A Study of the Hehavioial
Characteristics )f Conglomerates
THOMAS DAVID WOOD
A DISSERTATION PRESiENTED TO THET C;ADLATE COUNCIL OF
THE UNIVERSITY OF FLORIDA iN PARTIAL
FULFILLMENT OF THE REQUIR"''T:?S FCr,' TIHE DEGREE OF
DOCTOR OF PHILOSOPHY
UNIVERSITY OF FLOR.IDA
THOMAS DAVID WOOD
ACKNOWIED iG.I ENTS
The author gratefully acknowledges ths invaluable assistounicc
of his supervisory committee chairman, Dr. Williard E. Stone,
whose patience and wisdom contributed materially to the preparation
of this dissertation. His encouidgement and suggestions at every
stage of progress were necessary to its final completion.
The author is also indebted to the members of his committee,
and especially to Dr. John B. McFerrin and Dr. Fredercic C. Coddard
for their help.
TABLE 01 CONTElNTS
Acknowledgments ....... . . . .. . iii
Abstract ........ . . . . . . . vii
I. Introduction . . . . . . .. . 1
Purpose ................... 3
Methodology . . . . . . . 4
Major Sources of Data . . . . . .. 5
Limitations . . . . . . . . 6
II. The Significance of the Hypotheses ...... 10
The Hypothesis That Conglomerates Are Diversi-
fied Companies . . . . . ... 1
The Hypothesis That Conglomerates Achieve Di-
versification Through Acquisition and That
Acquisitions Are a Continuing Phenomenon. 12
The Hypothesis That Conglomerates Have High
Earnings Growth Rate Goals . . ... 18
The Hypothesis That Conglomerates Are Aggres-
sive Acquirers . . . . . . 21
The Hypothesis That Conglomerates Sell Ac-
quired Firms Easily . . . . ... 23
The Hypothesis That Managcment of the Ac-
quired Firm Is Kept by the Acquiring Firm .. 24
The Hypothesis That Conglomerates Are Loosely
Structured with Many Divisions. . . .. 25
The Rationale for the Hypotheses as a Group. 27
III. Tests of the Diversification, Diversification Through
Acquisitions and Continuity of Acquisitions Hy-
potheses .... . . . . . . 30
Tests of the Hypothesis "hat Conglomerates Are
Diversify .-d . . . . . . . . 30
Tests of the Hypothesis That Diversification
Was Achieved Prir aril/ Through Acquisiticns. 34
Tests of the Hypothesis That Acquisitions Are
a Continuing Pheno,-enon . . . ... 55
IV. Tests of the Ciowth latec, Aggre:siveness and
Ease of Soel-Off IypoLheses. . . 65
Test, of the Ilypothesis That Conglomerates
Have Iigh Growth Rate Goals. . . . 65
Tests of the llypothcsis That Cong)loictates
Are Aggressive Acquirers . . . .. 72
Tests of the Hypothesis That Firms Acquired
Are Easily Disposed Of. . .. ..... 89
V. Tests of the Hypotheses That Congloiera~.'s Retain
Management of Acquired Firm! and the Structure
of Conglomerates. . . . . . . 94
Tests of the Hypothesis That Management of
Acquired Firms Is Retained . . ... 94
Tests of the Hypothesis That Conglomerates Are
Loosely Structured Organizdtionally with MaIny
Divisions . . . . . .. . 98
VI. The Conglomerate: Its Nature and Implications for
the Future . . . . . . . .. 106
The Behavioral Pattern of the Conglomerate . 108
Implications for the Future . . . . 109
Conclusion. . . . . . . . . 118
I. A List of Selected "Conglomerates" ....... 121
II. Sales Mix and Product Variety by Company . 122
III. Specified Growth Rate Coals as Stated by the Firrs 130
IV. Earnings Growth Rates Achieved . . ... 131
V. Extent cf Divisionalizaticn. . . . . . 133
VI. Degree of Autonomy Given Divisions . . . 135
VII. Structure and Function of Executive Manmgement 136
VIII. Earnings Purchased by Year for Each Company
and Price Pair fer Total Earnings Purchased 139
DI. Impact of Purchased Earnings on Total Earnings 150
X. Comparison of Firms Retained with the Number of
Divisions .......... ....... 193
Selected Bibliography . . . . . . . . 195
Biographical Sketch. .... . . . . . . 199
Abstract of Dissertation Presented to the
Graduate Council of the University of Florida in Pasrial 'ulfilmnnl
of the Requirements for the Degree of Doctor of Philosophy
A STUDY OF THE BrFlAVIORAL,
CHARACTERISTICS OF CONGLOMTI:R'ToES
Thomas David Wood
Chairman: Dr. Williard E. Stone
Co-Chairman: Dr. S. C. Yu
Major Department: DeparLtent of Accounting
The importance of conglomerates necessitates a study of thli
behavior. Eight behavioral characteristics attributed conglomerates
financial writers and analysts have been hypothesized and each hy-
pothesis tested. Forty--three firms commonly regarded as conglom-
erates were used to accumulate data appropriate to the tests of the
The hypothesized characteristics are:
1. Conglomerates are diversified corpanics.
2. The diversification of conglomerates is accomplished
3. Acquisitions are a continuing phenomenon.
4. Conglomerates have high earnings per share growth
5. Conglomerates are aggressive acquirers.
6. Conglomerates c-t afford to experiment with their
acquisitions. Poor selections are disposed ot as
going concerns roie easily than components which
were gained through internal expansion.
7. Management of the acquired firm is retained. Re-
tention of management is likely to have attendant
8. Conglomerates are rather loosely structured organi-
zationally. Larger acquisitions are made into divi-
sions and the divisions operate nearly autonomously.
Tests of the hypotheses were as follows. Tests of tne di-
versification hypothesis are the firms' sales mix and product variety.
There are three tests for the hypothesis that diversification was
achieved through acquisitions: goals of the firm, the frequency of
acquisitions and the effect of earnings purchased on the total earn-
ings of the conglomerate. The hypothesis that acquisitions are an
on-going activity was tested by the frequency of acquisitions,
growth rate goals of the firms and motivations basic to acquisition
Four tests were made of the hypothesis that conglomerates
have high growth rate goals; stated goals of the firms, growth rates
achieved, emphasis on growth through acquisition rather than through
internal means and the magnitude of the effect of purchased earnings
on the conglomerates' total earnings. The hypothesi., that conglom-
erates are aggressive acquirers was tested by: t1.e ftrquency of
acquisitions, sell-off activity, bidding for prospective firns, rmove-
ment of purchase price over time and the variety of purchase te:ms
used. There are three tests of the case of sell-off of acquired
firms hypothesis: sell--off activity of the selected conglomerates,
stated policy of the firms and retention of management of acquired
The hypothesis that management of acquired firms is kept
was tested by reference to the policy of the firms with respect to
retaining management, contingent payments to management based on
future profits and stock options offered management of firms acquired.
There are five tests of the hypothesis that conglomerates are loosely
structured: the number of divisions of the conglomerates, method
of operating their divisions, purchase price payments contingent an
future profits, the structure and function of the firms' executive
management and central office functions performed for divisions.
Based on the results of the tests all the hypotheses were
accepted as characteristics of conglomerates.
It was concluded that there are several significant impJlcation:
for the future, assuming that conglomerates continue to behave as
they have in the past. Among the implications are: 1) continued
diversification to achieve the benefits of rirk reduction both by
congloiimILrtes and other firms competing for capital funds; 2) an
increase in the size and number of firms acquired; 3) prices for
potential candidates for take-over w 11 likely rise. This will ne-
ccssitate greater returns on investment; 4) a decline in the rate of
merger failures will follow as conglomerates and other firms become
more expert; 5) management efficiency and specialization will need
to be increased and appropriate training methods devised; and 6)
conglomerate behavior will promote a greater need for the study of
what motivates management and investors.
The number of mergers and acquisitions in American business
rose sharply in the years 1966, 1967 and 1968. In 1966, 1,746
mergers were consummated1 and in 1967, 2,975.2 There were
nearly 4,500 mergers in 1968.3 Acquisition activity in these three
years may be compared with that in three earlier periods. Between
1895 and 1904, a ten year period, there were 3,012 acquisitions.
In the seven year period from 1925 to 1931, 5,846 mergers and ac-
quisitions took place5 and in the eleven years from 1955 to 1965
there were 5,609 acquisitions.6
Much of the growth in acquisition activity has been attribute'
1Advertising Age, XXXIX, No. 13 (March 25, 1968), 1.
211id., XXXIX, No. 14 (April 1, 1968), 4.
4U.S. Department of Commerce, Su~-ve of Current r usin)ss,
1957-1959, "lIistorical Statistics oi the U.S.," p. 572.
:; ._ ,__,- ". '_ I, No. 1 (Fall, 1965), 39.
to a number. of corporite acquirers whose expansion, rz methods do
not fit the traditional pattern. Companies in this group have IbG n
given the narme conglomerates or financial congoloncrdtes. iMost of
the firms commonly placed in this category have been in existence
less than fifteen years, and part of the reason for their increasing
prominence is their rapidly growing size. For example, in the 1967
Fortune magazine'ss 500 largest U.S. corporations, there are thirty-
three companies classified as conglomerates.7 Three of these were
not in the 1966 list, and only eleven of the thirty-three were on
the 1955 list in one corporate form or another.
There are at least two reasons, then, for the increasing im-
portance of conglomerates in the U.S. economy. One is the impact
of conglomerates on the number of acquisitions and mergers. An-
other is the growth in the size of conglomerates, and their contri-
bution to Gross National Product. Their importance can be measured
by the attention given them by financial writers and analysts and by
the interest shown in the conglomerates' equity securities by the
securities markets .
Conglomerates have much significance for accountant. The
growth of the conglomerate form has contributed to the begnninnn of
7r'ortur IXXVII, No. 7 (June 15, 1968), 206ff.
a re-evaluation of the purchase technique versus the pooling of in-
terest technique in preparing consolidated financial statements. This
is of particular importance because most financial statements read
by the public are consolidated. It follows that part of the accoun-
tant's training must center on consolidation principles and procedures.
Another reason for the significance of conglomerates to accountants
is the consequences for income tax purposes. One such conse-
quence is the possibility of a taxable gain or loss where securities
are exchanged or in a cash transaction. A second consequence is
the possibility of a required adjustment to the depreciable basis of
assets involved in the transaction.
If appropriate accounting procedures or techniques are to be
applied, or new ones developed, accountants and others must have
an understanding of conglomerates. One aspect of a complete un-
derstanding of conglomerates is an understanding of the manner in
which conglomerates act. Thus, it is a proper object of inquiry to
investigate the behavioral characteristics of conglomerates.
This dissertation will hypothesize the behavioral characteris-
tics of conglomerates. Tests of the validity of the hypotheses will
be made. As a result of the tests, the hypotheses will be accepted
NIe lI u cliv
After a study of the financial literature, the following eight
hypotheses are examined and tested:
1. Conglomerates are diversified companies.
2. The diversification of conglomerates is aCOcplished
3. Acquisitions are a continuing phenomenon.
4. Conglomerates have high earnings per share growth
5. Conglomerates are aggressive acquirers.
6. Conglomerates can afford to experiment with their
acquisitions. Poor selections are disposed of as goinc
concerns more easily than corr.ponents which were
gained through internal expansion.
7. Management of the acquired firm is retained. Retentioc
of management is likely to have attendant advantages.
8. Conglomerates are rather loosely structured organiza-
tionally. Larger acquisitions are made into divisions,
and the divisions operate nearly autonomously.
The hypotheses se:.e the purpose of guiding the selsctio:' of
The data were accumn-late from the stud of the beh'.'rr of
forty-three companies selected because they are commonly legardcd
as conglomerates by financial writers and journals. These firms
are taken as representative of the conglomerate category, and they
are listed in Appendix I.
Major Sources of Data
Among the primary sources of data are:
1. Annual reports of the selected firms. For the most
part, the reports for the years 1963 to 1968 were used.
