A conglomerate is a large corporation formed by the merging of separate and diverse companies. Think of it as one giant parent company that owns a whole family of different businesses, often operating in completely unrelated industries. Imagine one company that owns a railroad, an insurance firm, a chocolate factory, and a furniture store. That's a conglomerate. The individual businesses usually operate independently, but their profits and strategic direction are ultimately controlled by the parent company's management team. These corporate behemoths were all the rage in the 1960s and 70s, with famous examples including ITT, Litton Industries, and, in its heyday, General Electric. Today, the most celebrated example, especially among value investors, is undoubtedly Warren Buffett's Berkshire Hathaway. The core idea is that diversification across industries can protect the parent company from a downturn in any single sector, and that a savvy management team can allocate resources more effectively than the open market.
Conglomerates don't just happen; they are built, usually through a series of mergers and acquisitions. Their history in the investment world has been a rollercoaster of boom and bust.
In the mid-20th century, conglomerates were Wall Street's darlings. The logic seemed foolproof. By owning a portfolio of businesses, a company could smooth out its earnings. If the textile business had a bad year, maybe the aerospace division would have a great one. This diversification was believed to create stability and predictable growth. The central pitch was synergy—the magical idea that the combined entity would be worth more than the sum of its parts (the classic 2 + 2 = 5). Promoters argued that a brilliant central management team could act as a superior internal capital market, shifting cash from slow-growing “cash cow” divisions to fuel growth in more promising areas. This was seen as a more efficient way to allocate capital than relying on external banks or stock markets.
By the 1980s, the magic had faded. The market began to penalize these sprawling empires with what's known as the 'conglomerate discount'. This means the stock market valued the company at less than the estimated value of its individual businesses if they were spun off and run independently. The promised synergy often turned into “di-worsification.” Why the discount?
For most of the last 40 years, the trend has been towards de-conglomeration—breaking up large companies into smaller, more focused “pure-play” entities. However, from a value investing standpoint, conglomerates aren't automatically good or bad. They can be a source of immense opportunity or a value trap. The difference lies almost entirely in the quality of management.
No discussion of conglomerates is complete without mentioning Berkshire Hathaway. It is the ultimate proof that the model can work, and spectacularly so. So, why does Berkshire succeed where so many others failed?
If you're considering investing in a conglomerate, you can't just look at the consolidated earnings per share. You have to roll up your sleeves and do some detective work.