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The Ultimate Guide to Conglomerate Merger

While Conglomerate Mergers are said to be not as popular as they used to be, they are still one of the main types of M&A activity.

In fact, perhaps during the last few months you’ve read about Louis Vitton’s desire to acquire Tiffany & Co.

LVMH has many other brands under its umbrella, and this Tiffany deal (which seems to be progressing much slower than originally planned) had others in the luxury industry wondering what this acquisition would mean for competition in the luxury industry as a whole.

We, at DealRoom, are specialised in mergers and acquisitions of all kind and in this blog, we go over the basics of conglomerate mergers as well as some famous examples and best practices. 

What is a Conglomerate Merger?

A conglomerate is a large company composed of smaller companies it has acquired over time. With this definition in mind, a conglomerate merger is a merger that involves two firms from unrelated business industries and activities. Conglomerates are less popular today, but were quite popular in the 1960s and 1970s. A Conglomerate merger is seen as a valuable move if the value of the two companies combined is more than they are valued at separately; this is often expressed by the 2 + 2 = 5 equation.

conglomerate merger

Pure & Mixed Conglomerate Mergers

Within this type of merger there are two additional categories: pure and mixed.

When we speak about a pure conglomerate merger, we are talking about two companies with absolutely no market crossover.

Conversely, a mixed conglomerate merger is when two companies merge in order to expand their markets/products/services. 

Advantages & Disadvantages of a Conglomerate Merger

Advantages:

  • diversification of business
  • lower investment risk due to diversification
  • financial benefits - especially with pure conglomerate mergers
  • potential to capture synergies
  • access to new personnel and networking
  • entry to intellectual property

Disadvantages:

  • cultural differences and clashes due to different backgrounds/industries
  • unwieldy management and costs to keep larger entity running smoothly
  • governance conflicts
  • possible loss of taxation benefits
  • potential overall reduced market efficiency
  • some believe conglomerate mergers reduce innovation due to the “buy” mentality

Examples of a Conglomerate Merger

  1. Walt Disney Company & American Broadcasting Company merger - this is often cited as a prime example of a conglomerate merger. In 1995, Disney purchased ABC, gaining entry into ABC’s national television realm, as well as ESPN’s extensive sports coverage. Since Disney already owned several cable networks at the time of the deal this would be a mixed conglomerate merger because it did open up extensive new distribution and content options for Disney. 
  2. eBay & PayPal merger - in 2002, eBay bought PayPal, providing it with a streamlined payment process for its goods. This merger combined the purveyor talents represented by eBay’s product platform with PayPal’s simplified electronic payment processing platform that was already popular with consumers. The two companies split in 2015 because of pressure from stockholders and the rapidly changing business environments in both commerce and payments, but they signed a five-year agreement that guaranteed reliable income to PayPal while it successfully  expanded its platform to other competing retailers and financial firms.
  3. Honeywell & Elster merger - this 5.1 billion dollar conglomerate merger in 2016 was attractive to Honeywell (which has a very active M&A portfolio) due to the fact Elster would lead to product and geographical growth. 
  4. COMCAST & UNIVERSAL merger - this merger was completed in 2011; it created a media empire that oversees how television shows and movies are created, but also how they are delivered to consumers’ homes via Comcast’s extensive network. Given the current social and business environment created by COVID, Comcast’s customers turn more and more to the company’s platforms for their entertainment and business needs, across multiple technology outlets...television, computer, tablets and smartphones, making this merger even more valuable and opportunistic. 
  5. Amazon & Whole Foods merger- Amazon’s purchase of Whole Foods in 2017 has been categorized at times as a horizontal merger, and at other times as a vertical or even conglomerate merger since Amazon fully broke into the grocery industry, illustrating the complexities and crossovers involved with some modern day large mergers. 

Best Practices for a Successful Conglomerate Merger

  • Ensure the acquirer has the resources to oversee and carry-out many diverse activities (such as production) once the deal takes place.
  • Spend time on integration planning to avoid governance and cultural clashes; integration planning also helps capture synergies and avoids destroying value.
  • Assess and plan to leverage newly acquired talent and intellectual property
  • Stay focused on overarching strategic goal.

Final Thoughts

In order for a conglomerate merger to be successful, the acquirer needs a clear strategy, sample resources and a good platform to support a deal.

While conglomerate mergers have not had a massive comeback since the 1960s and 1970s, we do still see larger companies with resources diversifying by dipping into new markets through M&A activity.

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