Data shown as 1968 data include those of corporations
with fiscal years ending in the first six months of
1969. These reports were the basic source for deter-
mining objectives of the firms and financial information.
2. Listing Statements to the New York Stock Exchance.
Financial information relative to firms acquired was ob-
tained from this source. In addition, certain qualita-
tive information concerning factors influencing the ac-
quisition decision was found.
3. Evaluations and analyses by brokerage firms and invest-
ment analysts. These provided fruitful sources of data
about the history of the firms.
Appendices begin on p. 120.
4. Articles in financial journals anid newspapers. These
provided a variety of information, including supplemtn-
tary data to announcements by official, of the firms.
5. Reprints of speeches made by company officers.
Other sources, such as Moody's Investor's Services and
Standard and Poor's,were used mainly as secondary sources with
which data independently gathered could be compared.
Whenever a selection process is applied, limitations arise.
No attempt will be made to examine every possible candidate for
designation as a conglomerate for data relevant to the hypotheses.
Such an undertaking is clearly unmanageable. It is necessary to
choose certain companies as representative of the whole category.
The forty-three companies were selected after a broad review of the
literature of finance, and the firms chosen are those most frequently
classified as conglomerates.
Limitations on data had a bearing on the firms selected.
Data concerning acquisitions are available in sufficient detail only
in the company's annual report or in the New York Stock Exchange
Listino Statements. There are no comparable documents to the List-
ing Statements for firms listed on the American Stock Exchrage.
Thus, where annual reports are not sufficiently explicit, data are
not available. For this reason, firms selected are New York Stock
Exchange listees only.
The lack of data poses certain limitations. While an attempt
was made to gather pertinent data for every acquisition of each of
the selected firms, such information is not available in every case.
It is not common, for example, for firms to supply the purchase
price of firms acquired in transactions where cash only is used.
Occasionally, this information can be obtained, but such instances
are rare. The lack of data in cash purchases is not considered
critical because the bulk of acquisitions are not purely for cash,
although for analytical purposes it would be useful to have the cash
For some transactions in stock, particularly smaller acqui-
sitions, the purchase price cannot be determined. Data sources, as
stated, are mainly Listing Statements with the New York Stock
Exchange. These Listing Statements are required only when the ac-
quisition involves the issuance of additional securities. Thus, when
the purchase can be consummated with treasury shares, data need
not be published unless the acquiring firm chooses.
Especially in the acquisitions of smaller firms, income data
of the acquired firmare often unavailable, even though the purchase
price may be ascertained. Films such as Telcdyne, U.S. Industries
and others make a practice of buying smaller fiums.
Aside from the limitations on acquisition data, additional in-
formation is frequently not available. For example, some ianagio-
ments do not provide sales figures in a fashion -conducive to decr-
mining sales by industry. Others do not publish sales mix data.
In some instances estimates can be made, and where this was
possible it has been done.
Some firms do not state the objectives or goals of the firm.
An example of a goal which has been stated by many of the firms is
the goal of a high rate of growth of earnings per share. This is
relevant information for several of the hypotheses.
Certain motivations which may influence behavior arc often
not explicit. In these cases, it is possible to look only aL the
effect rather than the cause. An example may be given with respect
to the motives which lead a particular company to acquire other
firms. Management may not explicitly state the reasons for acquir-
ing, but,if diversification follows, it is possible that a motive for
acquiring other firms is diversification. This is not to say that each
acquisition of each of the selected firms will be evaluated as to
underlying motives, for such is not the intention. Rather the motives
for acquiring will be evaluated only in broad perspective as they are
relevant to the hypotheses.
Post-acquisition earnings data of the acquired company can-
not be determined because of the reporting techniques of conglom-
erates. Divisional reports are not made public, and the earnings
information of a particular acquired firm is not available once the
merger is consummated. Thus, the effect of a single acquired
firm on the acquiring firm cannot be assessed. For this reason, in-
formation concerning the influence of the acquired firm on the growth
of earnings per share of the acquiring firm must be reported by the
acquiring firm or the information cannot be known. These data are
important to a comparison of internal versus external earnings growth.
At least in large measure, internal growth in earnings comes from
the expansion of earnings of previously acquired firms. Fortunately,
many of the selected firms have published earnings growth data in
one form or another.
Finally, although no empirical data were gathered to support
or refute this conjecture, the author believes that the behavioral
characteristics hypothesized here are not general characteristics of
all corporations, but rather they are peculiar to conglomerates.
THE SIGNIFICANCE OF THE HYPOTHESES
In this chapter, the hypotheses set out in the previous chap-
ter will be examined in turn. As each hypothesis is presented, se-
lected references to financial journals and analysts will be made to
demonstrate the significance of the hypothesized behavioral charac-
teristics, and a logical defense of each hypothesis will be made.
Finally, a line of reasoning will be offered to show how the hypoth-
eses cohere as a group.
The Hypothesis That Conglomerates Are Diversified Companies
Financial writers and analysts consider diversification as a
behavioral characteristic of conglomerates. One writer calls con-
glomerates ". . enterprises which combine a variety of unrelated
business under a single roof." Ira U. Cobleigh believes that con-
glomerates are lineal descendants of the old business trusts except
1'Rapid Growth Through Mergers," Financial World, CXXV,
No. 14 (September 6, 1966), 14.
that conglomerates are in several industries.2 He calls conglo;.-
erates "diversified multiple companics'3 IHarvey H. Segal des-
cribes a conglomerate as a ". group of companies v.hich op-
erate in separate markets and are held together by bonds of financial
and administrative authority.' A business periodical states that a
motive for acquisition is diversification. Most descriptions of
conglomerates contain a reference to their diversification.
Given certain assumptions about the effects of the behavior
of conglomerates, it can be reasoned that conglomerates should di-
versify. For example, if it is assumed that a higher market price
per share of a conglomerate's stock is more desirable than a lower
price, per dollar of earnings, and if it is assumed that diversifica-
tion has the effect of reducing business risk by spreading it, then
it seems to follow that a lower capitalization rate would be applied
by the market to the earnings of a diversified firm than to those of
a firm which is not diversified. This will yield a higher market
price for the diversified firm's shares, all other things equal.
2Ira U. Coblcigh, "Conglomerate Comments," Commercial and
Financial Chronicle, CCVII, No. 6790 (December 19, 1968), 4.
4Harvey H. Segal, "The Urge to Merge: The Time of the
Conglomerates," New York Times ,Magazin (October 27, 1968), p. 32.
S..-: (March 2, 1968), p.39.
The assumption that a higher price per share is more desir-
able than a lower price is not unrealistic for at least two reasons.
First, the higher the price per share, the fewer shares that must be
given to acquire another firm. Second, it seems obvious that the
conglomerates' shareholders prefer that their shares have a higher
price in the market than a lower one. Management holding stock
options is also likely to have a preference for the higher price.
The Hypotheses That Conglomerates Achieve Diversification Throucgh
Acquisition and That Acquisitions Are a Continuing Phenomenon
These two hypotheses are conveniently treated simultaneously
because once conglomerates begin to acquire for diversification, or
for whatever reason, there is an incentive to continue to acquire.
This will be explained below.
In financial literature it is commonly stated thaL diversifica-
tion came about through acquisitions and that acquisitions continue.
Cobleigh, quoted earlier, went on to describe conglomerates as
diversified companies ". . created through a series of acquisitions
and amalgamations of companies . .."6 Another financial
analyst describes conglomerates as diversifying through acquiring
other firms.7 Moreover, acquiring other firms is an on-going
6Cobleigh, oo, cit.
Joseph D'Alco, "The Conglomerates, A Wall Street Appraisal,
Mcrgers and Acouisitions, III, No. 3 (May-June, 1968), 53.
activity according to the same analyst. Acquisitions arc routine,
a part of the doy-to-day operation of the company. Another writ-
er believes that continued acquisition is necessary in order to mair
tain high growth rates in earnings.
Conglomerates may be expected to diversify through acquisi-
tion because there are several advantages to this type of diversifi-
cation over diversifying by expanding internally. Among the advan-
1. Acquisition is quicker.
2. It may be less costly.
3. Financing may be easier.
4. There is less risk.
5. Tax considerations may be favorable.
6. Competition may be eliminated.10
An explanation of each of these advantages seems in order.
When an acquisition occurs, revenues are generated immredi-
ately and the desired effect of diversification is achieved at once.
"Conglomerates--Pros and Cons," Financial World, CXXX,
No. 5 T(uly 31, 1968), 27.
10J. Fred Weston and Eugene F. Bligham, Manacerial Finance
(2d ed.; New Y3rk: Holt, Rinehart and Winston, I19C6), pp. 636f.
When diversification is undertaken by internal means, time must be
allowed for start-ups, test runs, etc. Moreover, a market is
likely to exist for the acquired firm's product, while markets must
be developed for products newly conceived.
Whether diversification through acquisition is less expensive
than through internal means cannot be demonstrated a posteriori.
The reason is that internal investment and acquisition cannot both
be done to carry out an identical diversification plan. Thus, no
comparison can be made. However, it can be argued a prior that
under certain conditions acquisition may be cheaper. For example,
in instances when share prices are depressed it is likely that buy-
ing a firm's stock is less expensive than building new facilities.
Diversification through acquisition can be financed more
easily than diversification through internal means because equity se-
curities may be used only in the former case. This conclusion re-
quires the following assumptions. First, the firm is starting at a
given size and wishes to expand and diversify. Second, equity se-
curities are "easier" financing than raising cash. Third, the major-
ity of internal diversification requires cash. The required assump-
tions are not too limiting if a firm can be imagined existing at a
point in time, desiring to diversify, and lacking the required cash
Acquisitions involve less risk than internal diversification be-
cause going concerns can be sold more easily and with less chalue
of loss than individual components. This is true partly because the
management of a going concern may accompany it, which is not
likely to be the case if a plant is sold off, and partly because a
market exists for going concerns. Both these points are discussed
in more detail under the aggressiveness hypothesis, the ease of
selling acquired firms hypothesis and the retention of management
Tax considerations are several. First, stock for stock ex-
changes generally are tax-free. Thus, no income tax consequences
are likely to arise when one firm acquires another by exchanging
equity securities. This, of course, is beneficial to the seller,
whose gain may be deferred until the securities are sold. Under
the purchase method of recording acquisitions, the buyer may acquire
a stepped-up basis in assets for depreciation purposes when cash or
debt are used as the medium of exchange. Second, the buyer may
purchase net operating loss carry-overs because of the ability to
carry losses backwards (or forwards) against the buyer's own income.
Such a loss can bring immediate tax relief of about forty-eight cents
per dollar of loss purchased. It is possible for the value of the loss
carry-ove- to approximate the selling price makirg the acquisition
extremely attractive. Third, loss carry-overs of the buyer may
enable it to pay a sizeable premium for an acquired firm's income
stream which will come tax-free to the buyer because of the effect
of offsetting the buyer's prior losses against the acquired firm's in-
come. None of these tax advantages are applicable to diversifica-
tion through internal expansion.
As for the elimination of competition, it appears that, in
view of the current tone of anti-trust sentiment as manifest in the
Ling-Temco-Vought and Jones and Laughlin Steel Company merger
and the proposed merger between International Telephone and Tele-
graph and the American Broadcasting Company, the conglomerate
would find it unfavorable to give evidence of attempting to eliminate
competition, whether it expands internally or externally.
Except for the sixth factor, elimination of competition, all
the factors mentioned give substantial reason to expect that con-
glomerates would diversify by acquisition rather than by internal
The rationale for the third hypothesis, that conglomerates con-
tinue to make acquisitions, is complex. This is true because it
involves a determination of the motives of the conglomerate to ac-
quire other firms.
It may be well to point out that motives are human traits,
not corporate ones. Thus, the use of the phrase "motives of the
conglomerate" means motivations of the conglomerate's management.
Similarly, the notion "conglomerate behavior" is intended as a mari-
festation of the motives of its policy makers.
