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

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.