What is a Conglomerate?

Conglomerates are like cake...

The ingredients that you need to bake a cake, such as eggs, milk, and flour, are all very different. By combining them, you can make something tastier than the individual ingredients. Likewise, the companies that make up a conglomerate may be very different. However, the owners’ hope is that the companies will be stronger when combined than when separate.

A conglomerate is a large business formed when one company purchases or merges with many other companies. Conglomerates are often formed with a single parent company. That company, known as a “holding company,” owns a part or all of the other companies, known as “subsidiaries.”

Historically, conglomerates were often formed to leverage the benefits of vertical integration. In this system, each new business added to the conglomerate functions in a different part of the same industry. Ideally, the businesses can provide lower costs and dominate the industry by working together.

However, modern conglomerates typically are companies with a presence in many unrelated industries. In some cases, this leads to diversification in goods and services. It can also make the company more resilient. Each subsidiary can lean on the others when it has financial difficulty, something it couldn't do on its own. This arrangement also allows profits from one subsidiary to move to another to invest in future growth or compensate for losses.

All conglomerates are corporations, but not all corporations are conglomerates.

Conglomerates differ from corporations in that a conglomerate must have wholly or partially owned subsidiary companies. A subsidiary is a company that is owned by another company. Corporations may or may not have subsidiaries.

To become a conglomerate, a company must first register as a corporation. Conglomerates can be an S-Corp, C-Corp, or a Limited Liability Company, or LLC.

• Owners pay personal income tax on profits
• Business doesn’t pay corporate income tax
• Business income and loss passes through to owners for tax purposes
• Can have no more than 100 owners
• Shareholders must be U.S. citizens or resident aliens.

• Owners pay personal income tax on profits
• Business pays corporate income tax
• No income or loss passes through to shareholders for tax purposes
• Can have an unlimited number of shareholders
• Shareholders can have any citizenship

• Owners pay personal income tax on profits
• Separates personal assets from corporate assets
• Income and losses pass through to owners for tax purposes
• Requires no annual or quarterly meetings
• Has flexible taxation options

Advantages:

One of the most significant advantages of forming a conglomerate is risk diversification. Companies that only operate in one industry are very vulnerable. If demand drops in that industry, there is little the company can do to grow.

However, a diversified conglomerate can weather a bad period in a single industry, since it relies on multiple areas for its income.

Conglomerates can also increase profits by reducing redundant positions. In some cases, subsidiaries can share resources, and reduce the number of jobs they need in-house to meet their needs.

Another advantage is that conglomerates can redirect profits from profitable companies to others that are less profitable or need capital for expansion or growth.

In a similar vein, the profits from a conglomerate can be used to expand the conglomerate. Since the holding company can leverage the assets of all its subsidiaries, it can get larger loans and purchase larger companies. Any of the subsidiaries on their own would typically not be able to make acquisitions as significant as those that the holding company can.

Disadvantages:

However, there are downsides to conglomerates. One problem that tends to grow larger as a conglomerate adds new businesses to its portfolio is the risk of being spread too thin. If the senior management cannot successfully focus on all its businesses, then some of the subsidiaries can suffer.

Conglomerates also run the risk of antitrust action. Antitrust action is a form of regulatory enforcement by the government to promote competitiveness in an industry. If the government determines that a company is behaving in an anti-competitive way, the government may impose monetary penalties, prevent a company from providing certain products or services, or even break the company up into smaller companies.

If a conglomerate become dominant in one of the industries in which it operates, antitrust action becomes even more likely.

Conglomerates are also associated with leveraged purchases. Holding companies use the assets they already own as leverage to get a loan to purchase new companies. Consequently, acquisitions that don’t turn out to be profitable can quickly put a conglomerate on shaky footing. If the newly purchased company doesn’t produce enough income, the debt acquired by the conglomerate to purchase the company can hurt the company’s bottom line.

Rankings of the largest conglomerates in the world will vary based on the metric used. For example, the Industrial & Commercial Bank of China has more than $4 trillion in assets, which ranks first in the world. However, by revenue, it would only rank 30th, and that’s just among banks.