One important reason for expecting conglomerates to continue
to make acquisitions is so that the conglomerate can maintain high
earnings per share growth rates. To generate a high growth rate is
sufficient reason for beginning acquisitions. There are myriad other
reasons, such as to provide diversification, to forestall failure and
renew the firm's life cycle, to avoid anti-trust action, to take ad-
vantage of tax losses, to simply expand, to acquire management, to
gain leverage or liquidity, to exploit an advantage or to simply build
a company of the General Motors type.
Of course, motives can change. For example, a motive to
acquire to take advantage of existing tax loss carry-overs will ul-
timately become meaningless as the losses are fully absorbed. This
motive is likely to be replaced by one or several of the others.
Once the acquisition program is begun the impetus to continue
to acquire is great because if the growth rate falls, the market is
likely to value the firm's stock downward. This can create other
problems for management who, it has been stated, prefer higher
share price. to lower ones.
This hypothesis must be given a broad rather than a strict
interpretation. Carried to its logical extreme, it suggest:; that con-
glomerates will continue to acquire other firms indefinitely. Ob-
viously, this is impossible inasmuch as the number of firms avail-
able to be acquired is not infinite.
The Hypothesis That Conglomerates Have High Earnings Growth
Financial journals have been replete with articles, analyses
and market recommendations extolling the "growth" potential of con-
glomerates. Conglomerates are commonly regarded as "growth" com-
panies, and this is stated as a truism not requiring substantiation.
The literature has many examples of high earnings growth rates
generated by conglomerates. Earnings growth rates as high as 36
per cent compounded annually between 1961 and 1965 for Litton
Industries,11 15 per cent for Textron in the same five year period,12
and 14.5 per cent for FMC from 1956 to 196513 may be cited.
Forbes has stated that conglomerates set high growth rate goals in
11The Magazine of Wall Street, CXIX, No. 11 (February -,
12Ibid., CXIX, No. 8 (December 24, 1967), 351.
131bid., CXIX No. 11 (February 4, 1967), 43.
14"The Multi-Companies: Conglomerate, Agglomerate and In-
Between," Forbes, CIII, No. 1 (anuary 1, 1969), 77.
It is expected that conglomerates should strive for high
growth rates in earnings per share. A theoretical example will
illustrate how the growth in earnings may be generated.
To achieve some increase in earnings per share in a given
time period under ceteris paribus conditions of intern li growth, it
is necessary only that the acquiring firm find a willing prospect
with a lover price-earnings ratio. Assume an acquiring firm with a
price-earnings ratio of 15 and a prospective acquired firm with a
price-earnings ratio of 10. Assume, further, that the acquiring
firm's earnings par share are $1.00 and the acquired firm's, $2.00.
The market price of the acquiring firm's shares is S15.00 and the
price of the acquired firm's is $20.00. The acquiring firm can pay
up to fifteen times the earnings of the acquired firm in the acquiring
firm's own shares and still increase its own earnings per share.
Assume the acquiring firm is willing to pay fourteen times
the acquired firm's earnings, and that they agree to exchange com-
mon stock on that basis. This price represents a 40 per cent pro-
mium over the market price of the acquired firm. For simplicity,
further assume that both acquiring firm and acquired fLrm have 1,000
shares of common stock outstanding. The acquiring firm will give
$28,000 for tlh acquired firm (1,000 shares times $2.00 car ings
per shar- ti;nr fouitet-).). In its own shares, the acquiring film
must give ],867 shares (--- ). Added to the 1,000 sharc ail-
ready outstanding, the acquiring firm now has 2,867 shares our-
standing. Taking into account the earnings purchased from the ac-
quired firm, the acquiring firm's total earnings rise from $1,000
($1,000 x $1.00) to $3,000 ($1,000 + $2,000). With 2,867 shares
now outstanding, the earnings per share of the acquiring firm is
equal to about $1.05 per share ( 2'867 ). This results in an in-
crease in earnings in this period of 5 per cent, solely as a result
of the act of acquiring.
It may be seen from the example that a desired annual gro>.
in earnings may be manipulated to a limited extent by varying the
premium paid for an acquired firm. This is especially true in case
where the price-earnings ratio of the acquirer is two or three times
that of the prospective acquired firm. A high growth rate can be
generated while at the same time large premiums over market price
can be paid to the acquired firm's shareholders.
The example presented may also demonstrate, at least im-
plicitly, why conglomerates desire high growth rates. High growth
rates in earnings are likely to create a favorable appraisal by the
market of the conglomerates' shares, perhaps resulting in still a
higher price-earnin.gs ratio. The higher the price-earnings ratio of
the acquiring firm, relative to that of the acquired firm, the higher
the growth rate that may result.
This rationale for high growth rate goals also scrvL; as
grounds for ihe hypothesis that acquisitions are a continuing phe-
nomenon for co;glornerates. Under the favorable relative price-
carnings ratios described above, more acquisitions yield more
earnings, and so on. In addition, a cessation of acquisition ac-
tivity may cause a decline in earnings growth which may be viewed
unfavorably by the market, with obvious undesirable effects on the
Corollary to the third and fourth hypotheses, that acquisi-
tions are a continuing phenomenon and that conglomerates have high
growth rate goals, is the notion that growth rates are generated
more by acquisition than by internal means. This is rasoned on
grounds presented earlier, that expansion is more easily accomplished
by acquiring going concerns than by internal means.
Tr.. r. r i .
The belief of financial writers and analysts that conglome-
ates have aggressive acquisition policies is exemplified by Joseph
D'Aleo, cited earlier. He describes conglomerate acquisition be-
havior as offensive rather than defensive. Conglomerates acquire
when the opportunity presents itself, not with a view toward seeking
balance in their acquisition:.1 One writcz has described the
15D'Aieo, o2p. cit., 53.
acquisition policy of conglomerates as "ambitious."16 Barton M.
Biggs believes that conglomerates must acquire miol fiui- or bigger
ones to avoid a decline in growth rates, and as a consequence a
decline in the price-carnings ratio.17 Biggs also suggests that
competition for likely candidates for take-overs requires that con-
glomerates be aggressive in their acquisition policy.18
The rationale for the aggressiveness hypothesis is partly do-
pendent on acceptance of the reasoning of the preceding four hy-
potheses, partly on the reasoning of the hypothesis that acquisition
are easily sold and partly on conditions of the market for going
concerns. The chain of reasoning is as follows: given that con-
glomerates desire to diversify and to maintain a high growth rate in
earnings, and given that both these desires are fulfilled through ac-
quisitions, then conglomerates must pursue potential candidates.
There are many conglomerates, each pursuing firms. This creates a
market where demand for possible acquisitions is heavy. Such a
market, where demand is heavy, is likely to promote aggressive
acquisition policies inasmuch as mistakes can be easily overcome b
16What's a Conglomerate?" ri __ (August 10,
1968), p. 70.
17Barton M. Biggs, "Day of Reckoning?" Barron's, XLVII,
No. 3 (L.pril 3, 1967), 3.
selling off undesirable acquisitions. Thus, the conglomerate can
afford to be aggressive in its acquisitions and may even experiment
by buying firms conditionally,19 knowing that they can be sold
The Hypothesis That Conglomerates Sell Acuired. Firms Easily
Many financial writers believe that it is characteristic be-
havior of conglomerates to sell firms acquired in relatively large
numbers. One journal has estimated that 10 per cent of all acqui-
sitions in 1967, 20 per cent of 1968 acquisitions and 30 per cent
of those in 1969 were purchases of firms from conglomerate ac-
quirers.20 Other writers believe that sell-offs are numerous, and
that they are a result of the failure of an acquisition. According
to one analyst, conglomerates have the highest merger failure rate
of all firms, 42 per cent.21 Eamon M. Kelly has asserted that con-
glomerates have a high failure rate, and consequently they sell
many acquired firms.22 The main reason for the failure is that too
19Edith Penrose, The Theory of the Growth of the Firm
(New York: John Wiley & Sons, Inc., 1959), p. 179.
20Mergers and Acquisitions, III, No. 6 (November Decem-
ber, 1968), 63.
21John Kitching, "Why Do Mergers Miscarry?" Harvard
Business Review, XLV, No. 6 (November-December, 1967), 91.
22Eamon M. Kelly, The Profitability of Growth Throuh
Mergers (The Pennsylvania State University, 1967), p. 65.
low a capitalization rate is applied to the expc'.:Lcd earnings stream.
In other words, Kelly believes conglomerates pay too much for their
acquisitions ,causing merger failures and scll-offs.
It has already been reasoned that an existing market for
going concerns facilitates sell-offs of acquired firms. Conglomer-
ates may prefer to sell whole firms on the grounds that it is less
expensive than divestiture of equivalent assets in an ad hoc fash-
ion when expansion has been internal. This reason is supported by
the rationale for the seventh hypothesis, that management of the
acquired firm is kept. Moreover, because a sale presupposes a
buyer as well as a seller, the buyer's preference for a going con-
cern for reasons previously stated will make going concerns more
by the Acouiring Firm
One significant factor, cited by at least one writer in fi-
nance, in determining if a firm is to be acquired and what police is
to be paid is whether the acquired firm's management will remain.23
He believes that a firm is more valuable as a potential candidate
for take-over if its management will accompany the firm. The
23 Merers and Aceuisitions, III, No. 1 (January-February,
MtiC gzin of Wall Strect has stated that managenecnt, including
that acquired by the conglonirate, may be the congloi.erati's main
asset,24 and this seems to sum up the general tone of the litera-
ture with respect to the retention of management.
The reasons that conglomerates are expected to retain man-
agement of an acquired firm are several. First, a firm with man-
agenent in place is more readily saleable than one whose manage-
ment will not accompany its firm. The reason is related to a sec-
ond reason; management familiar with the firm's operations is like-
ly to facilitate assimilation into the conglomerate. Third, consider-
ing the degree of diversification of the conglomerate and the number
of unrelated industries in which the conglomerate operates, the ac-
quired firm's management is much more likely to understand the in-
dustry and product of the firm acquired than is the conglomerate's
management. Fourth, if the firm is acquired primarily for its dem-
onstrated earnings capability, it may disturb that capability if the
maongermert responsible for making the earnings is replaced.
The Hypothesis That Conolomerates Are Loosely Structurre With
Mane Divisi ns
Those who write about conglomerates believe it is
2"What's in Store Now for Conglomerates?" The M- nazine
of Wall S;reet, CXXT, No. 13 (Varch 16, 1968), 33.
characteristic of conglomerates that they operate acquired firms on
a decentralized basis in the areas of both management and account-
ing.25 Again, another journal reports that management of conglom-
erates is decentralized, each acquired firm operating almost inde-
pendently of the management of the conglomerate.26 Mioreover, con-
trol over the acquisition is limited, and operational integration of
the acquired firm is not an objective of the conglomerate.27 There
exist little or no common facilities between the acquired firm and
the acquiring firm, and almost no inter-company transfers of goods
The rationale for this hypothesis is relatively simple and
partly relies on the reasons developed under the hypotheses that ac-
quired firms are easily divested and that management of acquired
firms is kept. A firm fully integrated with its affiliates, with com-
mon accounting systems, management, facilities, etc. is much less
likely to be saleable if a sale is desired, than a firm which is kept
decentralized. In addition, there is a considerable degree of
2A. A. Sommer, Jr., "Conglomerate Disclosure: Friend or
Foe?" Journal of Accountancy, CXXIII, No. 5 (May, 1967), 64.
26The Magazine of Wall Street, CXXI, No. 13 (March 16,
1968), 33. op. cit.
28A. A. Sommer, Jr., 2p. cit.
unrelatedness between the various acquired firms of one conglomer-
ate, for example, a bank, a food service company and a steel mill.
Moreover, there is a lack of familiarity of the conglomerate's man-
agement with these diverse areas. Thus, the management of the ac-
quired firm needs a high degree of autonomy in the operation of his
The number of divisions of a conglomerate is, of course,
dependent on many factors, only one of which is the need for de-
centralization. It does not necessarily follow that decentralization
requires that each acquired firm be made a division. In some in-
stances one acquired firm may be made into several divisions, or
several acquired firms may be placed in a single division. It does
seem reasonable, however, that in a general sense there is a direct
relationship between a desire for decentralization and creating a di-
vision for each unrelated acquisition on the grounds that division-
alization is one means of decentralization.
