Updated Feb 10, 2022

What is a conglomerate?

What is a conglomerate?

When it comes to business organizations, you've probably heard that there's usually one parent company that oversees several other companies that operate independently. This is frequently accomplished by the parent company owning significant holdings in the little businesses. A conglomerate is a term used to describe a parent corporation or organization. Conglomerates are formed for a variety of reasons, and these conglomerates have their own set of advantages and disadvantages. Let us go over the basic principles of the term Conglomerate to better grasp these reasons and to become more comfortable with the phrase.

What is a Conglomerate?

A conglomerate is a company that owns and operates several seemingly unconnected enterprises. A conglomerate's primary notion is that one corporation or organization manages some other enterprises that operate independently. The major firm, or parent organization, achieves control over these tiny businesses by owning a controlling position in them.

The development of a conglomerate serves a variety of purposes, and the largest conglomerates diversify their business risk by operating in a variety of marketplaces. Some conglomerates, such as mining conglomerates, choose to specialize in a specific industry.

Conglomerates are huge corporations made up of separate businesses that operate in different industries. Many conglomerates are multi-industry conglomerates with multinational operations. Every tiny business under the control of the conglomerate operates independently of the others. All of these tiny businesses, or subsidiaries, as they are generally known, report to the conglomerate or parent company on all of their commercial activities.

In a conglomerate, the parent company plays an important role, and it can lessen risk in the firm by investing in a variety of small enterprises rather than focusing on a single market. This move benefits the holding business as well, allowing it to cut expenses and use fewer resources. One of the primary motivations for building a conglomerate is the risk of inefficiency if a single firm grows too large.

Conglomerates come in numerous forms around the world, including media, industry, food, and many others. All of them are involved in various business operations and make money by investing in various markets. For example, a manufacturer begins by producing and selling items and products. This corporation may then decide to branch out and create a new business in a different field, such as finance. A media conglomerate typically begins by controlling newspapers and then expands to include television stations, radio stations, and even the publishing industry. A food conglomerate can begin by selling snacks or other basic food items, then expand by purchasing a huge food firm like a soda pop company.

What causes a conglomerate to form?

Let's try to understand why a conglomerate is formed in the first place now that we've seen the basic concept of a conglomerate and how it functions in the economic world. A corporation may decide to form a conglomerate for a variety of reasons. The following are a few of these reasons:

• One of the primary motivations for building a conglomerate is to fulfill a desire to get involved in a business that is unrelated to the company's primary focus or business operation.
• Another rationale for the development of a conglomerate, as previously mentioned, is the desire to diversify to reduce risk in a firm and to ensure that a loss in one business is compensated by profits or gains in another.
• A conglomerate can also be formed to help a company migrate to a new line of operation.
• Following the foundation of the conglomerate, the company or corporation may seek appealing revenues from the potential subsidiary, either historical or forecast.
• A conglomerate is frequently formed to defend against the danger of a subsidiary firm.

Many multinational organizations have chosen to build a conglomerate by owning a controlling stake in their subsidiary businesses for the reasons stated above. An associate or affiliate company is one in which a conglomerate controls less than a controlling percentage of another business's voting stock.

Pros and Cons of a Conglomerate

As with any business corporation or business strategy, even conglomerates have their advantages as well as disadvantages. These Pros and Cons are as follows:

Pros of a Conglomerate

The benefits of forming a conglomerate include the following:

• Because one of the main characteristics of a conglomerate is that it has a diverse range of companies in various industries, this may be advantageous to the main company because poor-performing companies and industries can be offset by other sectors or companies that are performing well and generating large profits and gains.
• The act of a parent firm or organization participating in a variety of tiny unconnected enterprises helps the parent company or organization decrease expenses by maximizing resource utilization and diversifying business interests. This also lowers the dangers of investing or operating in a single market.
• All of the conglomerates' companies have access to internal financial markets, which increases the company's potential to grow. If the external capital markets do not provide the terms that the company desires, a conglomerate can mark the capital of companies.

Cons of a Conglomerate

Although we have seen several benefits that come with the formation of a conglomerate, it also has several drawbacks that businesses should be aware of before deciding to form a conglomerate. The following are some of the cons of Conglomerate:

• The conglomerate's size can reduce the stick's worth. Conglomerate discount is a term used to describe this situation.
• The entire market value of a conglomerate's companies is 13 percent to 15% more than the stock value of the conglomerate.
• In addition to the aforementioned disadvantages, there are other concerns with financial transparency and management that cause the conglomerate shares to be valued at a discount.

Examples of Conglomerates companies that are based in India

Here is a popular business list of Conglomerates in India:

• Reliance Industries Ltd.Tata Group
• Aditya Birla Group
• Mahindra Group
• Bajaj Group
• Adani Group
• Larsen & Toubro group
• Godrej Group
• United Breweries Group
• ITC Limited

Conclusion

As a conglomerate expands and acquires other businesses, it can make use of its increased flexibility to develop newly acquired businesses and boost their size and profitability. Economies of scale and, in particular, economies of scope can be used to accomplish this. The former asserts that, up to a point, organizations will consistently cut relative costs as they grow, while the latter asserts that complementary services accessible within a rising entity can increasingly provide advantages.