases – huge spikes in market share prices or yearly growth as a result. That kind of success doesn’t come without effort, and each conglomerate merger is as unique as the companies it brings together. But even across operational and geographical borders, these four ground rules can help virtually any conglomerate merger start on a stable foundation:
- Assess ground-level fit and estimated market impact.
- Evaluate the compatibility of businesses involved in the merger, culturally and governance-wise.
- Identify any potential synergies and consider their impact on value creation.
- Analyze market trends and anticipate consumer response to the merger.
The truth is, the market for conglomerate mergers isn’t changing much today: it changed a long time ago. While conglomerate mergers peaked in popularity in the 1980s, the practice was largely deinstitutionalized in the 1990s. But why is that?
In a study for American Sociological Review aptly titled “The Decline and Fall of the Conglomerate Firm of the 1980s,” Davis, Kristina and Tinsley write:
“First, diversified firms were taken over at a high rate and their unwanted parts were typically sold off, and second, the less diversified firms that survived shunned the strategy of conglomerate growth. The aggregate result was that by 1990 the largest industrial firms in the United States became considerably less diversified. Business rhetoric tracked the shift in this prevalent organizational form and practice by denouncing the ‘firm-as-portfolio’ model in favor of a network model of regularized economic exchange.”
How Conglomerates Adapt
That’s not to say, however, that there’s no place for conglomerate mergers in today’s landscape at all. A June 2020 report by the Organization for Economic Co-operation and Development, for example, spends most of its pages warning that mergers involving complementary products (think Live Nation-Ticketmaster) can harm both consumers and competition, commenting on the regulatory body’s role in the trending vertical merger.
The same report notably offers the return of conglomerate mergers as something of a panacea to this, writing that…
“…mergers that combine unrelated products can result in procompetitive benefits if their production or distribution uses the same assets, inputs, or know-how. For instance, when suppliers combine their assets to jointly produce multiple final products for customers, a merger can eliminate contracting frictions and allow for profit maximization over a larger set of products. A single firm able to coordinate how these assets are used may be able to streamline production, inventory management, or distribution.”
In a cultural landscape (not to mention an FTC) that is increasingly pushing back on vertical corporate consolidation, the old-school conglomerate merger may yet find its place in the future of M&A, just as it planted roots in its past.
Make Informed Mergers
Whether pure, mixed merger or somewhere in between, effective conglomerate mergers are built on the basis of compatibility, synergy and complementary – even if different – interests. All of these factors, which affect everything from governance to bottom lines and beyond, live and die on one simple necessity: communication.
At the end of the day, communication is what makes informed mergers, conglomerate or otherwise, happen. And as a platform delivering the highest level of security, encryption and privacy, your VDR can’t just facilitate the uber-complex merger process — it needs to elevate it.
Let CapLinked elevate your privacy, security, and communication flow with the power of the cloud. Start your free trial today to find out how CapLinked’s cutting-edge features empower conglomerate mergers to cross business practices and borders alike.
Sources:
Corporate Finance Institute. (n.d.). Conglomerate Merger. Corporate Finance Institute. Retrieved February 26, 2024, from https://corporatefinanceinstitute.com/resources/knowledge/deals/conglomerate-merger/
M&A Community. (n.d.). Full Guide on Conglomerate Merger: Types, Impact, Best Practices. M&A Community. Retrieved February 26, 2024, from https://mnacommunity.com/insights/conglomerate-merger/
WallStreetPrep. (n.d.). Conglomerate Merger. WallStreetPrep. Retrieved February 26, 2024, from https://www.wallstreetprep.com/knowledge/conglomerate-merger/
Wahba, P. (Date of Publication). Disney’s 1995 Deal for ABC Made Buffett Billions by Marrying Mickey Mouse with SportsCenter. Forbes. Retrieved February 26, 2024, from https://www.forbes.com/sites/antoinegara/2017/05/23/disneys-1995-deal-for-abc-made-buffett-billions-by-marrying-mickey-mouse-with-espn/?sh=2b0ab4f97ffd
Microsoft. (2016, June 13). Microsoft to acquire LinkedIn. Microsoft News Center. Retrieved February 26, 2024, from https://news.microsoft.com/announcement/microsoft-buys-linkedin/
AT&T Investor Relations. (n.d.). AT&T and Time Warner Merger. AT&T. Retrieved February 26, 2024, from https://investors.att.com/stockholder-services/time-warner-stockholders/at-and-t-merger
Merced, M. J. de la. (2015, July 28). Honeywell to Buy Elster for $5.1 Billion. The New York Times. Retrieved February 26, 2024, from https://www.nytimes.com/2015/07/29/business/dealbook/honeywell-international-to-buy-elster-for-5-1-billion.html
Federal Trade Commission. (n.d.). OECD: Conglomerate Effects of Mergers – Note by the United States. FTC.gov. Retrieved February 26, 2024, from https://www.ftc.gov/system/files/attachments/us-submissions-oecd-2010-present-other-international-competition-fora/oecd-conglomerate_mergers_us_submission.pdf