The Rationale for the Hypotheses as a Group
While almost all of the hypotheses have a rationale indepen-
dent of the others, it is apparent that the rationale for several of
the hypotheses is nearly identical. This is true because all the
hypotheses set out are interrelated, that is, they are logically con-
To demonstrate the coherence of the hypotheses, the follow-
ing line of reasoning is offered. Conglomerates acquire firms for
various reasons. Two important reasons are the desire to diversify
and the desire for high growth rates in earnings. Diversification is
desirable because it tends to reduce risk. Other things equal, risk
reduction will likely increase the price-earnings ratio by lowering
the rate at which earnings are capitalized. High growth rates in
earnings may have the same effect, that is, to raise the price-
earnings ratio. A higher price-earnings ratio means that the firm's
shares sell higher relative to those of firms with a greater risk and
a lower earnings growth rate. Higher share prices of the acquiring
firm are more desirable than lower prices. One reason higher prices
are more desirable is that acquisition is easier when the price-earn-
ings ratio of the acquiring firm is higher than that of the acquired
New acquisitions are a means of achieving both diversification
and high earnings growth rates. Often acquisitions are a better ve-
hicle to attain these goals than internal expansion. Once a con-
glomerate has a reputation for high growth rates, there is a strong
incentive to continue acquiring other firms, or the conglomerate's
earnings growth rate may stall and its shares will likely face a
downward re-evaluation by the market. This is to be avoided be-
cause the higher the conglomerate's share price, relative to its earn-
ings, the easier it is to acquire other firms.
Because conglomerates have a strong impetus to acquire, and
because the number of possible candidates is finite, there arises
competition among acquiring firms for firms to acquire. This com-
petition requires that conglomerates be aggressive in their acquisition
policy. The more aggressive the conglomerates become, the more
intense the competition for acquiring firms becomes. This great de-
mand for firms, coupled with a limited supply, helps create a sec-
ondary market for firms. That is, firms acquired by conglomerates
may be more easily sold to other acquiring firms.
The sale and resale of going concerns is facilitated by many
factors. One important factor is that the management of the acquired
firm may accompany it, bringing experience in the industry and fa-
miliarity with the internal operations of the firm. Another factor
making resale easier is that acquired firms are not fully integrated
into the acquiring firm. One reason for keeping acquired firms de-
centralized may be the possibility that a later sale may be desirable.
Another reason is the lack of interrelationship between the compo-
nents of the conglomerate because of its diversity.
ACQUISITIONS AND CONTINUITY OF AC(QUISIONS HYPOTHESES
The behavioral characteristics of conglomerates have been
posited as hypotheses. The validity of the hypotheses must be
tested, and the first three hypotheses will be tested in lihs chapter.
For each hypothesis tests will be presented along with a defense of
each test. Tests are made by reference to data compiled from a
study of the forty-three firms selected as representative of the con-
glomerate category. As each test is completed, the significance of
the test will be presented. Finally, once all tests of these hypoth-
eses have been accomplished, the hypotheses will be accepted or
rejected and the reasons for acceptance or rejection stated.
Tests of th ...- -
There are two tests for diversification: sales mix and product
variety. Sales mix means the number of industries in which the
firm operates. Product variety means the number of different products
(or services) of the firm. For purposes of this dissertation diversi-
fication means that no one oart of the firm's business contributes
50 per cent of its sales, and that the firm does not have dependence
on one product or service. Thus, if the hypothesis is to be accept-
ed, conglomerates must have multiple products and sales spanning
at least three industries.
The test of the hypothesis by reference to sales mix data
may be defended on the grounds that diversification carries with it
a notion of independence from the cyclical effects of an industry.
Independence cannot be said to exist when one-half or more of
sales are made to a particular industry.
Sales mix data of the forty-three firms are presented in
Appendix II. The per cent of the companies' total sales in each
industry or technology is shown. Five of the firms have not made
sales mix data available, and no reliable method of estimation could
be found. A limited number of the remaining firms report their sales
mix in such broad terms that interpretation is difficult. For example,
Gulf & Western reports 49 per cent of its sales from "manufacturing.
The classification "manufacturing" does not fit an industry or a tech-
nology category, and it does not properly relate the diversity that
exists, for example, between the manufacture of tobacco products
and the manufacture of wire and cable or automobile parts.
There are thirty-eight companies for which data are available.
Three of these have sales of 50 per cent or more in a single industry
AMK, Indian Hcad and Parker.-Hannifin. Of the remaining thirty-five
firms, each had its sales spread between three and ten industries,
with no one industry contributing a preponderance of sale, dollars.
Almost one-half of this group, sixteen firms, have silcs in at l]cst
six industries, and seven firms have sales in eight or more indus-
This test is significant because it clearly shows the extent
of diversification of the selected conglomerates through the number
of industries in which the firms operate.
There is a warning, however, which must be presented here.
Sales mix percentages are highly volatile and can change from period
to period depending on the size and the number of acquisitions. For
example, Ling-Temco-Vought's sales percentages changed greatly in
1968 from 1967 with the acquisition of control of Jones & Laughlin
Steel Corporation. In 1967, 53 per cent of LTV's sales were sales
of food (as a result of its acquisition of Wilson & Company). In
1968, however, that percentage declined to 29 per cent, with steel
sales supplying another 29 per cent. There are other such instances
which could be cited. Thus, sales mix percentages for a single
year, or even a limited number of years, should not be accepted as
indicating that- a firm is not seeking to diversify. An indication of a
firm's intention to diversify is tabulated on Page 33, "Stated Goals of
the Firm." Twenty-three of the selected firms have diversification
as a goal.
STATED GOALS OF THE FIRM
OBJECTIVE: NUMBER OF FIRMS
At a specified rate or dollar amount 26
"Growth" but unspecified . . .. 12
Objective of growth through acquisition 12
Objective of internal growth ..... 1
To "build a company of AT&T, General
Motors type" . . . . . 1 52*
Wants diversification. . . . ... 18
No product or program to contribute
more than 10% of sales . . . 1
Balance between government and
commercial business . . . 2
To build an "international business
institution". . . . . ... 1 22
Will dispose of divisions not meeting standards. ... . 17
Maximize profits or present worth . . . . . . 3
Company is not acquisition minded. . . . . ... 1
*Does not total 43 because of overlap in some areas.
Source: Compiled by the author from reprints of speeches
by corporate executives and the annual reports of the firms.
The results of the test for product variety may be seen in
Appendix II. Except for AMK, all firms in the group have many
varied products and services.
The significance of this test is similar to that of the previous
one. The various number of products or services supplied by the
firms is indicative of their independence from one or a limited num-
ber of products.
The hypothesis that conglomerates are diversified is accepted
on the grounds that more than 80 per cent of the conglomerates used
to accumulate data had sales in at least three industries and many
products. None of these firms had sales in one industry contributing
50 per cent or more of its total sales.
Tests of the Hypothesis That Diversification Was Achieved Primarily
Three tests have been devised for this hypothesis: 1) stated
goals of the firms with respect to diversification and diversification
through acquisition; 2) frequency of acquisitions; and 3) effect of
earnings purchased on the total earnings of the conglomerate.
These three tests must be regarded as complementary. This
is necessary because proof of the hypothesis cannot be approached
directly. The direct approach would be to compare sales (or earnings)
of each acquired firm to the total sales of the conglomerate. This
information, along with knowledge of the industry or technology in
which the acquired firm sells and its product line, would provide
support for the hypothesis. Limitations on data, however, espe-
cially with respect to the products and industry activity of each
firm acquired, make this approach impossible. Thus, it is neces-
sary to use the three tests in conjunction, according to the follow-
ing line of reasoning. If it can be shown that the conglomerates
have the goal of diversification and want to acquire to accomplish
this goal, and if it can be demonstrated that conglomerates do, in
fact, acquire many firms, and further, if it is true the firms ac-
quired in order to give the conglomerate diversification contribute
significantly to the sales (or earnings) of the conglomerate, then it
seems to follow that diversification is achieved, at least in part,
through acquisition. The extent of the diversification through ac-
quisition will depend on the number of firms acquired and the effect
of their sales (or earnings) on the sales (or earnings) of the con-
Reference to "Stated Goals of the Firms," Page 33, will show
that twenty-two of the firms, more than 50 per cent, have diversifi-
cation as a goal. Now this information can be used simultaneously
with that tabulated on Pages 36 and 37, "Requirements or Criteria
Stated by the Conglomerates for Their Acquisitions." One criterion
F (.' ,,i ll ,,_ *.. I
REQUIREMENT NUMBER OF COMPANIES
Specified Sales Level 4
Specifications with Respect to Earnings of
Specific as a Per Cent of Sales or in
Absolute Terms 6
Unspecified Current Earnings 8
Specifications with Respect to Management:
"Competent" Management 19
Management Who Will Remain 14
Specifications with Respect to Growth:
A Specified Rate of Growth 4
"Potential" for Growth 12
Unspecified Present Growth 5
Specifications with Respect to Return on Investment:
A Specified Return on Investment 6
An Unspecified Return on Investment 4
Return on Investment Specified but
Not Related Directly to Acquisitions 14a
Specifications with Respect to Earnings of Acquirer:
Must Be No Dilution 5
Must Add (or Provide) Diversification 6
Restrictions, Either Qualitative or Quan-
titative, Imposed or Price 5
Some Specification for Synergey, Com-
plementarity or "Fit" 11
Acquisitions Become Divisions 1
Must Occupy "Established" or "Leadership"
Position Prior to Acquisition 9
REQUIREMENT -iT I _I l -_, : I. .
Must Be in a Certain Industry or
Must Be "Right" Size 2
Must Enhance Competition 1
Must Not Threaten Antitrust Action 1
Must Be "Small" Company I
Must Be Planned for in Advance 1
Able to Be Purchased for Cash 1
No Stated Requirements IIa
No Specific Plans, Just Wants Acquisitions 1
Acquisitions Made As Opportunity Arises 3
aSix are companies with a required rate of return on invest-
ment projects but no stated requirements for acquisitions.
Source: Compiled by author from annual reports, reprints of
speeches made by company executives and articles in financial
which six of the conglomerates have for their acquisitions is that
they provide diversification. Two of these six are not included in
the twenty-two firms which have diversification, or some aspect
thereof, as a goal of the firm (see Page 33). Thus, there are
twenty-four firms (twenty-two with diversification as a goal, plus
the two which are not counted in the twenty-three, but which re-
quire that firms acquired provide diversification) having a stated de-
sire to diversify.
Referring again to the data on Pages 36 and 37, six firms
state that acquisitions must be in a certain industry or technology.
These are Chromalloy, International Silver, Parker-Hannifin SCM,
TRW and Genesco. Both Chromalloy and International Silver origi-
nally specified that acquisitions must be in metals or metal working
fields. Later, however, Chromalloy acquired a barge line and a
finance company and International Silver a publishing company.
Genesco was to have "concentrated in apparel and footware," but
it purchased a huge variety store chain in 1964, S. H. Kress. SCM
and TRW have defined areas of interest for acquisitions quite broadly.
SCM has stated a preference for a "certain technology." This ob-
viously includes firms with such diverse interests as Durkee (foods)
and Glidden (Paint). TRW wants acquisitions in "proprietary product"
lines. If "proprietary" has its traditional meaning for TRW, that is,
products made and marketed by one with the exclusive right to do so,
then no specific industry is required. In fact, TRW is diversified
and has made acquisitions in such fields as electrical components,
space technology, metal casting, pumps, etc. The point of all
this is that five of the six firms which apparently limited acquisi-
tions to one industry have made significant acquisitions in widely
diverse fields. The sixth firm, Parker-Hannifin, has a goal of
limiting its major acquisitions to the "fluid-power components and
controls" area and has done so.
