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Key takeaways
- Conglomerates are collections of businesses owned by a single parent company.
- Managing conglomerates can be challenging when they’re very large.
- Conglomerates can use their size and bargaining power to their advantage (See link).
- Diversification protects parent companies from financial risks.
In this business guide we explain how conglomerates work, and their pros and cons as a corporate structuring mechanism.
What is a Conglomerate?
In business, a conglomerate is a collection of different entities that are owned, at least in the majority, by a single parent company. These businesses may share a common name or seem, externally, to be completely separate from one another. They are often spread across industries, though this is not necessary, and some may be in the same industry. However, the businesses in a conglomerate share a commonality, which is that one parent company has a controlling share in each of them. These subsidiaries may be wholly owned by that parent company, or at least 51% of their shares are owned by the parent. The companies in this arrangement are called “daughter companies” of the parent that owns them and “sister companies” of each other.
The purpose of forming a conglomerate is normally to diversify the parent’s business risk by having stakes in several industries. In the US, conglomerates were popular during the 1960s and 70s as large companies easily took control of other, smaller ones. However, many of them became too large and inefficient to be managed efficiently or were broken up in the 1980s due to the application of anti-trust laws.
However, many conglomerates still exist across various industries including transport, energy and mining, retail, media, banking, hospitality and manufacturing. Some well-known conglomerates include:
- PepsiCo, Inc: Pepsi owns many businesses in the food and beverage industry, including Tropicana Products, Quaker Oats, Gatorade, and Russian food & beverage company Wimm-Bill-Dann Foods, among others.
- News Corporation: News Corp is a huge media company that owns book publisher HarperCollins, Dow Jones & Company, which published the Wall Street Journal, News UK, which publishes The Sun and The Times, and News Corp Australia, among many others.
- Samsung: Known for its electronics manufacturing, Samsung is an enormous conglomerate in South Korea where it owns construction company Samsung Engineering, Samsung Life Insurance, and Cheil Worldwide advertising company. It also has investments in the textile, food processing, and shipbuilding industries.
Key Characteristics of a Conglomerate Structure
| Aspect | Description | Why it matters |
|---|---|---|
| Ownership | Parent company holds a controlling stake (typically 51% or more) | Enables strategic and financial control across the group |
| Industry scope | Operates across multiple industries or sectors | Reduces exposure to single-industry risk and demand cycles |
| Subsidiary structure | Separate legal entities held under one parent company | Helps isolate liabilities and manage risk by entity |
| Central management | Group-level strategy and capital allocation led by the parent | Improves governance and investment decision-making |
| Risk profile | Diversified revenue streams across business lines | Provides resilience during economic downturns in one sector |
| Regulatory exposure | May be subject to antitrust or competition law review | Limits excessive market dominance and anti-competitive conduct |
What Are the Advantages of Being a Conglomerate?
Conglomerates can become huge and difficult to manage. Still, they present benefits to the companies that form them, including:
- Diversification benefits: If a company is involved in a single industry, it’s at risk if that industry declines. Conglomerates usually acquire industries in a wide variety of industries to diversify risk so that if one industry declines, it may be balanced by another that experiences a boom.
- Economies of scale: When a parent company takes control of several other companies, it can gain increased purchasing power that can help it in price negotiations. As an example, one company buying lightbulbs alone may receive a normal price, but a company buying lightbulbs for itself and the 20 other companies it owns can negotiate a lower price by buying more. Economies of scale help conglomerates reduce costs for the parent and all subsidiaries in the conglomerate.
- Market power: Rather than competing with them, conglomerates can take over competitors to keep them out of the market. They can also selectively take over businesses in the supply chain that their competitors may also have depended on to create advantages for themselves. They can make it more difficult for their competitors to acquire the raw materials, products, and services they need to compete in the marketplace.
Challenges Faced by Conglomerates
There are clear advantages to taking control of other businesses and forming conglomerates. At the same time, though, conglomerates also have great challenges to overcome, which include:
- Management complexities: As conglomerates grow, managing them all for the best interest of the parent company becomes increasingly difficult. These companies typically are formed independently and have their own cultures, systems, and tech stacks, which may be very difficult to integrate into a unified system.
- Potential for inefficiency: The companies owned by a conglomerate all have their own management and directorship. Conglomeration adds an extra level of management that may not be needed and could create an inefficiency that wastes money.
- Antitrust laws: Also known as competition law, antitrust regulations seek to control the competitive advantages that may be gained by conglomerates. These laws protect the idea of free competition by punishing and breaking up conglomerates if they are seen as unfairly dominating markets, engaging in price gouging, or restricting free trade.
Strategies for Successful Conglomerate Management
Managing a large conglomerate is a huge challenge. Lessons can be gleaned, however, by looking at the successes of powerful conglomerates and the failures that others have endured.
Conglomerates may succeed if they can diversify well enough to protect them during economic downturns. For example, Johnson & Johnson has invested in healthcare, pharmaceuticals, and consumer goods and has been able to rely on booms in some areas to protect them from busts in others.
At the same time, conglomerates need to be wary of moving into industries that they have little experience managing. General Electric Company, for example, lost half of its share value in the 2008 financial crisis because it had diversified into mortgage and life insurance assets it was not experienced with.
In many cases, conglomerates succeed by focusing on a unified, clear corporate strategy, embracing technology, diversifying appropriately, and promoting innovation.
MSA advises companies on optimal corporate structuring, helping you balance diversification, control, and regulatory risk across multiple entities. Message →
Conglomerates operate across diverse sectors, requiring sophisticated corporate structures, governance frameworks, and compliance systems to manage complexity and stakeholder interests. MSA Asia’s China corporate services support complex organizational structures. Talk with us about conglomerate strategy.
A conglomerate can use its large size as an economy of scale advantage to negotiate lower prices from suppliers. They can also monopolize supply chains to their own advantage. Together, these behaviors can make it hard for smaller companies to compete.
Forming a conglomerate can diversify a company’s risk and help it gain strategic advantages. However, it can also lead to inefficiencies and confusion as the conglomerate may become too large to effectively manage. The behavior of different companies within a conglomerate may also not be transparent enough to create trust, and this can turn investors away.
