Advantages and Disadvantages of Conglomerate Merger

Conglomerate merger involves 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. Given below are some of the advantages and disadvantages of conglomerate merger

Advantages of Conglomerate Merger

  1. 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 decline in sales in one sector or industry. So in 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.
  2. 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 industry is 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.
  3. It increases the customer base of the company and hence company can cross- sell its products to the new customer base which in turn leads to increase in the sales of its core products leading to higher profits for the company.

Disadvantages of Conglomerate Merger

  1. 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.
  2. Another disadvantage of conglomerate merger is that company shifting its focus from its core business to other business which in turn results in 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.
  3. In conglomerate merger it is difficult to merge cultural value, employees and other things as compared to merger between companies which are working in the same industry and hence in a way this type of merger poses results in additional disadvantage as compared to simple mergers.

As one can see from the above that conglomerate merger has both advantages and disadvantages and the decision of conglomerate merger is completely dependent on the financials of takeover target and mindset of the management of the acquiring company.

0 comments… add one

Leave a Comment


Related pages


advantages and disadvantages of fifo and lifoskimming pricing advantagesmeaning of consigneecommand economy advantages disadvantagescurrent liabilities definition in accountingdifferent types of factoringhow to record prepaid rent journal entrysemi durable goods definitionfii meaningdefine inferior goodsinternational joint venture advantages and disadvantageswhat are the pros and cons of international trademerits and demerits of globalisation in indian economywhat is privatisation in economicsadvantages and disadvantages of invoice discountingexamples of horizontal mergertraditional economy definition exampleexample of conglomeratenationalization advantages and disadvantagespenetration marketing strategy exampleadvantages and disadvantages of profitability ratioshow to find errors in trial balancemixed market economy advantages and disadvantagesdisadvantages of bills of exchangeerror of omission in accounting examplenon redeemable preference shareswhat is a bearer chequeunsystamatic riskdefinition of bill discountingwhat does the law of diminishing marginal utility stateinternational trade disadvantagesadvantages and disadvantages of payback methodwhat is unsystematic riskconsignors meaningmerits of decentralisationexamples of traditional economydiscounted cash flow techniquewholesale banking definitionabsolute advantage in international tradeslr in banking termssystematic and non-systematic riskmateriality accounting principlefloat exchange ratebenefits of fifodisadvantages of cash flowdishonour of a billprofitability ratios formuladifferences between socialism and capitalismfeatures of an oligopolyadvantages and disadvantages of traditional bankingdiff between micro and macro economicsglobalisation benefits and disadvantagescommodity swapcurrent cost accounting advantages and disadvantagesconglomerate diversification definitionadvantages and disadvantages of advertisementswhat are the disadvantages of capitalismadvantages and disadvantages of demographic segmentationnegatives of socialismadvantages of perfect competitionconsigner meaningcharacteristics of forward contractadvantages of perfectly competitive marketwhat is the full form of nasdaqwhat are the advantages and disadvantages of industrializationadvantages and disadvantages of decentralisationideal liquidity ratioaman awasthidifference between debentures and sharesvostro definitionjit production advantages and disadvantagesbundling pricing strategy examples