18 Αυγ 2016

Conglomerate Companies



A conglomerate is a corporation that is made up of a number of different, seemingly unrelated businesses. In a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct business separately. Each of a conglomerate's subsidiary businesses runs independently of the other business divisions, but the subsidiaries' management reports to senior management at the parent company.

Advantages and disadvantages of conglomerate companies
For the management team of a conglomerate, having a wide array of companies in different industries can be real boon for their bottom line. Poorly performing companies or industries can be offset by other sectors. By participating in a number of unrelated businesses, the parent corporation is able to reduce costs by using fewer resources, and by diversifying business interests, the risks inherent in operating in a single market are mitigated.

In addition, companies owned by conglomerates have access to internal capital markets, enabling more ability to grow as a company. A conglomerate can allocate capital for one of their companies if external capital markets aren’t offering as kind terms the company wants.

However, the size of conglomerates actually hurts the value of their stock, a phenomena called conglomerate discount. The sum of the value of the companies held by a conglomerate tends to be more than the value of the conglomerates stock by anywhere between 13 to 15%. History has shown that conglomerates can become so diversified and complicated that they are too difficult to manage efficiently. Since the height of their popularity in the period between the 1960s and the 1980s, many conglomerates have reduced the number of businesses under their management to a few choice subsidiaries through divestiture and spinoffs.

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