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.

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