Conglomerate

A company may be engaged in a number of apparently unrelated activities, each within its own division. This type of company is often referred to as a conglomerate. Within some of the divisions there is more than one subsidiary company; for example
in the Shipping Division where there is a ship owning company quite separate from the company dealing with shipping services (agency, chartering etc.). Similarly, in the building services division, the company manufacturing bricks is quite separate from
the heating and air-treatment company. In the case of the oil-storage division you will see that there are sub-subsidiaries to
cover the situation where it is more convenient (or obligatory) for an overseas branch to be separately incorporated in the country concerned.
One obvious question that springs to one’s mind is why does a group like this have several divisions that are not only totally different, but also their functions in no way relate to each other. There can surely be no connection between bulk oil storage and
brick making. It is that very difference which makes such a group attractive to the investing public. When one activity is going through a bad patch the hope is that another division will be doing especially well. For example, a very mild winter in the UK would mean a thin time for the fuel distribution division but it would probably have meant that building work was not stopped for so many days so the sale of bricks
would have made better profit in that division. Why should an already established company be concerned about being ‘attractive to the investing public’? First, remember the company belongs to the shareholders who have the right to attend the company’s Annual General Meeting, which the company is obliged to hold each year. Those shareholders technically have the right to dismiss any member of the board of directors and whilst this rarely happens, the possibility is there. Secondly, if the company wants to expand it will need extra capital beyond its own resources. Although borrowing from a bank could raise some of this, the bank’s interest rates could be crippling to the new venture. Better, therefore, to seek the additional capital by offering new shares on the market the more efficient the company, the easier it will be to raise the extra money. Finally, of course, the directors of any company need some external measure of their success (or otherwise) and what
the stock market thinks is clearly shown by the price being offered for its shares.