Picture two very different characters. A brainy scientist with wild ideas and the other a laid-back artist with a flair for creativity. Suddenly, they are forced to share the same body! As they start working together, they realize their combined talents can create something truly extraordinary.
In this zany analogy, the conglomerate merger is like these two mismatched personalities coming together. They may clash at times, but their collaboration can result in innovation and unexpected success.
In our post, you will explore conglomerate mergers and their types. We will also cover the most significant conglomerate merger example cases, best practices, and all the pros and cons of the transaction. By the end of our guide, you will see how dynamic partnerships can inspire innovation, resilience, and possibilities in business.
What is a conglomerate merger?
A conglomerate merger is a union between companies operating in different industries and engaging in unrelated business activities.
Example: Company A, a maker of consumer goods, merges with Company B, a maker of personal care products, to form Company C. What is the result?
Company C has access to a more extensive customer base, allowing it to market its products more effectively. Specifically, Company A’s consumer goods can now be marketed to Company B’s customers and vice versa. Furthermore, the new firm gains efficiency by incorporating both merged companies’ best practices, leading to optimal business operations.
Source: https://corporatefinanceinstitute.com/resources/valuation/conglomerate/
As for the reasons why companies engage in conglomerate mergers, the top five key motivations are as follows:
- Expanded customer reach. The deal can provide access to a broader client base. It allows for cross-selling opportunities where products or services from different divisions are sold to each other’s customers.
- Mitigating market volatility. If one sector faces a downturn, the impact can be cushioned by the performance of the other unrelated industries.
- Stable revenue streams. Diversification into different industries through a conglomerate merger helps stabilize overall income and reduces the dependency on the economic conditions of a single market.
- Acquisition of new capabilities. Companies can acquire new technologies, skills, and business capacities to drive growth.
- Resource optimization. Organizations can optimize their use of resources by using shared technologies, logistics, and managerial expertise.
Next, we invite you to explore the different types of this deal.
For more insights: “A Theory of Conglomerate Mergers”
What are the two types of conglomerate mergers?
Imagine a scenario where a sushi restaurant merges with a bookstore. These are totally unrelated business activities. ➡ It is a pure conglomerate merger.
Next, think about a deal where a restaurant merges with a food delivery app. While the businesses are in different sectors, their operations partially overlap. ➡ It is a mixed conglomerate merger.
Now that you understand the main difference between these two transaction types, which lies in the degree of identity of industries engaged, let’s explore terms and specifics more deeply.
What is a pure conglomerate merger?
It is a type of merger where two companies from completely unrelated business activities combine to form a single entity. The primary motivation behind pure conglomerate mergers is to achieve diversification by expanding into new and unrelated markets.
What is a mixed conglomerate merger?
It is a type of merger where two companies from somewhat related industries combine to form a single entity. The primary motivation behind mixed conglomerate mergers is to increase revenue and gain market share through market extensions.
The following comparative table describes the key points emphasizing the distinction between these conglomerate merger types:
| Aspect | Pure conglomerate mergers | Mixed conglomerate mergers |
| Strategic objectives | Achieve risk diversification and enter new markets | Capitalize on synergies and shared capabilities |
| Synergies | Limited synergies due to the unrelated nature of businesses | Potential for operational efficiencies and cross-selling opportunities |
| Market diversification | Expands market reach within related industries | Broadens market exposure across unrelated sectors |
| Operational alignment | Minimal operational alignment | Some operations overlap |
| Competitive strategy | Mitigate risk by avoiding dependency on a single industry | Enhance competitiveness through combined strengths |
| Integration challenges | Managing diverse business operations and corporate cultures | Addressing cultural and organizational differences |
| Innovation and development | Limited cross-industry innovation opportunities | Potential for collaborative R&D and innovation initiatives |
| Financial performance | Aim for stable but varied financial results across unrelated businesses | Aim for synergistic growth and improved financial performance |
Now you know what a conglomerate merger is and what its types are. Next, we are moving to real-life cases and their outcomes to provide a comprehensive overview.
