Conglomerate definition

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What is a Conglomerate?

A conglomerate is a cluster of unrelated businesses that are under common ownership. Each subsidiary of a conglomerate is likely to conduct business independently of its fellow subsidiaries, since there is so little operational activity linking them. The financial results of the subsidiaries are consolidated into a single set of financial statements for the entire entity.

Advantages of a Conglomerate

There are several reasons for forming a conglomerate, which are as follows:

  • Mitigate risk. The owners of a conglomerate can mitigate their business risk by investing in activities across a broad spectrum of markets. By doing so, a decline in one market will only hurt a few subsidiaries, which can be counterbalanced by more robust results from subsidiaries located in other markets.

  • Easier funding. The corporate parent can more easily obtain funding and then allocate the funds to its subsidiaries, which they might not be able to do on their own (or only at a higher cost).

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Disadvantages of a Conglomerate

There are several disadvantages associated with conglomerates, which are as follows:

  • Difficult to manage. Conglomerates can be difficult to manage, since no one can have a comprehensive knowledge of the markets in which every subsidiary operates. Consequently, conglomerates tend to produce financial results that are somewhat worse than would be realized if their component subsidiaries were to be operated as independent companies.

  • No centralization. Conglomerates do not take advantage of consolidated purchasing across the owned entities. This means that they do not benefit from volume discounts. They also do not use centralized corporate functions, such as purchasing, IT, and human resources, which might otherwise result in greater efficiencies and lower costs.