Conglomerate

A conglomerate is a company that has many subsidiaries and associates that operate in a wide range of businesses.

There are several problems with conglomerates:

• There are few synergies between unrelated businesses.
• The extra layers of management needed, compared to standalone businesses, increases costs.
• A conglomerate is likely to disclose less information than standalone businesses; many numbers are disclosed consolidated, rather than separately for each business.
• The complexity of a conglomerates' accounts can make them harder to analyse - and makes it easier for management to hide things.
• Management are very unlikely have real expertise in all areas of the business.

For these reasons conglomerates have become much less common in developed markets than they once were. Most have chosen an area of business to focus on and sold or demerged non-core businesses.

Conglomerates are still common in some emerging markets. A number of explanations have been put forward. Most explanations for this revolve around the lack of well developed capital markets in developing economies. So the conglomerates take on the role of allocating capital to individual businesses, whereas in developed economies this is done by the market.

Lack of regulation and ineffective legal systems also make investors in emerging markets more suspicious of smaller companies (because if you are cheated you are less likely to be able to sue successfully or to expect regulators to act). This means that large companies, especially those that have a track record of treating minorities well (at least by emerging market standards!) have an advantage in raising capital. They can also fund investment in growth businesses from more mature cash generative businesses, avoiding the need to raise capital in the market altogether.