There are different reasons that companies pursue a merger with another entity, and thus different types of mergers that can occur. A common but slightly more complicated type is the conglomerate merger. Simply defined, a conglomerate is a heterogeneous mixture of one or more elements, materials, or items. Thus, a conglomerate merger involves the merging of two or more entities that are engaged in dissimilar kinds of business or that focus on discrete commercial activities. Here is a look at the two types of conglomerate mergers and the pros and cons of this sort of transaction.
Type 1: Pure
A pure conglomerate merger occurs when two or more companies that are involved in completely different, unrelated business activities join to form one entity. The reasons for a pure merger are often less clear than they are for a mixed merger, especially if the entities are operating in industries that have very little in common. But, this kind of merger is often beneficial in financial terms, as it affords instant diversification. And, over time, the culture of the separate entities may begin to change in a way that leads to increased business opportunities.
Type 2: Mixed
A mixed conglomerate merger is probably more common, as this type of merger allows two distinct yet somewhat similar entities to capitalize on the strategic advantages created by virtue of the merge. This type of merger is often pursued so that there is just one, larger company that is able to offer a broader array of goods and services, and it is able to reach a larger audience. In addition, this type of merger can allow for the cross utilization of valuable intellectual property, and the synergies created as well as economies of scale will no doubt benefit the newly formed entity in a myriad of ways.
There are obvious operational benefits to having access to more capital, resources, and personnel. And, depending on the commitment and involvement of the investors behind each entity, there are likely going to be increased networking and business opportunities as well. In general, the primary benefit to joining forces with a dissimilar or only remotely similar entity is that it provides an instant entry into other markets and potential product lines. Thus, by diversifying the company portfolio, there is enhanced revenue potential and diminished risk.
Some of the advantages of the conglomerate merger are also potential disadvantages. For example, by diversifying activities and spreading across multiple markets or industries, it can become more difficult for the company leadership to maintain oversight and control. It may also be necessary to invest in more skilled managers or specialized consultants to ensure there is adequate input from people with the right knowledge and expertise. Thus, although it is likely that a conglomerate merger will lead to higher profit margins, it may end up requiring a substantial amount of money to keep things running smoothly.