Holding company vs conglomerate: what is the difference?

A holding company and a conglomerate answer different questions. A holding company describes what a company does: it owns interests in other companies. A conglomerate describes the mix of businesses a group runs: several different, unrelated industries under one parent. The same group can be both, which is why the two terms are often used together and sometimes confused.

The short answer: structure versus business mix

"Holding company" names a role a company plays in a group. "Conglomerate" names a kind of group, judged by how varied its businesses are. One term is about the company at the top, the other about what the whole group does.

What a holding company is

A holding company is a company whose main activity is owning interests in other companies. It does not have to make a product or serve customers itself. The companies it controls are usually called its subsidiaries. The plain explanation of holding companies on this site covers the basic definition in more detail.

What a conglomerate is

According to the Wikipedia article on conglomerates, a conglomerate is "a type of multi-industry company that consists of several different and unrelated business entities". The article adds that these entities "operate in various industries."

The definition is about the spread of businesses. It does not describe the legal form of the group or how the group is owned.

How the two overlap

The article describes a conglomerate as usually a "parent company that owns and controls many subsidiaries." That parent is, in the sense above, a holding company. So the overlap is the structure: one parent at the top, several subsidiaries below it.

The difference is in what the group owns. A holding company may own businesses in one industry or in many. A conglomerate is defined by its businesses being unrelated to each other. A holding company that owns businesses in only one industry is a holding company but not a conglomerate.

The article gives a well-known example of the overlap. It calls Berkshire Hathaway "a holding company that used surplus capital from its insurance subsidiaries to invest in businesses across a variety of industries," and in the same article describes it as "Another example of a successful conglomerate."

Subsidiaries: legally independent, financially and strategically dependent

The article describes the subsidiaries of a conglomerate as "legally independent but financially and strategically dependent on the parent company."

In plain terms, each subsidiary is a separate legal entity with its own name and its own filings. Its money, plans and direction, however, depend on the parent. A group can therefore look like many companies on a legal chart and still be run as one business. This is the point where the legal map and the practical control of a group can look different.

Advantages and disadvantages

The article lists the commonly cited advantages and disadvantages of the conglomerate form.

Advantages:

• Diversification. In the article's words, "Diversification results in a reduction of investment risk."
• An internal capital market. "A conglomerate creates an internal capital market if the external one is not developed enough." In this case the parent moves money between its businesses rather than relying only on outside lenders or investors.

Disadvantages:

• Extra layers of management. "The extra layers of management increase costs."
• Complex accounts. The complexity of a conglomerate's accounts "makes it harder for managers, investors, and regulators to analyze" the group.
• Lack of focus. The article cites "Lack of focus, and inability to manage unrelated businesses equally well."

These are points raised in the debate about the form, not measured results for any particular group. The article does not settle which side weighs more.

The conglomerate discount, explained neutrally

The article says conglomerates can trade below the combined value of their parts. Its explanation is that investors can diversify by buying several stocks themselves. The article also notes that some traders view the discount as a market inefficiency. This page does not say whether any particular group trades at a discount.

Where to read more

• What a holding company is: the basic definition and the difference between a holding company and an operating company.
• Holding company, parent company and subsidiary: how the three terms relate to each other.
• Can a holding company also run a business?: what happens when the parent also trades itself.

Sources

• Wikipedia, "Conglomerate (company)": https://en.wikipedia.org/wiki/Conglomerate_(company)