Conglomerates in Emerging Markets
Introduction
There are several of definition for conglomerate. The definition that I feel is the most clear for me is “ conglomeratean organization / company which operates in many sectors, which have no apparent relation or business synergy among them”( wiki.answers). A good example of a conglomerate would be the Japanese Matsushita Corporation. For a conglomerate to be termed global, a substantial portion of the turnover and the profits of the conglomerate should be derived from global markets - i.e., outside the home market. conglomerate, in business, a corporation formed by the acquisition by one firm of several others, each of which is engaged in an activity that generally differs from that of the original. The management of such a corporation may wish to diversify its field of operations for a number of reasons: making additional use of existing plant facilities, improving its marketing position with a broader range of products, or decreasing the inherent risk in depending on the demand for a single product. There may also be financial advantages to be gained from the reorganization of other companies (global.britannica,2014)
Advantages and disadvantages of conglomerate diversification
Advantages:
a. Risk spreading. entering new products into new markets offers protection against failure of current products and markets.
b. High profit opportunities. Ability to move into high growth profitable industries especially important if current industry is in decline.
c. Escape. from the present business if competition is too hot.
d. Better access to capital markets.
Disadvantages:
a. The dilution of shareholders earnings if diversification is into growth industries with high P/E ratios.
b. Lack of a common identity and purpose in a conglomerate organization. A conglomerate will be successful only if it has high quality of management and financial ability at head office where diverse operations are brought together.
c. Failure in one business will drag down the rest.
d. Lack of management experience.
“Some conglomerates are highly diversified across a wide line of businesswith many affiliated firms that maintain legal and accounting independence.They are predominantly owned and controlled by members of a family, andfinancially interlocked. There are two ways of creating a conglomerate. One way is that the parentcompany founds its divisions or affiliates in new markets through internalgrowth, and the other way to establish it is through the merger and acquisition of existing firms. we primarily focus on the first type of conglomerateand treat the latter secondarily”(YOONG,2004)