Conglomerate Acquisition

What Does Conglomerate Acquisition Mean?

A conglomerate acquisition is a merger of firms that are involved in economically unrelated business activities. Conglomerate acquisitions range from short-term joint ventures to complete mergers. The firms can belong to different industries or different geographic areas. The acquisition of a soft drink firm by a shoe firm is an example of a conglomerate acquisition.

Divestopedia Explains Conglomerate Acquisition

A 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

There is sharing of assets, cross-selling and diversification leading to a reduced risk exposure. Existing large firms become dominant with distinctive competitive advantages. However, the firm may become too large and performance may suffer if it is unable to successfully blend two diverse businesses. The firms that go in for conglomerate acquisition should be able to manage a wide variety of activities. They need to add to production and strengthen their marketable area to ensure better profitability.

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.