What is a Conglomerate Merger?

A conglomerate merger brings together two organisations that operate in completely separate markets.

A pure conglomerate merger sees the two businesses continue to focus on their core areas following the merger, while a mixed conglomerate merger entails businesses attempting to extend their market or product range.

Is a conglomerate merger right for your business?

There are both advantages and disadvantages to conglomerate mergers with much depending on the nature of your own business and that of the company you are targeting.

Wilson Browne has a successful track record of providing expert advice on all areas of conglomerate mergers.

Conglomerate merger example

In 1995 Walt Disney Company bought American Broadcasting Company (ABC) in what many consider to be an excellent conglomerate merger example.

The deal provided Disney with access to ABC’s television operations (including the sports rights held by ESPN). It is classed as a mixed conglomerate merger given Disney already owned several cable networks which benefitted in terms of both content and distribution.

Pros and cons of conglomerate mergers

The advantages of conglomerate mergers include:

Diversification

The concept of a company diversifying its business activities through a conglomerate merger ties in with the saying about not putting all your eggs in one basket.

Any organisation, no matter how well run, can experience problems should the sector it operates in experience a downturn. By merging with a business in an unrelated sector, the company gives itself a safety net – a loss of revenue in its original area can be offset by expanding its activities in the new sector.

Synergies

Synergies occur when the performance of two merged organisations exceeds the combined total of what they would have achieved on their own. This is the result of factors like reduced costs (caused by economies of scale) and increased efficiency (due to the pooling of talent, best practices, and other resources).

Expansion of customer base

By operating in two separate markets, the merged organisation has access to two customer bases – rather than just one as the original businesses had. This creates the potential for cross-promotion and cross-selling.

Investment opportunities

A company that has expanded as much as possible within its sector could find itself in a situation where it has substantial cash reserves but no suitable ways of investing the funds. By merging with another business, the original organisation can invest the surplus money in the new sector, thereby increasing long-term revenue and profits.

The disadvantages of a conglomerate merger include:

The initial cost of the merger

For a conglomerate merger to be successful, considerable resources will likely have to be spent on its planning and implementation. These include not only the financial cost of the merger but also the amount of employee time and consequent lack of focus on core operations.

Incompatibility

A conglomerate merger brings together two separate organisations each with its staff structures, IT systems, accounting methods, and so on.

This can lead to inefficiencies caused by issues such as duplication of roles, friction between employees used to working within different corporate cultures, and incompatibility between software programs.

Lack of expertise

Following a conglomerate merger, members of the new management team are likely to have expertise in one of the areas of operation – but not both. This has the potential to cause poor decision making and inefficiencies.

Best practice for a successful conglomerate merger

A vital factor in a successful conglomerate merger is effective planning. An organisation should take the time to select an appropriate target (for example, in terms of providing compatibility and offering opportunities for synergies and cross-selling between markets) and to put in place a clear structure and operating procedures for the new organisation.

In addition, there should be provision for any necessary staff training and effective troubleshooting of issues that arise following the merger.

Where can I find out more about conglomerate mergers?

Wilson Browne’s team of company and corporate solicitors has a wealth of experience in all aspects of mergers and acquisitions – including conglomerate mergers.

By taking the time to get to know your company we can support you every step of the way, helping you to select an appropriate business with which to merge and then guiding you through the process to ensure that the new organisation operates most efficiently and profitably possible.

We have offices in Corby, Higham Ferrers and Rushden, Kettering, Leicester, Northampton, and Wellingborough.

For more information, call us on 0800 088 6004 or complete our online contact form.