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Conglomerates

CONGLOMERATES

CONGLOMERATES are corporations consisting of a number of different companies operating in diversified fields. In geology circles, the analogous definition of conglomerate is something consisting of loosely cemented heterogeneous material. Conglomerates in business are organizations built on the acquisition of firms that are usually in a type of business indirectly related, if at all, to the acquiring company's other corporate divisions. The parent company is what holds these loosely related companies together.

Although conglomerates existed before World War II, they became increasingly popular during the late 1950s and early 1960s. One reason for the adoption of the conglomerate strategy was that such entities could make acquisitions and grow yet maintain immunity from the anti-trust prosecution that companies making acquisitions in the same line of business often found themselves facing. Thus, businesses that were constrained within their own industry were able to freely expand into different markets. In addition, of particular importance at the time was that the conglomerate strategy allowed firms heavily engaged in defense contracts to diversify and reduce the risks associated with overspecialization.

One of the best examples of conglomeration and its focus on diversification was Textron Incorporated. After early beginnings as a parachute and textiles manufacturer, Textron, which was headed by Royal Little, began to acquire unrelated companies in an effort to expand profits and experience beneficial tax treatments. This diversification became so wide reaching that Textron began to acquire companies whose products ranged from cement to helicopters; by 1963, Textron was no longer even in the textile business.

Some experts believe that the techniques used by conglomerates to achieve the astounding growth for which they were noted was a direct violation of sound corporate operating principles. Conglomerates exercised few, if any, limits on diversification, often purchased less than 10 percent of their acquisitions, operated with complex capital structures, and exhibited high debt-to-earnings ratios. This loose-cement method often meant that a conglomerate's stock price could fall as quickly as it rose. In addition, conglomerate corporations often paid debt securities, such as bonds, debentures, and preferred shares, for the companies they acquired. This was derisively referred to as "funny money" because the payment did not represent ownership in the acquiring company, and the company being acquired would surrender outright ownership although in return it would receive nothing more than evidence of the acquirer's indebtedness.

Litton was one of the first conglomerates to take advantage of this acquisition technique. It was not, however, the originator of this corporate form. Before Litton came companies like U. S. Hoffman, Penn-Dixie Industries, Merritt, Chapman & Scott, and Aeronca, Incorporated. Each of these conglomerates started out small, made a series of acquisitions, and quickly became top stock market performers. They all failed, however, because they either purchased poorly performing companies, failed to add any substantial businesses, squeezed the worth from their acquisitions, or used slick accounting methods to appear stable.

Although the exact origins of conglomerates are un-clear, Litton seems to be the model that lit the fuse on the conglomerate explosion of the late 1950s and early 1960s. The company, which was created and led by Charles "Tex" Thornton, began in 1953 by purchasing three privately held companies with $3 million in combined sales. For the next fifty-seven straight quarters, a period spanning fourteen years, the company reported increases in quarter-to-quarter earnings per share. In 1968, sales reached an astounding $168 billion before the earnings record and the company collapsed. The company's stock price dropped from a high of 120 3/8 in 1967 to 8 1/2 in 1973—a 93 percent decline. Despite its failure, which Litton blamed on management problems, the company's earnings record encouraged dozens of new firms to take on the conglomerate form.

While efficient management helped many conglomerates improve the performance of acquired companies, others were seemingly more interested in earning profits from securities. Acquiring companies for stocks and bonds and later selling off portions of the acquired companies generated profits and funds for expansion. James J. Ling of Ling-Temco-Vought (LTV) used this method of building conglomerates to achieve remarkable success. By selling off portions of acquired companies and using the money to expand, Ling took his company from the 204th largest industrial organization in America to the 14th spot in just four years. He would eventually step down as chairman, however, after the government mounted serious anti-trust challenges and LTV began to suffer substantial losses, including a $10.59 per share loss in 1968.

Business went well for conglomerates until 1969, when antitrust indictments challenged some of them and business began to slow. In 1969 and 1970, ten national investigations, including studies by the Federal Trade Commission, Securities and Exchange Commission, and Department of Justice, began to explore the conglomerate culture. This increased scrutiny, along with the publication of stories detailing securities manipulations of certain conglomerate promoters, began to greatly affect their ability to continue doing business in the same way. As the economy began to slow in the early 1970s, the managers of some conglomerates were proved to have been far less efficient than they had claimed. Nearly a quarter of the conglomerates doing big business in the 1960s failed to make it beyond the 1970s. But while most conglomerates survived the recession of the early 1970s, they were no longer regarded with the enthusiasm they had enjoyed for over a decade.

The trend at the end of the twentieth century was for conglomerates to move from being large, unfocused behemoths to firms that created organizations focused on core capabilities. This means more companies began to avoid acquisitions that clashed with their business mix and focused on acquiring companies with related synergies. This, of course, is in direct opposition to the mindset of the conglomerate boom, when market focus and business streamlining were, at best, secondary concerns.