For this list, we’ve ranked companies based on market cap (the value of their outstanding shares multiplied by their price) as of November 7, 2019.

1. Berkshire Hathaway Inc ($545.70B)
2. Reliance Industries LTD. ($129.44B)
3. Siemens AG ($102.14B)
4. 3M ($100.36B)
5. Softbank Group Corp. ($82.63B)
6. SHK PPT (Sun Hung Kai Properties) ($45.36B)
7. Jardine Matheson Holdings LD ($44.04B)
8. Mitsubishi Corporation ($41.59B)
9. Citic ($39.41B)
10. CKN Holdings ($37.67B)

Berkshire Hathaway Inc. is arguably one of the most famous conglomerates in the world. Headed by billionaire Warren Buffet, it wholly owns companies such as BNSF, Dairy Queen, Duracell, GEICO, and Fruit of the Loom. It also has minority stakes in the Kraft Heinz Company, American Express, Wells Fargo, The Coca-Cola Company, Bank of America, Apply, United Airlines, Southwest Airlines, and American Airlines.

The Walt Disney Company doesn’t have product offerings as comprehensive as those provided by others on this list. Still, it uses several subsidiaries for different purposes within the entertainment industry. Subsidiaries include Walt Disney Pictures, Walt Disney Animation Studios, Pixar, Marvel Studios, Lucasfilm, 20th Century Fox, ABC, ESPN, National Geographic, the Disney Channel, as well as Walt Disney Parks and Resorts.

Samsung is probably known best for its largest subsidiary, Samsung Electronics. That subsidiary makes everything from televisions to smartphones. However, the holding company controls other subsidiaries. These include Samsung Everland, which operates a theme park, Samsung Fire & Marine Insurance, a general insurance company, and Samsung Heavy Industries, which builds ships and bridges. Samsung also owns Samsung Medical Center, which provides medical services.

Different countries sometimes have different varieties of conglomerates. For example, the Chinese state owns part or all of many conglomerates in the country.

In Japan, conglomerates often take the form of “keiretsu.” Instead of a holding company driving the conglomerate, a bank serves as the central figure in the conglomerate. Each company in the keiretsu owns a share in every other company in the group. The bank provides financing, while the shared control promotes cooperation between the companies.

This system promotes close cooperation. The included businesses benefit from lower costs when doing business with each other. However, the system can prevent companies from doing business with companies outside the keiretsu.

Keiretsu have declined since the turn of the 21st century. In 2015, Japan amended its corporate code to require an explanation for cross-shareholdings. This legal act greatly disincentivized companies from forming keiretsu.

In Korea, conglomerates often take the form of chaebol. These are family-owned businesses, and many of them are internationally famous, such as Samsung, Hyundai, and LG. Unlike the keiretsu, chaebol don’t organize around a central bank. Instead, many of the chaebol were able to grow to the size they are today because of favorable government policy and easy access to cheap credit.

In America, conglomerates first emerged in the Gilded Age, which lasted from the late 1870s until about 1900. Companies such as Standard Oil, American Tobacco, Kodak, and Alcoa were all founded in this era.

These companies were vertically integrated, and many achieved near-monopolies in their respective markets. Consequently, the American government took antitrust action. The government broke up Standard Oil and American Tobacco to promote competition. Kodak and Alcoa faced penalties with the same goal.

The next big wave of conglomerates in America formed in the 1960s. Low interest rates made it easier for companies to perform leveraged buyouts of other businesses. Because mutual funds were not as popular as they are today, purchasing a conglomerate’s stock was thought of as an excellent way to diversify a portfolio.

However, rising interest rates through the ’70s and ’80s made this a less effective strategy. Over time, it became more apparent that purchasing a new company didn’t always lead to gains in efficiency and proportionally more profit. As a result, forming conglomerates became a less effective strategy. Many conglomerates divested companies to focus on fewer products and industries.