Additional resources: Learn more about a vertical merger and a horizontal merger here.
What are the top seven conglomerate merger examples?
The most significant transactions that have occurred in the past twenty years are as follows:
- Johnson & Johnson and Synthes (2012)
Deal type. Mixed
Industries. Healthcare and medical devices
Johnson & Johnson, a global healthcare company, acquired Synthes, a leading manufacturer of medical devices and implants, for $19.7 billion in cash and stock.
This conglomerate merger allowed Johnson & Johnson to expand its presence in the orthopedic surgery market and strengthen its portfolio of medical devices. Synthes as the target company became part of Johnson & Johnson’s Medical Devices segment and increased revenue growth and diversification within the healthcare industry.
Source: • Johnson & Johnson’s Revenue Breakdown (2016-2023) – Business Quant
- General Electric and Baker Hughes (2017)
Deal type. Mixed
Industries. Industrial and oilfield services
General Electric merged with Baker Hughes to form a new publicly traded company. This conglomerate merger combined GE’s technology and digital solutions with Baker Hughes’ expertise in oilfield services and equipment.
The deal created a comprehensive player in the energy industry. The newly-combined entity, BHGE, strengthened its competitive position and expanded its global market presence.
- Amazon and Whole Foods Market (2017)
Deal type. Pure
Industries. Technology and retail
Amazon acquired Whole Foods Market, a leading organic grocery chain, for $13.7 billion.
This conglomerate merger enabled the American multinational technology company to enter the brick-and-mortar retail space and integrate physical stores with its online platform. Whole Foods expanded its product offerings and customer reach under Amazon’s ownership, benefiting from logistical and technological capabilities.
⬇ In 2018, Amazon secured the eighth spot on America’s largest companies list with a revenue of $177.87 billion.
Source: How Amazon Is Using Whole Foods in a Bid for Total Retail Domination | Fortune
- United Technologies Corporation and Raytheon (2020)
Deal type. Mixed
Industries. Aerospace and defense
UTC and Raytheon merged to form Raytheon Technologies Corporation, a leading aerospace and defense technology company.
The merged entity created a diversified company with enhanced capabilities across both sectors. As a result, Raytheon Technologies became a big player in the industry with a strong portfolio of product lines and services.
⬇ In 2020, Raytheon Technologies had a net income loss of around 2.9 billion U.S. dollars. However, in 2022, the company reported over 7.2 billion U.S. dollars in net income from continuing operations.
Source: Raytheon Technologies – net income 2008-2022 | Statista
- Comcast and NBCUniversal
Deal type. Mixed
Industries. Telecommunications and media
Comcast Corporation acquired a majority stake in NBCUniversal from General Electric. This merger combined Comcast’s distribution networks with the media assets of the target company, including NBC, Universal Pictures, and various cable networks.
The deal strengthened Comcast’s position in the media and entertainment industry. Specifically, it enabled cross-platform content delivery and advertising opportunities.
- Dow Chemical and DuPont
Deal type. Mixed
Industries. Chemicals and agriculture
Dow Chemical and DuPont merged to form DowDuPont. This transaction was followed by the subsequent separation into three independent, publicly traded companies focused on agriculture, materials science, and specialty products.
This successful merger and subsequent spin-offs brought multiple benefits. In particular, it allowed for focused operations in three separate sectors. As a result, each independent company could better serve its respective markets and drive innovation.
- Verizon Communications and Yahoo!
Deal type. Pure
Industries. Telecommunications and Internet services
Verizon Communications acquired Yahoo!’s core internet business, including its search, email, and advertising assets, for $4.48 billion.
The conglomerate merger was intended to improve Verizon’s digital media and advertising capabilities. Therefore, Yahoo!’s internet properties were integrated into Verizon’s media and online services. It supported the latter’s overall digital strategy and customer offerings.
