What are Conglomerate Mergers, and Why I'm Watching Obran Cooperative

Finance Sep 21, 2021

What if a co-op used mergers and acquisitions to grow its business? What if instead of operating in a single industry, a co-op ventured into multiple?

Mergers and acquisitions have been a staple of traditional businesses in the US for decades, including horizontal mergers and vertical mergers and conglomerate mergers.

Recently Obran Cooperative has come to my attention as a co-op that has adopted the mergers & acquisitions strategy and become a relatively unique co-op conglomerate.

To understand why this is so fascinating though, we first need to ask some foundational questions:

What are Mergers and Acquisitions?

Mergers and acquisitions are generally about combining two or more companies together.

There's a few ways to do it, such as a merger where two companies join together and form a new entity. The old companies cease to exist and a new one is formed from their union. These types of deals are relatively rare.

Then there's an acquisition where one company purchases ownership of another company. With an acquisition you can have either a consolidation where the target company is absorbed into the buyer's operations, or a subsidiary where the target company continues to exist as its own entity – but now owned by the parent company.

What is the Mergers and Acquisitions Strategy in Traditional Business?

In our capitalist society here in the US, money is the dominant factor of business. Making sure that your capital is always deployed efficiently for generating profit is the number one concern of management.

Which leads to an interesting conundrum: what happens when your business gets so big that it has more money than it can reinvest entirely into its operations? In other words, a surplus of cash.

Shareholders don't like to see idle cash; they want that cash to be working for more profits.

Which is where M&A (mergers & acquisitions) come in. As corporations are legal entities, they're able to own other companies. If that surplus cash can't be used to grow their own company, why not just purchase a budding company instead?

This gives rise to a high-business culture where large companies gobble up promising companies in the hopes of absorbing growth potential.

Like many things in life, this is a dual-edged sword. Large companies offer support and economies of scale to their acquisitions, amplifying the effects of startups. Yet it also reduces competition and innovation, as more and more companies are amalgamated into one conglomerate.

Not to mention the problems that come with stifling big corporation politics suddenly being thrust upon startup culture teams. Not that I'm speaking from experience, there...

Another phenomenon you see due to M&A is holding companies. I have an introductory article about them here:

What is a Holding Company?
Similar to how there are active and passive investments in the personal finance world, there are operating companies and holding companies in the business world.

In short, holding companies are entities which don't do business themselves. You can get them for a variety of reasons, such as limiting liabilities. Holding companies own operating companies, stockpile cash they get from their subsidiaries, and then use that cash to purchase more businesses.

In short holding companies are a prime example of capitalism: invested money snowballs and begets more wealth.

What is a Conglomerate Merger, a Vertical Merger, and Other Types of M&A?

There's two main ways to look at mergers & acquisitions (M&A): the type of M&A they follow, and the form of integration that they undertake.

There's a lot of types of M&A, which are about the purpose of a M&A. There's three main ones worth highlighting:

First there's vertical mergers where companies within different steps of the same sector merge to improve their supply chain. For example, when an iron foundry purchases an iron mine.

Second there's horizontal mergers where companies in similar industries (who may be competing) merge together. For example, a supermarket chain might purchase a fellow supermarket chain to expand its geographic level of service.

Thirdly there's conglomerate mergers where companies in different industries are combined for the purpose of diversification. For example, when a holding company purchases both a publishing house and a welding business – both are unrelated, but they add diversity to the holding company's portfolio.

It's also worth looking at the three forms of integration of M&A, which is about what happens to the companies after the deal:

Statutory mergers are where the target company is absorbed entirely, giving both assets and liabilities into the remaining entity. This is classically the "big company absorbs the little company" case.

Subsidiary mergers are where the target company continues to operate as its own entity, but it is now owned by a parent company.

Consolidation mergers are where both companies in a deal cease to exist and a new entity is formed from their assets and liabilities.

What is Obran Cooperative?

In short, Obran is a worker co-op conglomerate. That undersells it quite significantly, though. Let's look at the longer story.

Obran first appeared in my awareness thanks to a former colleague who became a member-owner in the cooperative. I thought that it was great to see a growing co-op, but didn't stop to really investigate what Obran was.

The second time it popped up, I paid more attention. During my usual daily walk with my dearheart, we discussed several entrepreneurial ventures we were interested in doing. I also brought up the point that I wanted to form a co-op, and I wondered if a co-op conglomerate was a proven business model.

When I got home and searched about that, I ran straight into Obran. Here's an article I shall call to your attention that introduces Obran neatly:

Obran: A Cooperative Conglomerate - Fifty by Fifty
Using business and finance tools to build community wealth

One of the biggest takeaways from the article is how people-centric Obran is. Employees of the subsidiary companies are also the owners of the Obran cooperative, forming an interesting loop of culpability. Employees work for the subsidiary which is beholden to Obran which is beholden to the employees (as owners).

This is huge considering that the big name in cooperatives is the Mondragon Corporation, which is a federation of co-ops. Federated co-ops have never appealed to me, since they're too distanced from workers. Yet what other options do we have?

Which is why I'm glad Obran is innovating a different type of business structure for large scale co-ops.

Obran is aiming to secure several industry verticals with its holdings and workers, including employment services and health. They're forming a community of workers that are able to provide their skills in service of several different businesses within the same broader portfolio. Such mobility is great for worker self-organisation!

For further reading, Obran itself has published a guide to its structure:

What is Obran Cooperative? A Member’s Guide. — Obran Cooperative
Obran Cooperative is a worker-cooperative conglomerate corporation. Over the next few months we will be publishing a series of articles aimed at providing a closer look at our structure, how we work together, and how we see our role in the ecosystem with the broader community. While we represent a r

There is also an interview with one of the co-founders here:

Fund Profile: Obran Cooperative

I will call to attention this quote from the interview:

"Somebody recently called us “a socialist PE [private equity] firm”! We’re just saying: take the best from both worlds, and not the worst."
– Joseph Cureton

For those of us interested in a better way of doing business, Obran is a forerunner. The optimist in me dreams of equitable and ethical business, all while accomplishing great things.

Why I'm Watching Obran

I'm watching Obran closely because I'm a dreamer.

I'm young and aiming to start my own entrepreneurial ventures as I get more experienced. I want to raise up fellow queers with the business entities I create, because giving queers money is better than meaningless statements of support.

I don't want to be limited to just one or two ventures either – I'm full of ambition and energy, and wish to become a serial entrepreneur.

Whilst co-ops are the dream, there's some harsh realities to take in. Most business ventures fail on their own. Then there's the fact that co-ops are less familiar in US business.

Familiarity leads to competence, so it's worrying that so few people are familiar with collectives and achieving consensus and worker ownership. I'm hoping that by the time I'm ready to launch my own ventures, there is a broader base of co-op support in the US.

If you're interested in reading more about co-ops, I have an optimistic article that touches upon the hurdles and difficulty associated with cooperatives here:

Business is Hard, and Cooperatives Will Fail
Cooperatives speak to the dream of equitable workplaces and profit-sharing that enriches communities, yet that dream is loaded with pitfalls and traps.

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Mistress

Mistress of the Home, responsible for all matters financial. A loving Domme tempered with ambition and attention to detail.

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