BIBLIOGRAPHY

Bagley, Edward R. Beyond the Conglomerates: The Impact of the Supercorporation on the Future of Life and Business. New York: AMACOM, 1975.

Matsusaka, John G. "Takeover Motives During the Conglomerate Merger Wave." Rand Journal of Economics 24, no. 3 (1993): 357–379.

Sobel, Robert. The Rise and Fall of the Conglomerate Kings. New York: Stein and Day, 1984.

Winslow, John F. Conglomerates Unlimited: The Failure of Regulation. Bloomington: Indiana University Press, 1973.

James T.Scott

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conglomerate (in business)

conglomerate, corporation whose asset growth, often very rapid, comes largely through the acquisition of, or merger with, other firms whose products are largely unrelated to each other or to that of the parent company. Merger to gain monopoly ( "horizontal integration" ) was notable at the end of the 19th cent.; somewhat later, acquisition of suppliers or buyers ( "vertical integration" ) became fairly common. Conglomerates did not emerge until the 1960s, when they quickly became popular among investors. Their stock prices often rose (and sometimes fell) spectacularly. Economic advantages attributed to the conglomerate include protection against overspecialization, availability of management expertise, and reduced costs. The rise of the conglomerate in the 20th cent. has been attributed to restrictions imposed by antitrust laws: As businesses were constrained within their own industry, they instead expanded into different markets. This trend greatly intensified during the 1980s and 1990s (see merger); a notable exception was ITT, which split up (1995) its companies to strengthen operations. The mid-2000s again saw the breakup of a number of conglomerates, most notably Cendant and Viacom, when investors seemed to favor more focused companies over larger companies with disparate businesses, but other conglomerates continued to thrive and grow.

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conglomerate

con·glom·er·ate • n. / kənˈglämərət/ 1. a number of different things or parts that are put or grouped together to form a whole but remain distinct entities. ∎  a large corporation formed by the merging of separate and diverse firms. 2. Geol. a coarse-grained sedimentary rock composed of rounded fragments (> 2 mm) within a matrix of finer grained material. • adj. / kənˈglämərət/ of or relating to a conglomerate, esp. a large corporation: conglomerate businesses. • v. / -ˌrāt/ [intr.] gather together into a compact mass: atoms that conglomerate at the center. ∎  form a conglomerate by merging diverse businesses. DERIVATIVES: con·glom·er·a·tion / kənˌgläməˈrāshən/ n. ORIGIN: late Middle English (as an adjective describing something gathered up into a rounded mass): from Latin conglomeratus, past participle of conglomerare, from con- ‘together’ + glomus, glomer- ‘ball.’ The geological sense dates from the early 19th cent.; the other noun senses are later.

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Conglomerates

Conglomerates

AEG A.G.

ALCO STANDARD CORPORATION

ALLIED-SIGNAL INC.

AMFAC INC.

ARCHER-DANIELS-MIDLAND COMPANY

BARLOW RAND LTD.

BAT INDUSTRIES PLC

BTR PLC

C. ITOH & COMPANY, LTD.

COLT INDUSTRIES INC.

ELDERS IXL LTD.

FARLEY NORTHWEST INDUSTRIES, INC.

FMC CORPORATION

FUQUA INDUSTRIES, INC.

GREYHOUND CORPORATION

GULF & WESTERN INC.

HITACHI LTD.

IC INDUSTRIES, INC.

INSTITUTO NACIONAL DE INDUSTRIA

INTERNATIONAL TELEPHONE & TELEGRAPH CORPORATION

ISTITUTO PER LA RICOSTRUZIONE INDUSTRIALE

JARDINE MATHESON HOLDINGS LTD.

KATY INDUSTRIES, INC.

KIDDE, INC.

KOÇ HOLDING A.Ş.

LEAR SIEGLER, INC.

LITTON INDUSTRIES, INC.

LOEWS CORPORATION

LTV CORPORATION

MARUBENI K.K.

McKESSON CORPORATION

MINNESOTA MINING & MANUFACTURING COMPANY

MITSUBISHI CORPORATION

MITSUI BUSSAN K.K.

NISSHO IWAI K.K.

OGDEN CORPORATION

SAMSUNG GROUP

SUMITOMO CORPORATION

SWIRE PACIFIC LTD.

TELEDYNE, INC.

TENNECO INC.

TEXTRON INC.

THORN EMI PLC.

TOSHIBA CORPORATION

TRANSAMERICA CORPORATION

TRW INC.

VEBA A.G.

WHITTAKER CORPORATION

W.R. GRACE & COMPANY

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Conglomerate

CONGLOMERATE

A corporation operating in several different and unrelated enterprises, such as the movie industry, baking, and oil refining.

A conglomerate merger is one that brings together two firms with totally different product lines, economic relationships, and functions. Such a merger may violate antitrust acts inasmuch as it may have an adverse effect on competition.

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