Are Conglomerates good?

[Warman17]

n. a corporation consisting of a number of subsidiary companies or divisions in a variety of unrelated industries, usually as a result of merger or acquisition.


Now for example a shoe and hat company, or paper and furniture company. I'm doing an economics project, and I've come to the conclusion i cant decide. From what I understand if one market is affected, it can now affect the other market due to the conglomerate; otherwise such an event would not occur. However this is as far as I can get when it comes to conglomerates being 'bad.' Which I'm not sure if the truly are. Even though the conglomerate now links markets, theres nothing intrinsically bad with doing so.

Now remember I'm talking about the strict definition of the word. I'm not including vertical or horizontal integration in this discussion.

 

[mrt144]

its case by case. some are absurdo and detract from what the company can do or does best, in others its simply another way to make money.

 

[Warman17]

its case by case. some are absurdo and detract from what the company can do or does best, in others its simply another way to make money.

I'm sorry I should have specified. I'm not looking to see if such a move is good for the firm itself, but for the market as a whole. Obviously a conglomerate may be a good or bad move from the firms point of view based on making or losing money. However I'm looking at the market and public interest.

For background I'm doing a project on mergers and acquisitions. I've already discussed vertical and horizontal integration and how it helps expand the power of a company and become closer to a monopoly, but conglomerates don't do that. Having a shoe firm merge with a hat firm does nothing to make the firm closer to becoming a monopoly. What it does is partially tie the shoe market and hat market together in the sense that if one side of the conglomerate fails, the other can support it or fail as well which is not what would 'naturally' happen if the conglomerate didn't exist.

 

[AL_DA_GREAT]

If the knowledge and/or production capacity can be shared yes otherwise no.

 

[Whomp]

However I'm looking at the market and public interest.

When you say the market do you mean the capital markets and when you say public interest I assume you mean the customer not the public?

 

[Warman17]

When you say the market do you mean the capital markets and when you say public interest I assume you mean the customer not the public?

I mean the supply market: since hats aren't substitutes to, complements to, or used to make shoes the hat market wouldn't naturally affect the shoes market. However since a hat-shoe conglomerate exists the two markets are now linked. Is this a good or bad thing?

 

[Whomp]

I mean the supply market: since hats aren't substitutes to, complements to, or used to make shoes the hat market wouldn't naturally affect the shoes market. However since a hat-shoe conglomerate exists the two markets are now linked. Is this a good or bad thing?

OK I see. For the owner of the haberdashery it's a good thing since he may only see one saleperson selling two products. This would leverage his time which is also important. I think Pepsico is a good example.

I presume they'll be better able to cross sell and compete for space as well as leverage the store owners time by having mulitple brands Pepsi, Frito-Lay, Gatorade, Tropicana and Quaker products. On the other hand, owning Taco Bell, KFC and Pizza Hut wasn't a good fit due to synergies and was better off being spun off.

Am I following you correctly?

 

[Cheezy the Wiz]

I'm more of a fan of horizontal business than a conglomerate-style expansion.

 

[Warman17]

Well what I was getting at is alright you two 'departments' in your firm, one making shoes the other hats. Now suddenly the demand for hats goes down. It goes down so far that the profit-maximizing point is now below the average variable cost, so you should shut it down. At this point 2 things can happen:

1) The shoes section simply picks up the slack and keeps the hat section afloat. In a sense this contradicts the market because otherwise the hats would have shut down; but now theres more supply in the market than would have 'naturally' occurred.

2) The shoes section can not pick up the hats section, and both departments are now below the shut down point. Thanks to the decrease in demands for hats suddenly a portion for the supply of shoes decreases as a result. Now theres less supply in the shoes market that would have 'naturally' occurred.

Since neither of these would have 'naturally' occurred if it were not for the existence of this conglomerate; is the existence of the conglomerate justified (good/bad).