The сomplete guide for conglomerate mergers: Definition, benefits, examples

Despite a significant drop in M&A activity last year, from over $5 trillion in 2021 to $2.5 trillion in 2023, mergers and acquisitions remain a critical strategy for companies aiming to grow and expand their market presence.

Among the common M&A types are conglomerate mergers — deals that involve the merging of companies from different industries.

This article explores conglomerate mergers, discussing their pros and cons, and offering practical tips for achieving success in such deals.

What is a conglomerate merger?

A conglomerate merger is a type of merger where two companies from different industries and totally unrelated business activities combine to form a single entity (unlike a horizontal merger or a vertical merger, where companies in the same or related industries merge).

For example, if a technology company specializing in software development merges with a food and beverage company, it would be considered a conglomerate merger because the companies involved operate in completely different fields.

Companies may pursue conglomerate mergers for several reasons:

1. Diversification. By merging with a company in a different industry, a company can diversify its revenue streams and reduce its overall business risk. This can help mitigate the impact of economic downturns or changes in consumer preferences in one particular industry.
2. Synergy. Despite operating in different industries, conglomerate mergers can create synergies by leveraging each company’s strengths, resources, and expertise. For example, a technology company may bring innovation and efficiency to a traditional manufacturing company, leading to improved products and processes.
3. Market expansion. Conglomerate mergers can provide opportunities for companies to enter new markets or geographic regions that they couldn’t access on their own. This can lead to increased market share and growth opportunities for the merging firms.

Pure and mixed conglomerate mergers

There are two types of conglomerate mergers — pure and mixed.

A pure conglomerate merger occurs when two companies from absolutely different fields join together. They don’t have anything in common in terms of what they sell or who they sell to. They aim to diversify their portfolios and minimize risk by entering new markets or industries. These mergers can make the new company bigger, potentially leading to increased revenue streams and opportunities for growth.

A mixed conglomerate merger involves companies from different industries that still share something in common, like a customer base or distribution network. They aim to expand market reach, leverage shared resources, or capitalize on cross-selling opportunities. 

Here’s a more detailed comparison:

Top 5 conglomerate merger deals

Let’s explore some successful examples of conglomerate merger deals.

1. Disney’s acquisition of Pixar

Disney bought Pixar in 2006 for about $7.4 billion. At the time, Pixar was known for hits like “Toy Story” and “Finding Nemo.” Disney wanted to boost its own animation division, which wasn’t doing so well. One of the key factors driving the acquisition was Disney’s desire to revitalize its animation division, which had struggled in the years leading up to the deal.

Under the terms of the deal, Pixar co-founder Steve Jobs became Disney’s largest individual shareholder, with approximately 7% of Disney’s outstanding shares. Additionally, Pixar’s creative team, led by John Lasseter and Ed Catmull, gained significant influence within Disney’s animation division.

2. Amazon’s acquisition of Whole Foods Market

In 2017, Amazon acquired Whole Foods Market for $13.7 billion, entering into the grocery retail sector. This merger enabled Amazon to combine its online expertise with Whole Foods’ physical store network. By doing it, Amazon gained valuable data insights into consumer preferences and shopping behavior, improving targeted marketing and personalized recommendations.

The acquisition also provided Amazon with a platform to expand its grocery delivery services, offering customers greater convenience and choice. Additionally, it allowed Amazon to experiment with new retail formats, such as cashierless checkout. Together, this diversified Amazon’s revenue streams and strengthened its competitive position in the retail industry.

3. Alphabet’s acquisition of Nest

Another conglomerate merger example is Alphabet’s acquisition of Nest in 2014 for $3.2 billion. Nest, known for its smart home devices like thermostats and smoke detectors, offered Alphabet an entry into the Internet of Things market. The acquisition aligned with Alphabet’s strategy to diversify its portfolio beyond its core search and advertising businesses.

Nest continued to operate as an independent entity under Alphabet’s umbrella. The deal enabled synergies between Nest’s expertise in smart home technology and Alphabet’s resources in software and data analytics. 

4. Salesforce’s acquisition of Slack Technologies

In 2020, Salesforce, a leading cloud-based software company, announced its acquisition of Slack Technologies, a provider of workplace collaboration tools, for $27.7 billion. This merger aimed to combine Salesforce’s customer relationship management (CRM) platform with Slack’s messaging and productivity software, creating a comprehensive solution for remote work and digital collaboration.