There are thirteen firms remaining which either do not have
diversification or diversification through acquisition as a goal, or
are not one of the five firms already cited as having diversified
through acquisition. The following tabulation will indicate the firm
and some of its major acquisitions which have results in diversifi-
A. J. Industries Dristwhit Metals
Robert Gordon Appliance
Jessup Wood Products
Allied Products Sterling Bolt
AMK John Morrell
Chicago Railway Equip.
Bangor Punta Smith and Wesson
Waukesha Motor Co.
Field or Industry
Engines and Radiators
Moore & McCormack
Rheem Mfg. Co.
Motel 6, Inc.
Home Insurance Co.
Chicago Malleable Steel
Field or Industry
Eaton, Yale and American Monorail Transportation
Towne E.N.V. Engineering Engineering Service
Glen Alden Schenley Whiskey
List., Ind. Motion Picture
Houdaille Viking Pump Industrial Pumps
Universal Engineering Engineering Com-
Lear-Siegler American Metal Products Metals
Sale Electric Electric Components
MSL Garrett Co. Fasteners
DK Manufacturing Aerospace
Perfecto Engineering Stamping Presses
Republic Strong Plastics Plastics
Corporation Gale and Thompson Hydraulic Units
Continental Graphics Graphic Ar s
This listing is, of course, incomplete. It does, however, show that
these firms have made substantial acquisitions in diverse fields.
The significance of the tests of the goals of the firms with
respect to diversification and diversification through acquisition is
partly dependent on lhe ojtcorme of the other two tests of this hypoth
esis. It is important, however, that almost all of the selected con-
glomorates have either made significant acquisitions which resulted
in diversification or had it as a goal to do so.
The second test of this hypothesis is that of the frequency
and number of acquisitions by conglomerates. It has been shown,
in the previous test, that conglomerates have goals of dive-sification
and diversification through acquisition or that they have made ac-
quisitions in diverse areas. The results of this test will show the
extent to which the firms have pursued their goals.
The number of firms acquired by year for each firm is tabu-
lated on Pages 42 to 45. The forty-three selected firms have made
some 1,323 acquisitions. The number of acquisitions ranges from
fewer than ten by AMK, National General and Seilon to over 100 by
Teledyne. It should be pointed out that not every acquisition made
by each firm is shown. Several of the acquiring firms have made
purchases too small to be reported. Other purchases were made
where control was not achieved, and these are not shown. Still
additional firms have been acquired in purely cash transactions, and
no data are available. It is believed, however, that all major ard
most minor acquisitions are listed. One further qualification should
be made. While every effort was made to assure the accuracy of
(BY YEAR ACQUIRED)
A. J. Industries 16
Allied Products 18
"Auto" Sprinkler 20
Bangor Punta 23
Boise Cascade 32
City Investing 15
Clark Equipment 11
Eaton, Yale & Towne 16
Glen Alden 15
W. R. Grace 69
Gulf & Western 81
Indian IHead 32
Int'l. Silver 12
Int'l. Tel. & Tel. 49a
Walter Kidde 50
Lehigh Valley 23
Midland Ross 17
National General 9
N. A. Rockwellc 15
Republic Corp. 37
1966 1965 1964
2 2 1
3 3 5
.6 13 11
6 12 11
1 3 1
7 4 10
9 10 2
4 3 3
2 2 1
1 1 1
2 3 4
5 2 1
1 1 1
3 1 1
3 1 2
6 8 5
4 6 5
1 2 3
1963 1962 1961
1 2 1
1960 1969 Prior To 1959
TOTAL 1968 1967 1966 1905 1964
U.S. Industries 62 21 18 3 1
White Consolidated 23 2 3 3 3 4
TOTALS 1,323 252 220 133 113 97
aAcquisitions from 1959 only.
bIncludes Jones & Laughlin.
CIncludes acquisitions of Rockwell Standard prior to 1967.
dNot including Occidental Life.
Source: Compiled by the Author fromListing Statements of the
New York Stock Exchange, annual reports of the firms and various fi-
1963 1962 1961 1960 1959 Prior To 1959
61 56 66 51 56 218
annual acquisition activity, it is often difficult to determine exactly
when an acquisition is consummated. Thus, there may be errors as
to the year in which the firm is acquired. Both these qualifications
are equally applicable to data concerning sell-off activity and earn-
ings purchased (Appendix VIII).
Three of the forty-three firms had acquired fewer than ten
companies by December, 1968. One of the three, Seilon, was in a
period of transition, divesting itself of several previous acquisitions
and at the same time making others. A second of the three, AMK,
had purchased only two firms of size, including John Morrell and
Company. AMK had been active in making tender offers for such
firms as United Fruit and Great American Holding Company. National
General, the third company, had made only nine acquisitions, but
six of the firms acquired had pre-acquisition earnings of one million
dollars each. Moreover, they were in such diverse industries as a
savings and loan company, television production, a film producer
and through its acquisition of Great American Holding Company, a
group of fire and casualty insurance companies as well as a life
Eight firms have made fewer than four acquisitions in the last
two years: Dresser Industries, FMC, Houdaille, International Silver,
Midland Ross, Parker-Hannifin, Clark Equipment and UMC.
The remaining thirty-two firms each have made twelve or
more acquisitions and four or more in the last two years. The ma-
jority of all the firms, twenty-seven, have acquired twenty or more
firms. Sixteen conglomerates which have acquired more than thirty
firms have acquired firms at an annual average of ten per conglom-
crate for each of the past two years. All fine h-ave acquired at
an annual average of about three firms per conglomerate in each of
the ten years beginning with 1959.
The third test of the hypothesis that diversification was
achieved largely through acquisition is the test of the impact of pur-
chased earnings on the total earnings of the acquiring firm. It has
been stated that the magnitude of the effect of the sales (or earnings)
of acquired firms on the sales (or earnings) of the acquiring firm is
indicative that diversification is achieved in large part by acquisition.
This test must be considered with the previous one, and both tests
are to be evaluated in terms of the conglomerates' stated goals of
diversification and diversification through acquisition.
Appendix VIII shows both average past earnings and current
earnings purchased by each of the forty-three companies. Average
earnings were determined by dividing the annual earnings of the ac-
quired firms prior to their acquisition for as many years as could be
determined (but at least three years) by the number of years. Current
earnings are simply the last year's earnings of the acquired firm
prior to its acquisition. Current earnings are shown only in total
for all acquired firms, not year-by-year. The table also shows the
purchase price for each year and in total, and the tirmrs earnings
By way of further explanation of Appendix VIII, A. J. Indus-
tries purchased firms in 1968 with average past earnings of
$166,784, for which A. J. Industries paid $3,360,750, or 20.1 times
average past earnings. Overall, A. J. Industries has purchased
$729,437 in average past earnings and has paid $12,424,970 for
the firms purchased. Using the earnings of the last year prior
to acquisition, i.e., current earnings, A. J. Industries purchased
$784,718 in earnings. At a purchase price of $12,424,970, A. J.
Industries paid 15.8 times current earnings.
In Appendix IX, purchased earnings, both average past and
current are plotted on the same chart with total reported earnings
of each acquirer on an unpooled basis. Again using A. J. Industries
as an example, by 1962 that company had purchased about $431,000
in average annual past earnings. There were no significant acqui-
sitions until 1967 when $131,500 in average past earnings were pur-
chased. This is $562,500 ($431,000 + $131,500) in "cumulative
average earnings purchased." In 1968, acquisitions with average
past yearly earnings of $166,784 were purchased. In total, A. J.
Industries purchased about $729,400 in average earnings. For some
of the forty-three firms the current year's earnings of their acqui-
sitions were significantly different from average annual past earnings.
Where this situation exists, the current earnings are plotted along
with average past earnings.
The use of the data in Appendices VIIIand IX is subject to
three qualifications, two of which were mentioned or Page 41. In
addition, the number of acquisitions shown on Pages 42 to 45 and
those represented by earnings in the two appendices above are not
identical. This is because of limitations on earnings and/or price
data, as stated in the first chapter of this dissertation. The author
believes, however, that pertinent earnings and purchase price data
were found for all major acquisitions.
While purchase price is not relevant to this phase and will
be mentioned in detail later in connection with the discussion of
the aggressiveness of conglomerates, Appendices VIII and IX do con-
tain information on price. It is appropriate, therefore, to give de-
tails here of the techniques used to determine purchase price. Cash
and debt were valued at face. Common and preferred stock were
valued at the average price for thirty days preceding the acquisition.
Price was determined by reference to various stock exchange listings.
Not infrequently, a quotation on preferred issues used for purchases
could not be obtained, ostensibly because the issue was not traded.
When the issues were convertible ones, con:mon stock prices were
used, considering the exchange ratio. There was only one instance
in which a market price could not be obtained for a non-convertible
prefened issue. Here, the acquisition was relatively small com-
pared to the size and numbers of other acquisitions by the same
firm, and that acquisition was excluded from Appendices VIII and IX.
Deferred payments were discounted to the present using the firm's
own required return on investment. Many of the firms report a re-
quired return on investment either in speeches made by executives
or in articles written about the firm and printed in financial journals
and newspapers. In all cases where deferred payments were used,
a required return on investment has been stated.
The charts of Appendix IX were uniquely constructed in that
the year-by-year earnings of each firm are cumulative, but cumula-
tive earnings do not include the recasting of prior year's earnings
due to current year poolings. Said another way, the total earnings
are as originally reported by the companies. This was done to em-
phasize the impact of purchased earnings whether treated as a pool-
ing of interest or as a purchase by the company. For a pooling,
companies are required to restate prior year's income as if the pool-
ing had been'in effect all year, and in all prior years. This require-
ment holds even though the acquisition is not consummated until
S. .at or shortly after the close of the period . ."1 For
acquisitions treated as purchases, of course, earnings are reported
from the date of the consummation of the acquisition.
Earnings purchased also were necessarily adjusted for the
per cent of ownership acquired. Thus, in the case of an acquisi-
tion where 75 per cent interest is acquired, 75 pxe cent of the earn-
ings are included. Finally, earnings used were "normal" earnings
insofar as was determinable. In other words, extraordinary gains
and losses were excluded from earnings figures.
With all explanations and qualifications now made, it is pos-
sible to evaluate the charts of Appendix IX. No chart was made for
Seilon because of losses of that firm for four of the past five years.
Reference to the charts will indicate that the firms can be readily
categorized initially into two groups, one on which purchased earn-
ings had no significant effect on total earnings and a second com-
prised of firms on which purchased earnings had a significant effect.
"Significant" here is defined as meaning that 50 per cent or more of
total earnings were purchased. Purchased earnings in this context
Is taken as meaning either average past or current earnings. Data
1Ameritan Institute of Certified Public Accountants, Opinions
of the Accounting Principles Board, Opinion No. 10, Omnibus Opinion-
1966 (New York: American Institute of Certified Public Accountants),
(1l967, p. 144.
on Fage 54 provide a summary of the information in Appendix IX.
According to the two categories mentioned, there are seven
companies in the former and thirty-six in the latter. The former
group consists of Clark Equipment, Eaton, Yale & Towne, Interna-
tional Silver, Midland Ross, North American Rockwell, Parker-
Hannifin and UMC. In the latter group there is a sub-group. The
firms in this sub-group show a striking correlation between total
earnings and earnings purchased. These firms are: AMK, "Automa-
tic" Sprinkler, Bangor Punta, City Investing, Glen Alden, Gulf and
Western, Walter Kidde, Lear-Siegler, Lehigh Valley, Ling-Temco-
Vought, MSI., SCM, Teledyne and U.S. Industries. Ten of these
fourteen showed purchased earnings exceeding reported earnings in
one or more years. The movement of total earnings in response to
purchased earnings is also of great importance.
