Diversification and Conglomerates

Why some companies spread into many unrelated businesses, why India's business groups remain so diversified, and the debate over the conglomerate discount.

Some companies focus on one business. Others spread into many, from steel to software to hotels. This is diversification, and firms operating many unrelated businesses are called conglomerates.

Types of diversification

Related diversification: entering businesses that share skills, customers or technology, such as a car maker entering electric scooters.
Unrelated diversification: entering businesses with little connection, such as a textile company buying a hotel chain.

Why diversify?

Spreading risk across industries.
Using shared resources, such as brand, management and finance.
Growth when the core market matures.
Filling market gaps: in economies where markets for capital, talent and information work poorly, business groups can do these jobs internally.

India’s business groups

Economists Tarun Khanna and Krishna Palepu argued that business groups thrive in emerging economies because of institutional voids: weak capital markets, limited information and unreliable contract enforcement. Groups such as the Tata, Aditya Birla and Reliance groups operate across many sectors. Their brand reputations, internal capital and management talent help them enter new industries.

The conglomerate discount

In developed economies with strong markets, investors often value conglomerates less than the sum of their parts. Reasons include:

Investors can diversify themselves by buying different shares.
Managers may spread attention too thinly.
Weak units may be subsidised by strong ones.

Many Western conglomerates have split up. For example, General Electric divided into three separate companies between 2023 and 2024.

The trend in India

As Indian markets develop, some groups have simplified structures or listed separate businesses, while others continue expanding into new sectors such as renewable energy and digital services.

Entering a new industry

A large Indian group with a trusted brand enters a new consumer business. Customers trust the name, banks lend readily and experienced managers move from other units. A start-up entering the same industry would need years to build such trust and resources.

Thinking diversification always reduces risk for shareholders

Shareholders can diversify by owning shares in different firms. Company-level diversification can add costs and complexity.

Key takeaways

Diversification can be related or unrelated to the core business.
Business groups thrive in economies with institutional voids.
India's groups operate across many sectors.
In developed markets, conglomerates often trade at a discount, and many have split up.