We live in a world where the business landscape is increasingly dominated by conglomerates. Think of Amazon and its varied divisions, which include Whole Foods and Audible. A conglomerate merger can help a company grow and diversify its offerings.
At NorthStar Venture Partners, we work with startup owners every day. One of the questions they ask most frequently -- especially when considering a merger -- is this:
What are the differences between a startup merger and a conglomerate merger?
That’s an important topic and one we think anyone who’s considering a merger should understand. Here’s what you need to know.
A Conglomerate Merger Happens Between Two Established Companies
The first big difference between a conglomerate merger and a startup merger is that a conglomerate merger usually occurs when both of the merging entities are well-established and successful.
The merging companies will each have their own strengths and weaknesses, of course, but that’s to be expected. In a startup merger, the same is true, but on a smaller -- and more uncertain -- scale.
A startup merger may blend two companies, one of which is farther along with R & D than the other, while its counterpart has more capital to burn. The hope is that the merger will give the new company the resources it needs to thrive.
A Conglomerate Merger Has Less Uncertainty Than a Startup Merger
Not every conglomerate merger is an instant success, but when two established and profitable companies merge, the likely result is a positive one. Of course that’s not set in stone, but investors tend to have a lot of faith in big companies and conglomerates.
By contrast, startup companies in general are plagued by uncertainty. There are many issues that can sink a startup, including lack of working capital, inadequate resources, competition, and more.
With a startup merger, the uncertainty may be multiplied, particularly if there are questions about how the two companies will integrate their staff, cultures, and resources. The merger may be successful -- and a well-planned startup merger can be exciting for everybody involved -- but startup mergers are not usually considered as predictable as conglomerate mergers.
A Startup Merger May Come with Built-in Conflict
In a conglomerate merger, the two companies merging often have decades of established success before they merge. For that reason, it can be relatively easy to keep their operations separate, allowing each of the merged entities to continue to do business as they did before under a shared umbrella.
With a startup merger, the uncertainty that’s inherent in the nature of a startup may be multiplied and cause conflicts. For example, if both startup owners want to remain involved in the new entity, it may lead to territorialism and conflict. As the saying goes, too many cooks can spoil the broth.
Conflicts may also arise as a result of poorly integrated systems, corporate culture clashes, and more. It’s essential to consider areas of conflict before embarking on a startup merger to minimize potential problems and maximize your chances of success.
Employee Morale May Be Affected by Any Merger
One area of potential conflict that deserves a separate mention is employee morale. In any merger, there’s a risk that employee morale may take a hit -- particularly when there is uncertainty about what the new entity will look like.
With a startup merger, the uncertainty may be profound and all-encompassing, and that’s going to impact employee morale. Even employees who keep their jobs may feel threatened or worried about their future with the new company.
Of course, there’s bound to be some employee uncertainty when two successful and established companies go through a conglomerate merger, as well. There may be some downsizing and growing pains, but it may be easier to cope with, particularly if there’s no intention of integrating the two entities in practice.
It May Be Easier to Put Together a Startup Merger
One area where startups may have the advantage is in finding potential buyers and/or merging partners. That’s because the lower purchase price of a startup may open up the possibility of M & A to buyers who would be priced out of a big conglomerate merger.
Very few companies have the capital and wherewithal to buy a company that’s already successful and likely to come with a high price tag. However, two startups can merge with each bringing its own strengths to the table. It can turn into a win/win that triggers exponential growth for the new, combined company.
Of course, a conglomerate merger can also lead to growth, but it may be less dramatic than expected. For example, many experts predicted that Amazon would become a grocery giant after its acquisition of Whole Foods in 2017. While its market share has increased, the merger prompted other grocery chains to innovate in response -- and Amazon has not had the growth that some people anticipated.
The bottom line is that conglomerate mergers are usually bigger, more expensive, and less risky than startup mergers. However, a startup merger may help two struggling entities combine their strengths for exponential growth.
Thinking about a startup merger? Click here to schedule a call with NorthStar Venture Partners and learn how we can help!