In every case, with respect to the fourteen firms just listed,
total earnings and purchased earnings move in close concert. This
phenomenon is not unique to these fourteen firms, however. A
similar relationship can be seen by reference to charts for Bendix,
Boise Cascade, Chromalloy, Dresser, FMC, Genesco, W. R. Grace,
Indian Head, International Telephone and Telegraph, Na'ional Gener-
al, Ogden, Republic, TRW, Textron, Transamerica and White Con-
solidated Industries. In fact, it may be instructive to :nake a
mental chart of total earnings of those firms after first removing
each year's purchased earnings. In some cases year to year in-
creases in purchased earnings exceed the increase in total earnings.
This is true for "Automatic" Sprinkler, Bangor Punta and Glen Alden
between 1966 and 1967 and 1967 and 1968; for Bendix, Dresser,
Lehigh Valley, MSL and SCM in 1966; and for Gulf and Western
and Lear-Siegler in 1965. Ling-Temco-Vought's purchased earnings
increase far exceeded the change between 1967's earnings and
1968's. The same is true of Litton's, Ogden's, TRW's and Tele-
One further comparison can be made using the data of Appen-
dix IX. For each company the relationship between total purchased
earnings and total earnings is shown in absolute terms, and the
differences between the average purchased earnings, total earnings
and current earnings purchased (where applicable) are emphasized.
The test of the impact of purchased earnings on total earn-
ings has significance because it demonstrates that the earnings of
most of the conglomerates are affected substantially by the earnings
of firms purchased. Over 80 per cent, 36, of the firms had at
least 30 per cent of their total earnings purchased from other firms.
Nearly 60 per cent, 25, of the forty-three firms had 50 per cent or
more purchased earnings.
it ii 7 .- F --
Purchased earnings 50% or more of
total earnings . . . . . ... 25
Purchased earnings at least 30% of
total earnings . . . . . . 36
Purchased earnings less than 30% of
total earnings . . . . . . 7
Firms with purchased earnings exceed-
ing reported earnings for one or more
years . . . . . . . .. 10
Firms where purchased earnings and
total reported earnings are nearly i-
dentical (i.e., a relatively small ab-
solute difference in either cumula-
tive current earnings purchased or
cumulative average earnings purchased
and reported earnings) . . . .. 13
Firms showing close correlation be-
tween purchased earnings and re-
ported earnings . . . . ... 14
*Summarized from data in Appendix IX
S ,- ,I. _ *
The three tests just completed taken together support accep-
tance of the hypothesis that conglomcirates diversify largely by ac-
quiring other firms. In the first test of this hypothesis it was
shown that twenty-four of the firms had diversification and diversi-
fication through acquisition as a goal. All of the remaining nine-
teen firms had purchased firms with a diversifying effect. The sec-
ond test showed that all but eleven of the conglomerates had ac-
quired twelve or more firms. The third test isolated twenty-six
firms with 50 per cent of their total earnings purchased.
There are three tests of this hypothesis: 1) frequency of
acquisition; 2) growth rate goals of the firms; and 3) motivations
basic to acquisition policy.
It is reasonable to expect that if acquisitions are an on-
going activity for conglomerates they would acquire firms with regular-
The data tabulated on Pages 42 through 45, "Acquisition
Activity by Year," show that the selected conglomerates as a group
have acquired'not only with regularity but an increasing number of
firms in each of the ten years from 1959 to 1968 except 1962 and
1963 when activity decreased below the 1961 level. For seventeen
of the firms, acquisition activity has increased each of the years
1966, 1967 and 1968. In cases where the numbers of acquisitions
has declined in those three years, ten of the remaining twenty-six
companies have increased the size of their acquisitions in terms
of amount of earnings purchased. This resulted in an increase in
total earnings purchased in each of the three years even though the
number of firms acquired declined. FMC, Houdaille, International
Silver and Midland Ross remained at about the same level of activ-
ity. Four other firms acquired more companies in 1968 than in 1967
but 1967 acquisitions had declined from the number made in 1966.
One of these firms, W. R. Grace, purchased 53 per cent of Miller
Brewing Company in 1966, distorting the increase in earnings pur-
chased which would have occurred without that acquisition. In
similar fashion, Walter Kidde purchased Lighting Corporation of
America in 1967 which made that year an exceptionally fruitful one.
A. J. Industries, AMK, Clark Equipment, City Investing,
Dresser, Eagle-Picher, National General, North American Rockwell,
Republic, SCM and Seilon have not acquired firms in five or more
of the ten years shown. "Automatic" Sprinkler is not included in
this group because it has not been in existence all of the ten years
Of the eleven companies in this group, five have increased their
acquisition activity in 1967 and 1968.
This test clearly shows that the acquisition activity of the
selected conglomerates is a continuing phenomenon. This is true
because of both the number and size of their acquisition on a year-
by-year basis. Only eleven of the companies had gaps of five
years or more of the last ten years when no firms were acquired.
The majority of the firms not only acquired other companies regu-
larly over the ten years but they increased the number of their ac-
quisitions each year.
The goals of the firm with respect to earnings growth rate
objectives will indicate whether conglomerates continue to acquire
other firms. Thus, where conglomerates have an objective of ac-
quiring other firms to grow or to maintain growth, it is to be ex-
pected that firms will be acquired frequently.
Twelve of the firms have a goal of growth through acquisi-
tions. (See Page 33, "Stated Goals of the Firm.") Eleven of the
twelve companies have specified a growth rate and have stated that
acquisitions are a requirement for that rate to be achieved. Some
have higher expectations for growth rates from acquisitions than
from internal means (see Appendix III). In addition, sixteen firms
have growth as a goal, without specifying what acquired firms will
contribute to that goal, but eleven of this group state that acquisi-
tions will play a role.
The majority (twenty-two) of the selected conglomcrjtes were
shown by this test to have either a goal of growth through acqui-
sitions at some specified rate or a goal of growth in general with
acquisitions to contribute sore part.
The final test of the hypothesis that acquisitions are a con-
tinuing phenomenon is the motivations of the selected conglomerates
which give them the impetus to acquire. It is expected that con-
glomerates will continue to acquire other firms where there are
significant motives to do so.
Of course, all motivations cannot be discerned. Moreover,
even if motives can be known, there is certainly no known method
of determining if the motives stated are the ones which prompted a
continuing acquisition policy of the conglomerates.
Stated goals of the firm will provide a means of determining
some motives. Two such goals have been hypothesized as charac-
teristic of conglomerate behavior: the desire to diversify and the de-
sire for growth in earnings. Both of these, it has been stated, have
motivated the conglomerate to acquire other firms. Other goals have
had the same effect.
Data on Page 33, "Stated Goals of the Firm; are a tabulation
of the stated goals of the forty-three conglomerates. No attempt
was made to imply goals which were not stated directly, to avoid
the bias of the author. There are several broad statements of ob-
jective such as a desire for "bigness" or to "put together a major
U.S. corporation" or to build a company like General Motors or
American Telephone and Telegroph. Seven of the firms have made
such statements. These have expressed a desire to maximize pro-
fits or the present worth of shareholders' interests. One firm,
Eagle-Picher, says it is not acquisition minded.
Each of the forty-three firms made some statement of goals.
By far the largest percentage had a goal which bears a direct re-
lationship to growth. Over 50 per cent of the group state diversi-
fication or some variation as a goal. Parker-Hannifin would remain
in a particular industry. For firms which state more than one goal,
no order of priority could be determined.
Except for Eagle-Picher and Parker-Hannifin, the goals of all
the firms are consistent with a continuing acquisition policy.
A study of each of the selected firms has provided data rele-
vant to this test of the hypothesis. Several of the firms have a
special motivation to acquire. One group may have begun its ac-
quisitions in-order to avoid failure.
A. J. Industries, formerly Alaska-Juncau Mining Company,
was organized in the 1890's as a gold mining company. When the
gold was exhausted in 1944, the company abandoned its mining ac-
tivities. Shortly thereafter, acquisitions were begun.
Bangor Punta is the result of the merger of Bangor Aroostock
Railroad and Punta Alegra Sugar Company. Punta lost its sugar
operations to Castro in 1960. Profits from the railroad had declined
to less than $150,000 in 1962. Bangor Punta has as one of its
goals growth through acquisition.
Bendix appears to have suffered from two frailties. First,
the company was primarily in the aviation industry and subject to
its cycles. Second, that business began a decline and profits fell
substantially until 1964. Bendix's acquisitions picked up signifi-
cantly in 1964.
Chromalloy began in 1957 with patent rights to a metallizing
process. Until acquisitions began, the company was small and un-
Dresser's story is similar to Bendix's except that Dresser
was primarily in oil and gas.
W. RI Grace suffered a severe set-back in earnings because
of the volatility of its steamship operations, and it began its ac-
quisitions in 1953.
Houdaille once manufactured automobile bumpers p:rimn ily.
It began losing its market when automobile makers began making
many of their own parts, including bumpers.
International Silver experienced a decline in its earnings per
share from $1.48 in 1956 to $.48 in 1957. Silver sales had begun
a decline in those years attributable to the decline in marriages.
Midland Ross, like Houdaille, was committed to the auto-
mobile industry and suffered when that industry began to make its
Republic Corporation was formerly Republic Pictures. The
firm's operations declined until 1966 when there was a profit of
only $100,000. The company began intense acquisition activity in
SCM's profits began declining in 1957 and continued until
a loss was experienced in 1960. SCM's management believes a
company needs to be "big" in order to survive.
Textron had its beginning in the textile industry. By 1952 i
had a loss of $4 million. Textron spun off its textiles (into a cor
pany which became Indian lHead) and began acquisitions.
U.S. Industries, once called Pressed Steel Car Company,
made railroad freight cars. The company was near bankruptcy when
White Consolidated Industries at one time made sewing ma-
chines. From 1957 to 1962 the company suffered losses.
It was mentioned that some of these firms wcre single pro-
duct or single industry firms. As a motivational influence, the
need to diversify (perhaps to survive) and escape the cyclical ef-
fects of a single industry may have prompted the following addition-
al companies to begin an acquisition program: AMK, "Automatic"
Sprinkler, City Investing Company, Eagle-Picher, Eaton, Yale &
Towne, Gulf and Western, Indian Head, International Telephone
and Telegraph, Ogden, Seilon, Transamerica and UMC.
Two companies had a special incentive to diversify. Ogden
and Genesco both ran into restraint of trade problems with the Justice
Department. Genesco was prevented from continuing its expansion in
the shoe industry and Ogden met resistance in shipbuilding and scrap
Still another group had a special impetus to acquisitions: net
operating loss carryovers which could be offset against the profits
of acquired firms. Among this group are: Bangor Punta and its
losses from the expropriation of its sugar properties in Cuba; Glen
Alden, which had net operating loss carryovers until 1967; Lehigh
Valley had $25 million in net operating loss carryovers from losses
in coal mining; MSL, which had $29 million in losses from railroad
operations; National General, which had a net operating loss carry
forward of $13.4 million due primarily to the operation of its sub-
sidiary, Twentieth Century Fox; and Textron, which had large losses
from its textile operations.
It is not possible to rely solely on this test of the hypothe-
sis that acquisitions are an on-going activity for conglomerates.
This is true because of the limitations on data and the difficulties
of interpreting available information. it is possible, however, to
conclude that the test shows the tendency of conglomerates to ac-
quire, because of one or several motives. A goal of "bigness,' for
example, may provide sufficient motivation to acquire other firms
until the desired degree of size is achieved.
The hypothesis that acquisitions are a continuing phenomenon
is accepted based on the results of all three of the tests just com-
pleted. It was shown that conglomerates do acquire other firms reg-
ularly and that, for the most part, the number and size of acquisi-
tions hns increased in the ten years beginning in 1959. Moreover,
in view of the growth rate objectives of the conglomerates, coupled
with the requirement by twelve of the firms that growth comes from
acquisitions, it is concluded that acquisitions must continue in
order to achieve stated goals and to preserve growth rates generated.
Finally, a clear tendency to acquire other firms may be seen from
motives of the conglomerates which prompt them to commence and
to continue acquisition programs.
TESTS OF THE GROWTH PATE, AGGRESSIVENESS
AND EAC ,_ :- i -'-
In this chapter three hypotheses will be tested in turn.
