Divestopedia Explains Conglomerate AcquisitionA conglomerate acquisition provides an opportunity to reduce capital costs and overheads while achieving other efficiencies. Because the two firms involved operate in distinct markets, there is no direct effect on competition. Instead, this type of acquisition reduces the possibility of future competition. The main reasons behind conglomerate acquisitions are:
- Expanding into new markets
- Reducing unsystematic risks
- Eliminating redundant activities
- Attaining synergies
A minor firm could strengthen its competitive position by taking advantage of the retained earnings of the large firm. A clear advantage of a conglomerate merger is an exponential increase in reach and a spreading out of risk among more factors. The positive economic contributions of a conglomerate acquisition include invigorating lethargic and inefficient firms and more objective resource allocation decisions. These may, however, have an adverse psychological effect on competition.
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