EDIT: And they just leave those sub companies as they are (provided they are already making profit), so the only thing that changes it that the excess profit could go to the whole company; they leave it to function the same
ALSO EDIT: Not necessarily passive income (mb) but just to expand the larger companies reach- theoretically could one country have non-negligible stakes in every major industry through this method?
Thank you all this was actually very helpful 😀
In: Economics
They certainly can,and often do. There was that infograph going around recently about how there are about 100 companies that own some ridiculous percentage of everything we buy. A lot of those products started out as being owned by independent companies, then were brought out by the big ones.
Another common trick is to buy a competitor and shut it down since long term that is more financially beneficial than competing with them.
Yes they can, but it’s not as simple as just buying a company and making extra money from it.
Buying a company means taking on the risk, being involved in an industry you might not be familiar with, and then hoping to make back the amount of money you paid for it.
Think of it this way, if a company was guaranteed to keep making money, for essentially no work, why would the owner even sell it?
Sure. Isn’t this similar to how Mars, the candy company, started buying veterinary practices and raised prices?
They can, but generally don’t. It is much more common for them to spin off non-core business. This is because companies are typically more successful when focused on specific industries or markets where they have the most expertise.
The key idea here is that the company is owned by shareholders, and if the shareholders wanted to own part of another company, they could just buy stock themselves in that company. It is not the job of a company’s management to diversify shareholder portfolios by forcing them into owning part of another company.
The only time an acquisition should happen in theory is when the value of the two companies combined is greater than the sum of their parts. This is what is typically called “synergy” though the term has been wildly abused. Of course, in practice, this doesn’t always work out as sometimes managers have incentive to do things on their own that don’t necessarily benefit shareholders.
They can but the issue is it’s difficult to actively manage a company from a different industry without having the skillset available. Yes, they can hire people with specialization to run the company but you still need knowledge to hire the right people.
It would be very difficult for let’s say… Nike to buy a computer company and then run the company efficiently. For example, Apple wanted to make electric cars but abandoned the idea. It goes to show how important and difficult specializing in a specific industry can be.
What companies actually do is they invest their money in a whole lot of industries, pretty much just like how you and I buy stocks.
Basically, passive investment > active investment because it’s much less risk and work
If I’m a shareholder, my immediate question is “Why don’t you just send me that money so I can do the exact same thing the way I want to?” Companies should do things they have a competitive advantage in. There already exist investing companies that only do what you’re talking about, eg Berkshire Hathaway. But for a company with an actual purpose, eg Google or General Motors, the general thought is that you should do what you’re good at.
(Although you still might buy companies in seemingly unrelated fields to your core business because of synergy, eg GM buying AmeriCredit to form GM Financial.)
Yes. GE is notorious for this in medical device. Ge can’t make the most popular C arm x ray scanner? Just buy the most popular vendor then!
Celgene has a promising cancer therapy? Bristol Myers Squibb just buys them
Yea. Think of a company like Yamaha. What don’t they make? They are the broadest company that comes to mind for me.
Warren Buffett’s [Berkshire Hathaway](https://en.wikipedia.org/wiki/Berkshire_Hathaway) is holding company. Its HQ has only [25 staff](https://www.businessinsider.com/berkshire-hathaway-omaha-office-staff-2016-2) as of 2016. Its [website](https://www.berkshirehathaway.com/) looks like it is from the 1990s, but it is worth $937 billion. It owns several companies outright (GEICO, BNSF) and large chunks of several others (Apple, Coca-Cola, Amex).
Latest Answers