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 they can. But investors in public companies generally would prefer the companies they invest in don’t do this.

Think about it as an investor. You are able to invest your money in whatever companies you want to. You can do your own research and figure out whether you think Company A (a semiconductor company) or Company B (a cheese company) is a better investment. And you can perfectly tailor your exposure to different companies and industries based on your expectations.

But if Company A starts acquiring other businesses it will make it more difficult for you to determine how your money is invested. If that company begins to acquire companies in other industries and with other business models you lose direct oversight of your exposure to those industries. Maybe you invested in them because they were a semiconductor company, but they went on to buy a cheese company, and now your semiconductor investment is subject to forces in the cheese industry.

As an investor you would prefer Company A stays 100% in the semiconductor industry and Company B stays 100% focused on cheese so that you can directly control your investment levels and exposures in each industry.

Obviously there are exceptions! Berkshire Hathaway is a conglomerate and its investments are based on Warren Buffet’s good sense about what he thinks is a good investment. There are investors who are willing to buy Berkshire Hathaway stock in spite of the drawbacks I mentioned above because they have such deep trust in the management to make good decisions on investment allocation.

Edit: responding to your second edit, a company with exposure to every other company sounds like an index fund. What you’re describing works better as an index fund than a company.