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 such as 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 England 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 (AGM), 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.

 

Differing Businesses

Conglomerates consist of a number of differing businesses, operating in a variety of sectors of industry and commerce. Generally, conglomerates have grown from a smaller, single activity company.

Horizontal Integration

Conglomerates usually acquire other businesses over a period of time for a variety of reasons; other businesses may simply have been attractive, profitable private limited companies that could not develop further without the resources of a larger organization. On the other hand, other businesses may have been struggling enterprises which the conglomerate’s Board of Directors (BOD) considered could be bought cheaply and, with careful management, turned into valuable, profitable businesses.

Whatever the original reason for their acquisition, the component companies of such a conglomerate provide a good example of horizontal integration. The diverse and seemingly unrelated nature of other businesses’ activities provides the conglomerates with a broad base of operation in a number of different businesses, industries, countries and even continents.

Diverse trading reduces the conglomerates’ risk exposure in any one sector. Although conglomerates regularly rise and fall in the estimation of the share-trading public, a well-managed conglomerate can provide shareholders with both consistently good dividends and some expectation of capital growth. Usually, conglomerates will find a ready market for their shares when specialized sectors of the market are under pressure.

Vertical Integration

On the other hand, opposite to a diverse group (conglomerates); the opposite being a vertically integrated company. Literally, vertically integrated company is the integration from top to bottom of a particular industry such as giant oil companies. For example, one company in the diverse group (conglomerate) owns some forest land, another company owns sawmills, another company owns a furniture manufacturing company and another company owns a chain of retail furniture shops.