Conglomeration would compel you to expand your corporate reach into various types of businesses and industries. Umbrella Corporation allows you to manage the portfolio of various product lines. Some corporations buy other businesses and become conglomerates, and the others diversify their resources in order to expand their product variety. Today, we’ll discuss how to start a conglomerate with the step-by-step complete guideline.
How to Start a Conglomerate – Steps
Some of the main steps on how to start a conglomerate are as follows;
According to the Harvard Business Review, the reason conglomerations fail is that they struggle to manage different types of businesses in various industries. Before jumping into the ship of conglomeration, you should know how it would help your corporation.
If you are a manufacturer and also own a retail store, and it is selling products and work for you. You have got a company that follows the unique manufacturing methods and techniques, and you want to implement its magic in various other manufacturing industries. If your brand offers the first rated excellent customer service, then it’s such a skill set that you can implement it into other fields.
Relevant to Your Skill
One of the best ways to expand your corporate business and become a conglomeration is to build up in the same field that you’re already doing. For instance, Amazon launched its business as purely the online retailer of books, and then it started retailing all types of merchandise.
Nowadays, it has stepped out from its main category and offered services like cloud services, online payment services to various businesses and companies, and selling kindle for the study of ebooks. If you find a way to take your core business operations and diversify them into other areas, then you’re on the verge of conglomeration.
The other important way towards conglomeration is through the purchase of other businesses and companies. It could only be possible if your corporation has got resources. For instance, Meta (Facebook) purchased Instagram, Whatsapp, Oculus Rift Gaming, and various other platforms. Meta has to spend approximately 2 billion dollars on the purchase of Oculus Rift Gaming Company.
If your business or company isn’t multinational, then you have to prioritize your options in terms of what type of business or company you should purchase. For instance, Meta only purchases competitive social networking platforms. The best conglomeration strategy is to buy businesses relevant to your core niche business category. You don’t have to purchase random businesses just because you can afford them.
If you want to diversify and expand your business, the expansion plan would be struggling for the management team. For instance, if you purchase a well-growing business, and it runs into losses a year later. You should develop an exit strategy in order to deal with the situation. The subsidiary brands of various conglomerates aren’t performing well and the management decides to make their separate brands. It could be risky when the market starts growing, and wish that you should have stayed in the same line and kept your business diversified.
Some members of the management team may float the idea of investing in the stock. A corporation is a legal entity and it has the right to purchase as a separate entity. On the other hand, sole proprietorship and partnership aren’t separate entities from their owners, and they can’t invest their resources in the stock. A company can purchase the shares of the other company, and it would only be possible when the other corporation is selling the shares and stock.
Why Purchase Other Company
Corporations purchase the share of the other companies for various reasons, and they’re as follows;
- Size Expansion: Some business and corporate owners have the resources and they purchase other companies to amplify their assets and make their company’s size bigger. For instance, Marvel Comics acquired a competitive rival company in the 1990s in order to become the bigger publisher.
- Age & Maturity: when a business matures, then its probability of growth and sale reduces over time. When you acquire a competitive company, it increases your customer market size and growth rate.
- High Return: the cash flow of some companies is higher and their expenses are lower. Acquiring other businesses would offer you better results than just putting money into the bank.
- Diversification: it’s easier for a computer manufacturing company to acquire a video gaming company and expand its customer market, rather than entering a completely different new market.
- Market Expansion: the salesmen of IBM were tech-oriented and they were excellent at selling the products, which allowed IBM to acquire other smaller tech firms and expand its market
- Faster & Cheaper: inventing something new, launching it successfully in the market, and making the customers accept it; the whole process is very time-consuming. For instance, Apple was not the inventor of Siri, but the company acquired the personal assistant application from the other firm
- It allows you to eliminate competition in the market
- Larger companies have a competitive edge while negotiating with suppliers
Holding Company vs. Parent Company
When you acquire the company, then you have the option to become the minority stakeholder and consider the stock of the company as the other income stream or the dividend. When you have the minority stock, then you’re at the stake of the majority. Some companies want power and 100% ownership.
When a company buys the major stock in the company, then it becomes the majority stakeholder. In such a case, it has the option either to become the holding company or the parent company.
Here the buying company is the parent company and the acquired firm is the subsidiary company. It is not like a merger, and the two companies would remain separate legally. The parent company has a lot of control over the subsidiary company because of the majority stakeholder and the status of the parent company.
The power of the subsidiary and the holding company is the same as the parent company. But the existence of a holding company is purely for the sole purpose of owning the stock in the other company. However, the holding company doesn’t get involved in the operations of the other company, and the holding company only keeps stock in the other company and conducts its own operations.
Conclusion: How to Start a Conglomerate – Complete Guide
After an in-depth study of how to start a conglomerate; we have realized that a conglomeration requires a lot of things to consider before launching it. If you’re planning to launch it, you should follow and keep in mind the abovementioned steps.
Ahsan Ali Shaw is an accomplished Business Writer, Analyst, and Public Speaker. Other than that, he’s a fun loving person.