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Exploring the Benefits and Challenges of Conglomerate Mergers

Last updated Thursday, May 25, 2023 21:48 ET

it is recommended to compare virtual data rooms independently for making an optimal choice of a solution.

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Mergers and acquisitions are some of the best ways to nullify or minimize internal and external restraints. These activities can tackle challenges like skilled workforce shortage, capital shortage, market competition, supply chain issues, etc. Since 2010, there have been more than 0.5 million M&As on a global level, allowing companies to utilize the effects of M&A synergies.

M&A is a broad term that represents mergers, acquisitions, divestitures, and similar financial transactions. There are further types of mergers; each type has its own objectives, advantages, and drawbacks. One important and relatively less common type is a conglomerate merger. Let's explore the benefits of conglomerate mergers, the challenges associated with them, and how technologies like virtual data rooms simplify complex M&As.

What is a conglomerate merger?

A merger is a business activity in which two firms or businesses voluntarily combine their operations, assets, capital, workforce, etc., to operate as one business entity. The new company formed after a merger is generally intended to create a competitive advantage, minimize competition, reduce costs, strengthen research and development, or explore new markets.

In a conglomerate merger, two businesses conducting unrelated business activities or operating in different geographical locations combine and make a new business entity. For example, if a tech company acquires a poultry business, it will be categorized as a conglomerate merger.

Are conglomerate mergers common?

Conglomerate mergers were highly popular in the 60s and 70s in the US. Although the trend has changed significantly, the United States M&A market has seen few major cases of conglomerate mergers in the last two decades.

For example, Disney acquired Pixar back in 2002 for $7.4 billion, and it is considered as one of the best conglomerate mergers ever. The latest example of a conglomerate merger is Amazon's acquisition of Whole Foods Market for $13.7 billion in 2017.

You can read more about types and best practices for conglomerate mergers at: http://mnacommunity.com/insights/conglomerate-merger/

Benefits of conglomerate mergers

Few may question the essence or importance of conglomerate mergers, but they are beneficial for businesses in different ways.

Diversification and risk minimization

A merger of two unrelated businesses can help the new entity minimize market risks. That said, if one company isn't performing well due to any reason, the other one can minimize the losses by performing better in another market. The strategy is also known as the conglomerate diversification strategy.

Access to more capital

When two entities merge, they have excess resources and capital. For example, if one company is earning massive profits, idle funds, or has unused capital, the other company can use it for expansion, research or development, marketing, or any other purpose.

Combined marketing efforts

A merger between a well-recognized business entity (company A) and a less-known business (Company B) can boost the marketing game. Company A can use its marketing channels to promote company B and vice versa. Ultimately, both companies will be able to increase their customer base.

Apart from that, conglomerate mergers help companies achieve economies of scale and give better access to skilled human resources.

Challenges in conglomerate mergers

Apart from common M&A challenges, conglomerate mergers are tougher for businesses once the deal is closed. Here are common issues faced in conglomerate mergers.

Cultural integration

A company driven by technology and risk-taking will find it hard to collaborate with a business that likes playing safe. Both companies will have different cultures and thus a differently managed workforce. Removing cultural barriers will take consistent efforts.

Governance issues

Getting management from both sides on the same page is a herculean task for the dealmakers. The decision-making process, ideologies, and ways of doing things are highly likely to be different. What's more, accounting and audit practices may also differ. One company may run accounts on an accrual basis, while the other company may do it on a cash basis.

How to use virtual data room software in M&As?

A virtual data room has been a key element in the M&A sector for over a decade. It is a cloud-based digital data management and project management platform for M&As, capital raising, due diligence, and similar processes. Here is how online data room software improves the post-merger phase.

Better communication

Virtual data rooms are all-in-one deal management solutions where dealmakers can share documents and communicate in one place. Data room services offer different channels for individual and group communication. Interested parties can arrange online meetings, hold Q&A sessions, and communicate through chat groups.

Smooth post-merger integration

Once the deal closes, integration teams can use electronic data room software as a base point. They can create, share, and implement integration strategies using VDRs. That said, they can assign and manage tasks, mediate meetings between both sides, resolve disagreements, etc.

Final words

Conglomerate mergers open new business opportunities, give access to more cash, capital, and human resources, minimize risks, and achieve synergies. On the other hand, post-merger integration can be challenging in conglomerate mergers.

However, using technologies like virtual data rooms reduce communication barriers, making the integration phase smoother. Some of the best virtual data room providers for M&As include DealRoom, iDeals, Intralinks, and Merrill. However, it is recommended to compare virtual data rooms independently for making an optimal choice of a solution. You can also consult data room review websites that have independent comparison results ready for your look.

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