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
The other commenters have already raised good points but none have mentioned the price of takeover: if a company is already profitable, the owners want something extra, because why else would they sell?
Well this “extra” is a higher cost.
The higher cost means that for it to be worth buying, you need to make the company even more profitable to compensate. This lowers the value of buying the company, and achieving it takes focus away from the main business.
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.
Yep happens all the time. Or investing in the other company just for profit potential. Example being AMC buying a stake in hycroft mining. They didn’t buy the whole company just a stake in Otto diversify their income stream similar to what you’re referring to.
Yes, a great example is Tencent. They have their fingers in more pies than I care to count and they’re very hands off as long as you make money because why screw with a good thing?
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).
Yes. This happens all the time. Pretty much all the different beers you see at the store that isn’t from a small local brewery is owned by 3 companies. All the domestic beers, the Mexican lagers, the popular European brands, virtually none of them are standalone companies. Same story with all the different shampoos. P&G, Johnson and Johnson, and L’Oréal own almost all of them. There are certain laws against monopolies and occasionally these “mergers” will be blocked in court but it’s rare. Most industries have been consolidated by a few giant corporations.
A company that owns a bunch of businesses on different industries is called a conglomerate. There is some benefit of diversification when one business does well while another does poorly. However, they ofter trade at a discount to the businesses separately. Think of it this way, if a company owns an energy business, a software business and a retail business, there may be investors who would love to invest any one of those businesses but doesn’t want to infest in the others.
I know someone in HR at a business that does this. She calls it a holding company.
https://en.m.wikipedia.org/wiki/Holding_company
Because truly passive income is probably so low it makes for a bad investment compared to an active one. And there are very few companies that have such a large market share that the best investment isn’t trying to get more of it. Or at least an adjacent market they can feed into their primary market. Think of Microsoft buying tech companies and then developing their product to use windows
Many of them do, but passive incomes are usually not the primary goal.
If they want to own a company, they need to buy the current owners out, who wouldn’t consider that unless they make significant profits out of the deal, i.e. the acquiror has already lost money on the deal.
To make it viable, the acquiror has to make up for the premiums by making the acquiree more profitable or it must benefit them in other ways. For example, if company A accounts for 70% sales of company B, by acquiring company B, future purchases will be made at the cost of ingredients.
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