The basic difference between a conglomerate and a single product company is that one deals with multidimension business and other is specific to a product. Lets look into this bipartisan idea.... !! (can it be termed like this ????)
Not really!! they are the two facets of business, coined in reverse fashion.
Lets take an example of Nokia... were they a mere mobile manufacturing company? No they had a varied range of consumer electronic goods (when they started) .... but after their operational disaster they shifted to a specific domain.
Now we take an example of conglomerate... HP, IBM ... in India Tata...
What is the synergy that is driving them? Tata, a back bone of Indian economy, is holding almost 80 companies (Tata sons) catering to different areas like steel, automobile, heavy engineering, chemicals, consumer durables, food, software .............
Its software wing, TCS employs almost 80 thousand employees :0 . Where do the Tatas get such a huge amount to capture Indian Real estate business? That is where the benefit of being a multi "cuisine hotel" lies. Market is changing and also ever growing ... but when we say "ever growing" we cannot ensure which field will come up and which business will face a bear. New acquisition of Anglo-Dutch barron Corus also reveals the same story. Tata steel was not the top performer in India, but managed realize one of the largest acquisitions of this year: Rolling steel wheels !!!!
There are some players who take a mid way ... like Mittal steel, they do not want to invest in totally diverse field , rather they have chosen for all together a different business... "eau de cologne". Mittal was not hugely into business of steel plates.. like Arcelor, but this helped them to capture more diverse area and market. The strategy is to make a strong hold such that a paralysed segment can be insured by the pie of a perfect limb. If not for a long run , may be for a short spell.
The question still remains unanswered!!! which one is better, lets dig a bit deeper. IBM which had a multi-dimensional business (server to pc software to hardware) had established their ground in the market. This helped them to capture the largest pie of the global services industry, "IBM on demand". Can a new start up with a huge funding, achieve such a big height with in such a short time span.... I doubt..
Lets take another example of Hewlett Packard, influenced by IBM they have also concentrated on services. Was it possible to do without such a huge brand name? (HP is basically known for its IPG group , printer segment, headed by VJ). HP innovation :)
The same trend follows when we watch closely MICROSOFT'S operations... capturing all segments of Tech - industry , crm, finance, os, pda, search engines and also gadgets (xbox...). That's Bill's way to put foot mark. Why not get Customers of diverse field under same brand and also make huge money? The risk part is also manageable, compared to the specific product oriented business, because you can pull some of your non-performing segments, if needed. or can get going with new ideas under a big flagship. They call it fund raising !!!!
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Conglomerates became popular in the 1960s due to a combination of low interest rates and a repeating bear/bull market, which allowed the conglomerates to buy companies in leveraged buyouts, sometimes at temporarily deflated values. As long as the target company had profits greater than the interest on the loans, the overall return on investment (ROI) of the conglomerate appeared to grow. For many years this was enough to make the company's stock price rise, as companies were often valued largely on their ROI. The aggressive nature of the conglomerators themselves was enough to make many investors, who saw a "powerful" and seemingly unstoppable force in business, buy their stock. High stock prices allowed them to raise more loans, based on the value of their stock, and thereby buy even more companies.
However, as soon as interest rates started to rise in order to offset inflation, the profits of the conglomerates fell. Investors also noticed that the companies inside the conglomerate were growing no faster than they had before they were purchased. By the late 1960s they were frowned on by the market, and a major sell off of their shares ensued. In order to keep the companies going, many conglomerates were forced to shed the industries.
Unlike other conglomerates, General Electric came up with huge industrial equipment surplus and turned into a successful rental and leasing business company. During 1980s, GE also moved into financing and financial services, which today accounts for half of the company's income. GE was not highly leveraged, and when interest rates went up they were able to turn this to their advantage as it was often less expensive to lease from GE than buy new equipment using loans.
The best known British conglomerate was Hanson plc. India created some of Asia's largest conglomerates such as the Tata Group, Kirloskar Group, Reliance Industries and the Aditya Birla Group. Today Germany's Siemens A.G. is the worlds largest conglomerate. Almost 160 years old, with 472,000 employees and almost $ 100 billion annual sales.
With a general overview, conglomerate organizations can always boast for better potential advantage over standalone companies. For example consider a hypothetical conglomerate may consists of a book store and an internet cafe. Suppose the book store has high cash flow, but very few profitable investment opportunities whereas Internet cafe needs to encourage more investment opportunities. By combining the businesses together, the cash from the book store can be used to make profitable investments for the internet cafe.
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