Conglomerate (company)
Advantages and disadvantages of conglomerates
Diversification results in a reduction of investment risk. A downturn suffered by one subsidiary, for instance, can be counterbalanced by stability, or even expansion, in another division. For example, if Berkshire Hathaway's construction materials business has a good year, the profit might be offset by a bad year in its insurance business. This advantage is enhanced by the fact that the business cycle affects industries in different ways. Financial Conglomerates have very different compliance requirements from insurance or reinsurance solo entities or groups. There are very important opportunities that can be exploited, to increase shareholder value. A conglomerate creates an internal capital market if the external one is not developed enough. Through the internal market, different parts of conglomerate allocate capital more effectively. A conglomerate can show earnings growth, by acquiring companies whose shares are more discounted than its own. In fact, Teledyne, GE, and Berkshire Hathaway have delivered high earnings growth for a time. The extra layers of management increase costs. Accounting disclosure is less useful information, many numbers are disclosed grouped, rather than separately for each business. The complexity of a conglomerate's accounts make them harder for managers, investors and regulators to analyze, and makes it easier for management to hide issues. Conglomerates can trade at a discount to the overall individual value of their businesses because investors can achieve diversification on their own simply by purchasing multiple stocks. The whole is often worth less than the sum of its parts. Culture clashes can destroy value. Inertia prevents development of innovation. Lack of focus, and inability to manage unrelated businesses equally well. Brand dilution where the brand loses its brand associations with a market segment, product area, or quality, price or cachet. Conglomerates more easily run the risk of being too big to fail. Some cite the decreased cost of conglomerate stock (a phenomenon known as conglomerate discount) as evidential of these disadvantages, while other traders believe this tendency to be a market inefficiency, which undervalues the true strength of these stocks.
Conglomerate (company)-21