Many executives are turning to M&A as an effective transformation and value-generation strategy to respond to market complexity.
The world has seen over 500,000 merger and acquisition (M&A) deals completed globally since 2010. And even though the global economic downturn and the pandemic decreased M&A activity in 2020, it still bounced back in 2021.
Understanding the differences between mergers and acquisitions types helps to tie up deals faster and more efficiently. Today, M&A Community shares what every executive needs to know about a conglomerate merger.
What are the advantages of conglomerate mergers? Are there any drawbacks? What are the types of conglomerate mergers?
The guide below will provide the answers.
What is a conglomerate merger?
A conglomerate merger involves companies active in totally unrelated business activities or operating in different geographical locations. An airline company acquiring a newspaper is a good example of a conglomerate merger.
Conglomerate mergers first appeared in the United States and were quite popular in the 1960s, and 1970s. But they’re not as popular today. According to the OECD Competition Committee, just a few authorities have challenged a conglomerate merger in recent years.
Even though it doesn’t seem like a conglomerate merger will become a more frequent phenomenon soon, we still witness mergers of companies that want to diversify and capture new markets through the M&A deal process.
In many cases, companies are worth much more together than separately. The metaphorical equation 2 + 2 = 5 perfectly describes one of the main conglomerate merger advantages.
Types of conglomerate mergers
There are basically two types of conglomerate mergers — pure and mixed.
Pure conglomerate mergers
A pure conglomerate merger happens when the buy side and the sell side of the M&A process have nothing in common; they specialize in completely different industries, and their strategies don’t overlap. A good example of a pure conglomerate merger is W.R. Grace, a chemical business that acquired over 150 different companies. The list included retail outlets, food chains, construction, gas, oil, agriculture, etc.
Pure conglomerate mergers are beneficial in many ways. First, they’re great for entering a new market fast. Second, they can significantly boost the merged company’s finances, ultimately attracting investors. They also result in a more diversified customer base.
On the other hand, when compared to conglomerate acquisitions, a pure conglomerate is often considered a riskier type (just like real estate private equity investing). The merging firms have many differences; their shareholders might not agree to the merger in the first place, and even if they do, different merging companies may become very difficult to manage and develop.
Mixed conglomerate mergers
Mixed conglomerate mergers occur between two companies from different industries that still have something in common, for example, a customer database. Typically, market or product extensions are the goals of a mixed conglomerate merger.
Walt Disney Company acquiring the American Broadcasting Company is a great illustration of a mixed conglomerate merger. It is also a great example of how two firms, when merged, can grow and succeed faster together. Disney became the first media company with a major presence in four distribution systems: films, television, broadcasting, and telephone wires.
Nevertheless, mixed conglomerate mergers are quite rare. Few companies do that because of the differences in corporate culture, product lines, business operations, financial planning, etc. The process is so complex and challenging, that not everyone can manage its proper execution. Additionally, mixed mergers require lots of financial resources, which appears to be another significant drawback.
Three best conglomerate merger examples
Let’s see how two separate companies from different industries successfully merge and become conglomerates.
Amazon and Whole Foods
In 2017, Amazon acquired Whole Foods Market, the largest American supermarket chain, for $13,7 billion. This merger increased the total value of the two companies up to $14,3 billion.
Why were companies combined? Amazon wanted to learn more about the grocery business operations.
Its strategy was to get into brick-and-mortar stores and expand its grocery business. It also helped to extend its product range and corporate territories, which is often the main goal of a conglomerate merger.
eBay and PayPal
eBay and PayPal are great examples of successful business combinations; two companies from different industries underwent a triumphant merger in 2002. As a trading platform, eBay needed a secure and reliable online payment system. So when those two firms united, buyers and sellers could trade more easily and safely.
Even though the integration was effective and advantageous for both firms, eBay dropped PayPal in 2018 and replaced it with a new company from the Netherlands called Adyen. One of the reasons for such a decision was a desire to have a checkout process customized to the local habits of buyers.
Disney and Pixar
Disney and Pixar merged back in 2006. It’s still considered the greatest conglomerate merger example as the union became truly powerful. Yet, when Disney bought Pixar for $7,4 billion, many skeptics did not believe in the deal’s success, even though the two companies came from the same industry.
Now Bob Iger, CEO of the Walt Disney Company, says the merger was his “proudest decision.” It ultimately led to the Disney animation rebirth and attracted more investments. By the way, such a successful integration proved to other studios they wouldn’t lose their legacy. That’s why, in a while, Marvel and Lucasfilm joined Disney as well, forming a much larger company.
Pros and cons of a conglomerate merger
A merger between different business organizations has several advantages and disadvantages. Let’s learn the main ones.
Advantages of conglomerate mergers
Here are the potential advantages of merging companies:
A conglomerate diversification strategy helps lessen the risk of loss. For example, if one business sector experiences a decline, other business sectors compensate for the losses.
- Products cross-selling
A conglomerate merger allows companies to cross-sell their products when the target market is similar. It inevitably results in higher profits.
- Excess cash
It sometimes happens that the company has excess cash, but can’t expand in its business area. If that is the case, it’s better to invest in another industry.
- Customer base extension
When companies cross-sell their products, they get a bigger client base, and thus, sales and profit increase.
- Investment opportunity
A conglomerate merger is a good option for investors because it’s less risky to put money into a company functioning in different areas.
Disadvantages of conglomerate mergers
The drawbacks of a conglomerate merger are the following:
- Lack of experience
Proper diversification is often hard to achieve because of the business differences between a target company and a buyer. That is why problems with production, sales, and marketing appear.
- Management issue
When new company management has to maintain control over unrelated businesses, it slows down the decision-making process.
- Cultural differences
It is often hard to adjust to a new corporate culture that develops due to the merger; cultural differences impact all company activities.
- Loss of efficiency
Because of the merger process complexity and shift in focus to other market areas, other business sectors don’t get enough attention.
Best practices for a successful conglomerate merger
A conglomerate merger is one of the most challenging processes for businesses. You must keep in mind many dependencies, rules, and potential issues. Let’s look at what other firms do to successfully navigate mergers.
- Take a good example of a conglomerate merger. Research the market and see if there are any businesses similar to yours that merged efficiently, and study what they did to achieve their goals.
- Define your objectives and strategy. You must clearly understand where your business is now and where you want to move. Why do you need a merger? To grow market share? To eliminate competition? To win new clients?
- Create a merger team. Organize specialists from both firms to work together to ensure a smooth transition. Typically you need a finance and executive team, sales, and marketing.
- Compare the company cultures. Both small and large companies have their own unique corporate cultures. When changes come, employees of the two firms may experience unwillingness to work under new management. Make sure you can cope with that.
- Ensure proper communication. Everyone should be on the same page. Keep the teams updated on the changes, strategies, new opportunities, etc.
- Plan due diligence. A successful merger requires thorough research of both an acquiring company and a target company. It includes finances, technology, legal, policies, operations, etc. If done well, nothing can spoil the merger.
- Be transparent. Even though some information and documents will be kept confidential, all main processes should be transparent to all employees.
Even though conglomerate mergers haven’t been so popular since the 1960s and 1970s, companies still unite frequently to grow together faster. Here are the main takeaways from the guide:
- The main benefits are increased market share, diversification, customer base extension, and product cross-selling.
- Mergers take a long time to market, negotiate, and close. That’s why having a clear vision of your goals and mission is important. A well-devised strategy is also crucial to successfully seal a deal.
- To eliminate potential risks, governance issues, and loss of efficiency, create a merger team of professionals able to conduct due diligence well and make the transition as smooth as possible.