Conglomerate (company)

A multi-industry corporation is known as a conglomerate. A conglomerate is a combination of many commercial organisations that operate in wholly diverse industries under the umbrella of one corporate group. Conglomerates often include a parent company and a large number of subsidiaries. The vast majority of conglomerates operate across many countries.

The United States was swept up in a "conglomerate craze" during the 1960s, which turned out to be a sort of speculative insanity. This "fad" lasted throughout the decade.

Conglomerates were able to engage in leveraged buyouts and acquire smaller firms because financing rates were historically low and the market saw recurrent bear and bull cycles (sometimes at temporarily deflated values). Ling-Temco-Vought, ITT Corporation, Litton Industries, Textron, and Teledyne are a few examples of well-known companies that were founded in the 1960s. The challenge was to find acquisition targets that had strong profits and price–earnings ratios that were much lower than those of the acquirer. A tender offer would be made by the conglomerate to the shareholders of the target at a significant premium to the stock price of the target at the time of the offer. After receiving permission from the company's shareholders, the conglomerate would typically settle the deal using a form of payment other than cash, such as convertible debentures, bonds, or warrants (issuing the latter two would effectively dilute its own shareholders down the road, but many shareholders at the time were not thinking that far ahead). After doing so, the conglomerate would add the profits of the target to its own earnings, which would result in an increase in the total earnings per share of the conglomerate. The acquisition was referred to as "accretive to profits" in the financial industry. When computing the post-acquisition consolidated profits statistics for the conglomerate, accountants were often able to get away with using creative arithmetic thanks to the comparatively liberal accounting regulations that prevailed during that period. After that, the price of the conglomerate's own stock would go up, which would result in the reestablishment of its prior price-earnings ratio. After that, the conglomerate would be able to carry through the whole process once again with a new objective in mind. To put it more simply, multinational corporations were engaging in a pattern of quick acquisitions in order to give the impression that they were experiencing rapid expansion.

The proliferation of mutual funds, and particularly index funds beginning in 1976, made it possible for investors to more readily gain diversification by owning a tiny portion of numerous firms via participation in a fund rather than by buying shares in a single conglomerate. Berkshire Hathaway, which is owned by Warren Buffett and is a holding company, is another example of a successful conglomerate. Berkshire Hathaway is a holding corporation that invested the excess cash from its insurance subsidiaries in companies that operate in a range of sectors.