These are: 1) that conglomerates have high growth rate goals and
performance records; 2) that conglomerates are aggressive acquirers;
and 3) that conglomerates can easily sell off firms acquired.
Tests of the Hypothesis That Conglomerates Have High Growth
There are four tests of this hypothesis: 1) stated goals of
the firm relative to growth rates; 2) growth rates achieved by con-
glomerates; 3) emphasis on growth through acquisition rather than
internal expansion;and 4) the extent of the effect of purchased earn-
ings on the total earnings of the conglomerates.
This hypothesis may be tested by referring to goals of the
firms relating to growth rates in earnings. It seems obvious that
where conglomerates have such objectives, and state them publicly,
it can be said that conglomerates have high growth rate goals.
A "high" growth rate is taken to mean a rdte exceeding that
of the gross national product. In terms of current dollars, the gross
national product grew at a compound annual rate of about 7.5 per
cent for the period 1964-1968. A current dollar growth rate is used
because earnings of the selected conglomerates are stated in current
Data relevant to the first test are presented on Page 33,
"Stated Goals of the Firm." Almost 90 per cent of the firms have
expressed a goal of growth. Twenty-seven of this group haveex-
pressed a specified growth rate goal or dollar amount, while twelve
want to grow in earnings but do not specify a rate. The data also
show that twelve of the selected conglomerates emphasize growth
through acquisition and only one claims to emphasize internal growth.
Appendix III indicates the amount of growth in earnings that
the twenty-seven firms have established as a target rate. Twenty of
these twenty-seven have target rates of more than 10 per cent, and
only two firms, Eagle-Picher and Eaton, Yale and Towne, have goals
of less than 10 per cent. Every one of the twenty-seven firms with
a stated growth rate goal had a goal equal to or exceeding the growth
This test is successful in showing the heavy emphasis placed
on growth by the selected conglomerates. That twenty-seven of the
conglomerates would commit themselves to a high growth rate in
earnings is indicative that conglomerates have high growth rate
goals. Eleven of the remaining sixteen firms have made a positive
statement about growth as a goal without a commitment to a specific
The second test of the hypothesis, that conglomerates have
achieved high growth rates, is complementary to the first test. If
conglomerates have high growth rate goals it may be expected that
they will strive for achievement. It may be expected that, not in-
frequently, their growth rates achieved may also be high.
A comparison of the data in Appendix III, "Annual Growth
Rate Goals," and Appendix IV, "Average Annual Earnings Growth
Rates Achieved," is presented on Page 68. In this way performance
can be measured against targets. Of the twenty-seven firms stating
specific growth rate goals, nearly 80 per cent (21) either met or ex-
ceeded their goal, or were within 20 per cent of achievement.
Considering all forty-three firms, both those with and those
without stated growth rate goals, thirty-seven firms achieved a larger
growth rate than 7.5 per cent per year, three companies had earnings
growth rates between zero and 7.5 per cent and three companies had
negative rates of growth in earnings.
This test has significance because it shows that over 86 per
COMPARISON OF ANNUAL EARNINGS GROWTH RATE
GOALS WITH PERFORMANCE*
Number of Firms
Firms meeting or exceeding goal. ... . 17
Firms with performance within 20% of
goal . . . . . . . . 4
Firms with performance not within 20% of
goal ................ .. 6
Firms for which data areincomplete . 16
*Summary of data from Appendix III and Appendix IV.
EARNINGS GROWTH RATES ACHIEVED*
Number of Firms
Firms with growth rates exceeding 10%,
compounded annually. . . . ... 33
Firms with growth rates equal to or ex-
ceeding growth rate in GNP of 7.5%
annually for five years ending 1968 . 37
Firms with growth rates between 0 and 7.5% 3
Firms with negative growth rates . .. 3
*Summary of data from Appendix IV.
COMPARISON OF INTERNAL WITH EXTERNAL GROWTH RATES*
Number of Firms
Firms with growth generated mainly through
external means . . .. .. . 4
Firms with approximately equal external
and internal growth . . . . 5
Firms growing more internally than ex-
ternally ............... 4
Firms for which data were incomplete . 30
*Summary of data from Appendix IV.
cent of the forty-three conglomerates have achieved annual growth
rates in excess of GNP.
High growth rate goals of conglomerates suggest that the
firms would emphasize acquisitions to achieve the growth on the
grounds presented on Pages 13 and following. Thus, conglomerates
are expected to emphasize growth through acquisition.
Available data concerning the preference stated by the firm
for growth through acquisition over internal growthare presented in
Appendix III. Information could be obtained for only eleven of the
firms. Three of the eleven stated a goal of higher growth through
acquisitions than internal expansion. Four companies expressed an
objective of equal growth through acquisition and internal expansion.
Growth rates achieved through acquisition and internal ex-
pansion are shown in Appendix IV and are summarized on Page 68.
Only thirteen firms reported the information. Four of the thirteen
attained more growth through acquisitions. Five achieved approxi-
mately equal growth through the two means. The remaining four grew
more internally than externally. All the firms for which data are
available showed substantial growth through acquisition.
Because of the insufficiency of data, this test cannot be re-
lied on as grounds for accepting or rejecting the hypothesis that
conglomerates have high growth rate goals. Nor is it possible to
suggest that a tendency is indicated. The firms for which infor-
mation is available were spread about evenly between those desiring
growth through acquisition and through internal expansion. The same
is true of performance records.
The final test of this hypothesis is a test of the extent of
the impact of purchased earnings on total earnings. The present
test is defended on the same grounds as the previous test, that is,
conglomerates are expected to rely on acquisitions for a substantial
portion of their growth in earnings.
Data relevant to this test are presented in Appendix IX and
Appendix VIII. A study of the charts in Appendix IX will show the
dependence of the conglomerates on earnings of acquired firms for
increases in total earnings. This is emphasized by the close cor-
relation which exists between purchased earnings and total earnings
and by the steady increase in purchased earnings as shown in
In almost all instances where purchased earnings failed to
increase, total earnings of the conglomerate declined or increased at
a much smaller rate than previously. This may be seen by comparing
data in Appendix rC with those ofAppendix VIII. As an example,
"Automatic" Sprinkler's purchased earnings declined in 1968, as
shown in Appendix VIII. The chart for "Automatic" in Appendix IX
shows that total earnings declined substantially in 1968. Similarly,
Bendix purchased firms showing losses in 1968. The slope of
Bendix's total earnings curve in Appendix IX clearly leveled in that
year. The same effect can be observed by making the same conm-
parison for Dresser and W. R. Grace in 1967 and for Walter Kidde
and SCM for 1968. Except for Boise Cascade, Eaglc-Picher, FMC,
Indian Head and International Silver, each firm which had a decline
in purchased earnings also experienced a decline in total earnings.
The remaining firms, which had significant earnings purchased, in-
creased purchased earnings in each of the years 1966, 1967 and
There are nine firms which show little or no dependence
on purchased earnings to achieve increases in or to maintain total
earnings. These firms are: Clark Equipment, FMC, Houdaille,
International Silver, Midland Ross, Parker-Hannifin, Seilon, UMC
and Eagle-Picher. That Boise Cascade and Indian Head were able to
maintain the rate of increase in earnings despite a decline in earn-
ings purchased is a phenomenon peculiar to 1968. Prior to that
year purchased earnings and total earnings moved together for both
firms. Of thd remaining thirty-three firms, purchased earnings ac-
counted for 50 per cent of total earnings for twenty-five of the firms,
and 30 per cent of total earnings for eleven more.
The test shows that over 60 per cent of the selected con-
glomerates relied on acquisitions for 50 per cent of their total earn-
ings. This is a clear indication that acquisitions play an important
role in the growth in earnings of conglomerates.
The hypothesis that conglomerates have high growth rate goals
is accepted on the grounds that three of the four tests support this
position. It was shown that the twenty-seven conglomerates which
have stated annual earnings growth rate goals have a goal equal to
or exceeding the annual growth rate in GNP. Thirty-seven of the
conglomerates out-performed the GNP earnings growth rates. Finally,
the majority of the conglomerates relied on earnings purchased through
acquisition for 50 per cent or more of their total earnings. Consid-
ering all the data accumulated, it seems obvious that conglomerates
have high growth rate goals.
Tests of the Hypothesis That Conglomerates Are Aggressive Acouirers
The tests of this hypothesis are: 1) frequency of acquisitions;
2) sell-off activity; 3) bidding for prospective firms; 4) movement of
purchase price over time;and 5) variety of purchase terms.
A firm which is an aggressive acquirer is expected to make
frequent acquisitions. Of course, attempts to acquire firms may be
frustrated, but sufficiently aggressive acquiring firms are expected
Data relevant to this test have been presented in examining
the hypothesis that conglomerates diversify largely by acquiring
other firms and need not be repeated here. It is sufficient to re-
peat only that acquisition activity for the selected firms has in-
creased every year, except one, from 1959 to 1968, and that thirty-
two firms have made twelve or more acquisitions. These thirty-two
purchased four or more firms in 1967 and 1968.
Because the results of this test show that the firms acquired
by the majority of the selected firms are numerous and frequent, the
test supports the hypothesis that conglomerates do have an aggres-
sive acquisition policy.
The sell-off activity of the selected conglomerates is the sec-
ond test of this hypothesis. The rationale for the ease of sell-off
of a going concern over that of selling components constructed in-
ternally has been presented. Conglomerates are expected to experi-
ment with acquisitions, because of a ready market for resale. Thus,
the number and frequency of acquisitions resold will support the
notion that conglomerates can afford to be aggressive in their ac-
quisition policy inasmuch as acquisitions are readily sold.
A word- of caution is necessary concerning sell-off data. Sell-
off data are limited because the sale of a previously acquired fi:r.
may be, in some way, considered failure. This is true for two
A. J. Industries
W. R. Grace
Gulf & Western
Int'l. Tel. & Tel.
N. A. Rockwell
SELL-OFF ACTIVITY BY YEAR
TOTAL 1968 1967 1966 1965 1964 1963 1962 1962
4 3 1
4 1 1 1 1
2 3 1
1 2 1 3
1 2 1 3
2 4 2
2 2 5
TOTAL 140 29 10 23 11 11 18 8 30
Source: Compiled by the author from annual reports of the firms,
Moody's Industrial Manuals and selected financial journals.
reasons. First, an acquired firm sold may suggest that the criteria
for acquisitions, announced by the firm, were nut met or that the
acquiring firm made an error in the application of the criteria when
the firm was originally purchased. Second, a sel!-off may indicate
that the acquiring firm could not assimilate the firm acquired, or its
management or both. Thus, the listing of firms sold by the selected
conglomerates should by no means be regarded as complete.
About 10 per cent of the acquisitions made by the forty-three
selected firms have been sold as shown on Page 74. No year-by-
year comparison would be meaningful inasmuch as firms sold were
not necessarily sold in the year purchased. In fact, it is reasonable
to suppose that an acquisition is kept for some time prior to its re-
sale. Thus, the outcome of 1968 purchases, as far as disposals
are concerned, is not likely to be known for some time.
Still referring to the data on Page 74, four of the selected
conglomerates have sold ten or more acquisitions. Five others have
disposed of between five and nine. In all, thirty companies have
sold one or more of their acquisitions.
For some firms, the number of acquisitions sold is far greater
than the 10 ptr cent sales for all firms. A. J. Industries, for ex-
ample, has sold about 25 per cent of its acquisitions, as have
Gcnesco and International Silver. Indian Head, National General and
Ling-Temco-Vought have sold one-third or more and Seilon, Glen
Alden and AMK have sold more than 50 per cent of the firms they
Because of data limitations the results of this test are not
regarded as conclusive. The results, however, indicate a clear
tendency on part of the conglomerates to resell their acquisitions.
This, then, lends support to the belief that conglomerates can afford
to be aggressive acquirers.
