Advantages and Disadvantages of Conglomerate Merger

A conglomerate merger involves a merger between two companies that are completely unrelated to one another in terms of products they sell. For example, an information technology company merging or taking over an FMCG company is a type of conglomerate merger. In order to get a better understanding about this term one should look at some of the advantages and disadvantages of conglomerate merger –

Advantages of Conglomerate Merger

Diversification

The first and foremost advantage of conglomerate merger is that it helps the company in diversification hence a company is less vulnerable to losses due to a decline in sales in one sector or industry. So in the above example in times of recession, the sales or revenue of IT Company will decline whereas FMCG Company will continue to give stable cash flows to the company which in turn will make the company less vulnerable to its counterparts which are not diversified.

Good Use of Excess Cash

It is also helpful when the company has excess cash but does not have enough opportunities for growth investing in the same industry and hence buying a company outside of the industry is the best bet for such companies which are having excess cash as it results in good utilization of cash rather than company sitting on idle cash.

Increase in Customer Base

It increases the customer base of the company and hence the company can cross-sell its products to the new customer base which in turn leads to an increase in the sales of its core products leading to higher profits for the company. In simple words conglomerate merger can have a multiplier impact on the profits as well as growth of the merged company.

Disadvantages of Conglomerate Merger

Lack of Experience

The biggest disadvantage of this type of merger is that company is taking over another company without having any experience about the industry and hence chances of mismanagement and overpricing the target company increase substantially. It can be compared to a sportsman who is playing football for many years and suddenly one day he is asked to coach hockey to others the result will be a complete failure the same thing applies to the conglomerate merger also as the company having no experience of the unrelated industry has more chances of failure than sucess.

Shifting Focus from Core Business

Another disadvantage of the conglomerate merger is that company shifting its focus from its core business to another business which in turn results in the company performing poorly in both areas because on one hand you are shifting focus from your strong business which you were doing for the past so many years and on the other hand you are trying to venture into that business where you do not have any experience and expertise.

Practical Difficulties

In a conglomerate merger, it is difficult to merge cultural value, employees, and handle other things as compared to merger between companies that are working in the same industry, and hence in a way, this type of merger is more difficult to handle as compared to a normal merger where two companies working in the same industry are merged. Hence for example if two football teams are asked to make a team then they will easily make a team but the same football team is asked to make a team with a hockey team then we all know how difficult it will be for them to play together the same thing happens with employees of both the company when a conglomerate merger takes place between two companies.

As one can see from the above that a conglomerate merger has both advantages and disadvantages and the decision of conglomerate merger is completely dependent on the financials of the takeover target and mindset of the management of the acquiring company as any wrong decision can have a long-lasting impact on the future of the company.