Conglomerate Merger: Definition & Examples

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we'll discuss conglomerate mergers, the combination of two companies. We'll define pure and a mixed mergers, give advantages and disadvantages of each, and supply real-world examples of mergers.

Conglomerate Mergers

''Berkshire Hathaway buys Precision Castparts,'' ''Kraft Heinz removes its bid for Unilever,'' ''Regulators Approve InBev's Merger With SABMiller Creating a Beer Giant.'' Just a quick glance at the business section of the newspaper will show mergers are very popular right now.

There's a bit of merger mania! Historically low interest rates and sluggish sales volumes have motivated companies to acquire competitors or other businesses in completely different industries. In this lesson, we will 'peel back the layers of an onion' on conglomerate mergers, when two companies combine. There are two types of conglomerate mergers, pure and mixed mergers.

Pure Mergers

Pure mergers involve two companies that have nothing in common. They produce different products/services, serve different customer groups, and compete in different industries. An example of this is a pet food company merging with a company that owns auto body shops.

What are the advantages of a pure merger?

  • There are potential cost savings. Once the companies combine there is no need to have two human resource departments, two finance and accounting departments, two marketing departments, or two company headquarters. You get the idea. There is opportunity to consolidate the different departments and in the process, eliminate duplicate jobs and excessive waste.
  • Low cost of financing. Let's say one of the businesses can borrow money from the bank at a much lower rate than the other business. In fact, let's say the difference in interest rates between the two companies is 5% vs. 10%. By combining, the business with the lower cost debt can borrow money and then transfer it to the other business. In the end, a business that traditionally borrowed at 10%, will have access to money at a cost of 5% interest.
  • A pure merger may happen when one company does not like its own future growth prospects, or its future is in jeopardy because of regulation or a potential lawsuit. For example, in the 1980s-90s, the large cigarette manufacturers diversified into consumer goods (mostly food) as their cigarette business came under increased public scrutiny.
  • A pure merger also may happen if the management for one of the companies believes that another company is not being run properly. Even though these businesses may be in different industries, the management of one company may believe they have the requisite skill to turn the other business around.

What are some common pitfalls of pure mergers?

  • The most obvious pitfall is that the companies may have no knowledge about the other business. They may not be able to share common practices because the businesses are so different. For example, it may not matter if the pet food manufacturer knows the best way to talk to large department store clients, because the auto body shop talks directly to retail customers. Also, there is the risk that the acquiring company may pay too much for the other business because it doesn't know the business well enough.
  • Management can also get distracted with two very different businesses. They may inadequately divvy up resources, leaving promising new products starved of money and unproductive products with too much funding. In a similar vein, as the company gets larger there is greater risk of bureaucracy problems and less accountability. For example, the cat food section of the pet food manufacturer may be a chronic under-performer, yet this may go unnoticed because management is distracted.

Mixed Mergers

Mixed mergers involve two companies that have some common characteristics. Unlike pure mergers, they may sell the same, or similar, products and services, and they may serve the same customer group.

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