The Conglomerate Code: Building Legacy Through Diversification

Across the globe, conglomerates have long played a pivotal role in shaping national economies - manifesting in diverse forms shaped by their historical contexts and business culture.

- By: Jitendra Sriram, Senior Fund Manager, Equity Baroda BNP Paribas Mutual Fund

From the sprawling chaebols of South Korea to Japan's intricate keiretsu networks these corporate giants have thrived by weaving together businesses across industries. Their continued dominance is driven by more than just economic scale; it's their agility in adapting to change, diversifying operations, and driving progress across industries and communities.

What is a conglomerate?

A conglomerate is a group of companies that typically share a common promoter / parent company who in turn exert management control in multiple businesses through subsidiaries, holding companies or business units within the larger companies in the group. These subsidiaries / associate companies typically operate independently from each other while at the same time drawing strength from being part of the large conglomerate.

Why do conglomerates exist, and what does that mean in practice?

While some conglomerates emerge from the merger of smaller businesses aiming to strengthen their market position, others are built by large parent companies seeking entry into new industries. Also, a lot of these conglomerates started with a single business line and grew into these conglomerates as they diversified into other businesses, both adjacent or unrelated to the existing businesses. Each conglomerate has its own unique origin, but a shared strategic objective often lies in diversification.

The primary motivation behind diversification is risk mitigation. By distributing assets across various sectors, conglomerates can buffer themselves against market volatility. For instance, a retail-focused conglomerate might own brands that sell luxury items such as jewellery and handbags, alongside subsidiaries offering essential goods with inelastic demand such as salt or food items, ensuring overall stability in performance even during economic downturns.