Companies conducting conglomerate mergers may face challenges, including cultural integration, stakeholder communication, on their way to positive outcomes. In the following section, we will explore best practices for navigating difficulties and maximizing transaction success.
What are the best practices for successful conglomerate mergers?
Now, we will show you what other firms do to successfully navigate mergers.
1. Define clear strategic objectives
Set clear and achievable goals for conglomerate mergers. Explain why the businesses are combining and what you hope to achieve. Make sure these goals are in line with your long-term plans for growth and creating value.
2. Conduct thorough due diligence
Perform a thorough investigation to evaluate the financial, operational, legal, and cultural aspects of both an acquiring company and a target company. Find potential risks, synergies, and integration challenges early in the process.
3. Focus on cultural integration
Foster open communication, mutual respect, and understanding between employees from different organizations. Promote a new corporate culture that values diversity and collaboration.
4. Prioritize synergy identification and realization
Develop a detailed plan to combine businesses and take advantage of their strengths after they merge. Focus on making operations more efficient, saving money, and increasing revenue.
5. Engage stakeholders and communicate effectively
Involve key people such as employees, customers, suppliers, and investors. Keep communication clear and open to manage expectations and address concerns.
6. Implement robust integration planning
Develop a clear conglomerate merger strategy for combining different areas such as IT systems, supply chain management, organizational structure, and talent management. The plan should include specific milestones, timelines, and responsibilities.
7. Retain and develop key talent
Ensure the retention of valuable employees from both merging companies involved. For this, you can provide career development, training, and opportunities for growth in a newly-merged company.
8. Manage regulatory and legal compliance
Make sure you follow all the rules and get the necessary approvals to comply with antitrust, competition, and industry-specific regulations. Work closely with legal advisors to reduce regulatory risks.
Successful conglomerate mergers require strong leadership, effective communication, dedicated resources, and an expert merger integration team.
As we near the end of our post, we invite you to explore the transaction’s appealing and challenging aspects.
What are the pros and cons of conglomerate mergers?
No business strategy is without its drawbacks. So, explore conglomerate mergers’ pros and cons to understand the deal’s full scope.
Pros
- Diversification. Companies involved diversify their business portfolios when entering new markets and different industries. It reduces risks associated with dependence on one business sector.
- Synergy creation. A conglomerate merger unlocks cost savings, operational efficiencies, and cross-selling opportunities. These synergies can increase profitability and improve competitiveness.
- Economies of scale. Larger conglomerates may benefit from bulk purchasing power, shared resources, and reduced operational costs per unit of output.
- Enhanced market presence. Conglomerate mergers can expand a company’s reach and customer base. As a result, you get new geographical markets and distribution channels.
- Risk mitigation. Diversified conglomerates are less susceptible to economic downturns. Poor performance in the same industry may be offset by a stronger one in another.
Cons
- Integration challenges. A conglomerate merger can be tricky because businesses may have different cultures, management styles, or technology. Therefore, smooth integration can take time, effort, and resources.
- Lack of focus. Managing various businesses can make it hard to concentrate on strategy. In particular, it can result in moving resources and manpower from core business operations.
- Regulatory scrutiny. Mergers of big companies face increased regulatory scrutiny, especially regarding antitrust concerns and competition policy. Often, it delays the process.
Key takeaways
- A conglomerate merger involves the combination of businesses operating in different industries and participating in unrelated business activities. There are two types of conglomerate mergers: pure and mixed.
- A pure merger combines companies from entirely unrelated industries. In contrast, a mixed merger involves companies from related or complementary industries.
- A successful conglomerate merger requires a strategic approach that covers clear objectives, thorough due diligence, effective communication, and robust integration planning.
Final tip: To avoid potential problems and keep things running smoothly between merging firms, create a team of experts to conduct due diligence and ensure you get all conglomerate merger advantages.