Upon completion, the acquisition positioned Salesforce as a leading provider of integrated cloud-based solutions for sales, marketing, customer service, and collaboration, enabling organizations to streamline workflows and improve communication.

5. Johnson & Johnson’s Acquisition of Actelion

Another successful conglomerate merger, valued at $30 billion, occurred in 2017 between Johnson & Johnson and Actelion. Actelion, a Swiss biopharmaceutical leader, specialized in pulmonary arterial hypertension treatments. The deal granted Johnson & Johnson access to Actelion’s innovative drug pipeline, particularly in PAH treatments, and expanded its global reach with Actelion’s established presence in Europe.

The merger enabled synergies, allowing Johnson & Johnson to speed up the development and distribution of novel therapies. Financially, the acquisition diversified Johnson & Johnson’s revenue streams and enhanced its pharmaceutical standing.

Best practices for successful conglomerate mergers

To achieve a successful merger, consider the following recommendations:

1. Thorough due diligence. Conduct comprehensive due diligence to understand each company’s financial health, market position, operational capabilities, and potential synergies.
2. Clear strategy. Define a clear conglomerate merger strategy, outlining how the combined entity will create value and achieve competitive advantage. Develop a roadmap for integration that aligns with long-term strategic goals.
3. Transparent communication. Establish communication channels with employees, customers, investors, and other stakeholders. Keep them informed about the key reasons behind the merger, progress updates, and any changes that may affect them.
4. Talent retention. Identify key talent within merging companies, offer personalized retention plans, and communicate clearly about their role in the merged entity. Also, providing opportunities for professional development and career advancement can motivate and retain valuable talent.
5. Integration planning. Develop a detailed integration plan covering all functional areas, including IT systems, supply chain, and marketing.
6. Customer focus. Prioritize customer satisfaction throughout the merger process by maintaining high-quality products, services, and support. Minimize disruptions to customer relationships and address any concerns promptly.
7. Monitoring and evaluation. Establish key performance indicators (KPIs) to track the merger’s progress and measure its success against predefined objectives. Conduct regular assessments to identify areas for improvement.

Pros and cons of conglomerate mergers

Conglomerate mergers present a range of advantages and disadvantages for both the acquiring company and the target company.

Conglomerate merger advantages

• Diversification of products and markets
  A conglomerate can expand its revenue streams and reduce the risk associated with dependence on a single product or market segment.
• Risk reduction
  By operating in multiple industries, conglomerates spread their risk, making them more resilient to economic downturns or industry-specific challenges.
• Synergy opportunities
  Conglomerates can leverage synergies between different businesses, such as sharing resources, technology, or distribution channels, leading to cost savings and improved operational efficiency.
• Access to new markets
  Merging with companies in different industries can provide access to new markets, enabling growth opportunities.
• Access to new technologies and expertise
  A conglomerate merger can improve the quality of products and services. For instance, a pharmaceutical company merging with a biotech firm can leverage new research capabilities to develop groundbreaking treatments.

Conglomerate merger disadvantages

• Integration challenges
  Integrating diverse businesses with different operating models, cultures, and management styles can be complex and challenging, leading to execution risks and potential disruptions.
• Lack of focus
  Conglomerates may struggle to maintain a clear strategic focus when operating in multiple industries, leading to inefficient resource allocation and reduced competitiveness in core markets.
• Lack of synergy
  While synergy is often a key driver of mergers, achieving it in conglomerate mergers can be difficult because of the differences between merged companies. For example, merging a financial services firm with an entertainment company can be challenging due to different operations, target markets, and corporate cultures.

Key takeaways

• Conglomerate mergers involve the merging of companies from unrelated industries. They can be classified as pure conglomerate mergers, involving completely unrelated industries, or mixed conglomerate mergers, involving companies that share something in common.
• Conglomerate mergers offer benefits such as diversification of products and markets, increased market power, access to new technologies and expertise, and opportunities for market expansion.
• Despite the potential advantages, conglomerate mergers present challenges such as integration complexity, lack of strategic focus, and difficulty in achieving synergies.
• To achieve success in conglomerate mergers, companies should focus on thorough due diligence, clear strategy, transparent communication, talent retention, integration planning, and continuous monitoring and evaluation.