Can large companies simply buy large companies from smaller industries in order to a) get passive income and b) have alternate industries to fall back on?

Question

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

Answer 1

Yes, but the buying company could also just invest in the stock market to get that passive income, so unless there’s some additional benefit the companies can get from being managed together, buying the whole company isn’t usually a good approach. You do see some big conglomerates that are collections of seemingly random companies, but usually they’re getting some benefits from being managed together like economies of scale for advertising, shipping/logistics, marketing, relationships with stores or resellers, regulatory benefits, etc. Some of these conglomerates also date back to when there weren’t so many ways built into the market to manage risk and having the conglomerate manage it for you was more of a benefit.

You have to assume that the executives and largest shareholders of the company being bought know their business at least as well (and probably better) than the big company. So they’re only going to sell if the price is better than the fair price of the company. That fair price is what the stock is worth with maybe some influence by what the executives and shareholders think it will be worth in the future. Unless the company doing the buying can bring some benefit that the company getting sold couldn’t do on its own, the buyer is probably overpaying and their shareholders are going to tell the board and executives that they think their investment would be better spent elsewhere (including the company just investing it in the market to manage risk or buying back shares to drive up stock price for the existing shareholders).