Evidence of bidding by the conglomerates for prospective firms
will support the aggressiveness hypothesis. This constitutes the
third test of this hypothesis. It is expected that companies aggres-
sively seeking to acquire other firms will bid against other prospec-
tive acquiring firms, when this is necessary, in an attempt to con-
summate a merger.
Some information relative to the bidding activity of the selected
conglomerates is shown on Page 77. Thesedataare limited for two
reasons. First, bidding for prospective firms is not public knowledge
unless one of the parties chooses to make it so. Second, even if a
bid is made public, there is no way to assure that research will dis-
close it. In fact, gathering such information is largely fortuitous.
The author believes, however, that the data lend strong support to
the hypothesis, even if they are not conclusive.
I _!i ,* I I!-.iF-,!
SCM & Great America
Walter Kidde & Continental Can
Indian Head N.A. Rockwell
Dresser, Ind. & FMC
& Boise Cascade
City Investing Signal Oil
White Cons. Ind. Ling-Temco
Teledyne & Williams Bros.
Bangor Punta & Chris Craft
Glen Alden & Lorillard
Walter Kidde, Whittaker
Corp. and Colt Ind.
Bangor Punta & AMP
Textron & AMK
Gulf & Western
& Atlantic Richfield
Northwest Industries &
Litton & Ling-Temco-
National General & AMK
TRW & Gould National
"Automatic" Sprinkler &
Jim Walter Corp.
Source: Compiled by author from selected financial journals and
news articles in Wall Street Journal and the New York Times.
Available information shows that City Investing, for example,
was engaged in bidding to acquire a major corporation in four in-
stances. AMK and Bangor Punta bid against other firms for two
large corporations. As many as four companies bid for Miehle-Coss-
Dexter and Allis Chalmers. In addition, SCM and Creat America
bid for Glidden. Shortly after SCM was successful in its bid for
Glidden, Great America was taken over by Ling-Temco-Vought. Gould
National outbid TRW for Clevite. Even the firms selected here are
not inviolable. UMC was controlled by Liquidonics as of December,
1968. A bid to take over Glen Alden was made by Rapid American.
Subject to data limitations mentioned previously, the test in-
dicates some of the bidding activity which takes place among ac-
quiring firms for potential candidates, and a tendency is clearly dem-
The fourth test of this hypothesis is the movement of price
paid for acquired firms over time. There are at least two competing
influences on the price an acquiring firm is willing to pay. One of
these influences will tend to drive prices up, and it has been men-
tioned previously: the intensity of the desire for firms to acquire and
competition among acquiring firms. The second influence may miti-
gate the first. As acquiring firms gain in expertise, they may find
means to make an offer more attractive through, for example, various
purchase options, contingent payments to be made in the future on
earnings, and other means, without raising the price. Of course,
there is no way to isolate the effects of either influence. Obvious-
ly, there are many other influences on purchase price which cannot
be known, or which cannot be quantified even if known. The author
believes that on balance the aggressiveness of conglomerates will
result in rising prices for acquired firms as potential acquiring firms
bid against one another.
Data in Appendix VIII have been compiled partly for this pur-
pose. By way of explanation, information in the last column of
Appendix VIII was computed by dividing average annual earnings into
the price paid for firms acquired, and by dividing current annual
earnings into purchase price. The latter computation was done only
for the totals. Each year's average earnings purchased was divided
into the total price paid for firms acquired in that year. Thus, a
year-by-year comparison can be made of the "times earnings paid"
for firms acquired. Where current and average annual past earnings
were not materially different, no separate calculation was made for
"times current earnings" purchased.
The following tabulation is a summary of the relevant data
from Appendix VIII:
Number of Firms
Price times earnings purchased increased, 1968
over 1967. . . . . . . 25
Steady increase in price times earnings purchased
1966-1968 . . . . ... .14
Steady decline in price times earnings purchased
1966-1968 . . . . . . 7
Fairly constant times earnings paid, 1963-
1968 . . . . . . . . .. 4
Overall times earnings paid, based on average
past earnings, 25 times or greater . 11
Overall times earnings paid, based on current
earnings, 25 times or greater ... .5
Firms paying more than the average times earn-
ings paid by all firms in:
1967 . . . . . . .. 15
1968 . . . . . . ... .10
It may be seen that twenty-five, about 60 per cent of the forty-three
firms, paid a higher price relative to earnings in 1968 than they paid
in 1967. More than one-half of the firms have shown a steady, if
erratic, increase in times earnings paid over several years. In con-
trast, seven firms have shown a fairly regular decline in times earn-
ings paid for firms acquired. There is a third group of four compa-
nies for which times earnings paid has remained nearly constant in
the latest three to five years shown. The remainder of the firms,
seven, have had wide fluctuations in times earnings paid from year
to year, with no trend established.
The times earnings paid for acquired firms varies widely among
the selected companies. Using times average annual earnings paid,
nineteen firms have paid twenty times earnings, or more. Nineteen
others have paid between ten and nineteen times earnings end five
have paid ten times earnings or less.
Prices paid by the selected firms may be compared with the
average times earnings paid by all acquiring firms for all their ac-
quired firms in 1967 and 1968. In 1967 the average paid for all ac-
quired firms was eighteen times earnings and i968, twenty-five
times. Of the selected conglomerates, ten paid in excess of the
average in 1968 and fifteen paid more than the average in 1967.
The results of this test have only limited usefulness to the
acceptance or rejection of the hypothesis that conglomerates have an
aggressive acquisition policy. This is true partly because of the
wide fluctuation in price paid relative to earnings over time and be-
tween firms and partly because of the unidentifiable factors influ-
encing price. The results of the test, however, have some useful-
ness in that they show an established trend by the majority of the
selected conglomerates to pay more for firms acquired, relative to
earnings, in 1968 than in 1967.
The final test of this hypothesis is the test for the variety
of purchase terms and mediums of exchange used by conglomerates to
1Gilbert Burck, "The Merger Movement Rides High," Fortune,
LXXIX, No. 21 (February, 1967), 79ff.
A. J. Industries
Eaton, Yale & Towne
W. R. Grace
Gulf & Western
International Tel. &Tel
N. A. Rockwell
I" I'' *''*
* i '
CONV. PRE- &
BONDS FERRED STOCK
CASH MON FERRED
2 7 1
2 7 1
4 2 2
5 12 2
3 22 5
2 17 4
3 1 2
1 23 4
1 3 6
5 4 1
3 3 2
1 30 4
2 6 1
2 4 1
1 4 4
EXCHANGE ACCOUNTING TECHNIQUE
CASH MON COM- BONDS FERRED
& WAR- MON& & ACCOUNTED FOR AS PAY-
BONDS RANTS PFD. STOCK POOLING PURCH. COMB. MENTS
1 1 1 2 1
2 4 1
4 5 8 1
1 1 2 5 3
1 5 1
5 12 1
3 21 9
1 2 1 2
1 52 14
1 1 1 1 12 5 3 1
5 1 1
20 35 1 1
7 25 1
1 1 2 8
4 2 1 3 3 1
5 2 33 9 3 4
2 3 6 2
1 4 1 2 2
7 3 1
1 9 2
1 30 2 1
COM- PRE- CONV. PRE- &
CASH MON FERRED BONDS FERRED STOCK
TRW 7 4 8 1
Teledyne 1 65 6 1 11 2
Textron 7 6 2 4 2
Transamerica 8 1 2
U.S. Industries 1 24 11 2 13 4
White Cons. 2 1 1 1 1 5
TOTALS 73 489 89 12 166 96
Source: Compiled by the author from Listing Statements of the
New York Stock Exchange.
EXCHANGE ACCOUNTING TECHNIOUE
CASH MON COM- BONDS ERRED
& WAR- MON & & ACCOUNTED FOR AS PAY-
BONDS !ANrTS PFD. STOCK POOLING PURCH. COMIB, MENTS
3 13 1
1 6 1 69 10
2 2 29 10 4
1 1 7
19 9 70 8 485 156 12 16
effect a take-over. It is expected behavior for a conglorierato, as
an aggressive acquirer, to use various purchase terms, modes of
payment and mediums of exchange in order to entice a prospective
firm to accept the offer. With many other acquiring firms also
seeking to acquire, it is likely that more and more variety will be
used. Obviously, this behavior is complementary to the expected
behavior that conglomerates will pay higher prices for acquired firm;
In addition, this test has a relationship to the growth hypothesis.
One motive for an aggressive acquisition policy is the desire for
high growth rates. It is expected that an aggressive acquiring firm
is likely to use terms of purchase and mediums of exchange which
will promote the highest growth rate.
Not only is the conglomerate expected to use a wide variety
of terms, but it is expected to emphasize equity securities as the
medium of exchange. Moreover, the method of payment affects the
accounting treatment accorded the acquired firm in consolidated stat
ments. The accounting treatment directly affects the conglomerate's
reported earnings. Because the pooling method of accounting for
consolidations has a more favorable effect on earnings than does
the purchase technique, it is expected that conglomerates will shov
a preference for the pooling method. The pooling method yields
higher consolidated earnings than the purchase method because no
goodwill is recognized requiring amortization under the pooling
purchase price satisfied with bonds or cash is shown as a purchase,
and the portion in stock is accounted for as a pooling.
There were sixteen acquisitions made by the selected con-
glomerates in which deferred payments of some type were used.
This test is significant because the results show, for the
most part, that selected conglomerates have used a variety of pur-
chase terms or methods of payment. Four firms stand out as
lacking in variety: AMK, which has used common and preferred in
combination; Parker-Hannifin, which has used cash primarily;and
Clark Equipment Company and UMC, both of which have used only
common stock. Moreover, as expected, the conglomerates showed
a marked preference for common stock as the method of payment and
the pooling technique as the method of accounting.
The hypothesis that conglomerates have an aggressive ac-
quisition policy appears to be acceptable. Reasons for its accep-
tance are several. First, data accumulated showed that the selected
conglomerates have acquired many firms, that they acquire firms fre-
quently and that their acquisition activity has increased steadily in
the past several years. Second, while information was limited, that
which was available demonstrated that the firms do resell some ac-
quisitions. Data showed that over 10 per cent of all the firms ac-
quired by the conglomerates were resold. Third, and again in face
technique; also, the basis of assets for depreciation purposes i
not raised using the pooling method.
Data relative to this test are tabulated on Pages 82 to 85 .
The various mediums of exchange used are shown in the first ten
columns. The accounting treatment accorded the. acquired firms in
the consolidated financial statements is shown in the next two col-
umns. The last column shows the number of acquisitions with de-
ferred payment terms made by the firm.
Common stock alone was used by the firms as the medium of
exchange in nearly as many instances as all other mediums alone or
in combination. Preferred stock convertible into common was next
most widely used. Cash, as the sole medium of exchange, was
used sparingly. Cash was used with stock or bonds in 115 instances.
Common stock warrants were rarely used. In all, ten methods or
combinations of methods of payment were used by the conglomerates.
They have made use of cash, common stock, preferred stock and
bonds, alone and in almost all combinations.
The pooling of interest technique was used by the conglom-
erates to account for their acquired firms three to one over the pur-
chase method. In twelve instances both the pooling and purchase
methods were used. This was limited to acquisitions where bonds
or cash were used in conjunction with stock. That portion of the
of limited data, it is clear that conglomerates have a tendency to
bid for their acquisition. Fourth, there is a tendency for the se-
lected conglomerates to pay higher prices for firms acquired each
year. Finally, it is obvious from observing data presented that
the conglomerates use varied terms and methods of payment in an
attempt to satisfy the desire to acquire.
Tests of the Hypothesis That Firms Acquired Are Easily Disposed Of
There are three tests of this hypothesis presented: 1) sell-
off activity of the selected conglomerates; 2) policy of the firm with
respect to selling firms acquired;and 3) policy of the firms with re-
spect to retaining management of the acquired firms.
The first test of this hypothesis is the sell-off activity of
the forty-three firms. That firms acquired are resold is evidence
that a market exists facilitating resale. The more resales of firms
that are made, the more the indication is that firms are easily sold.
All the information relevant to this test has been presented
previously. Reference is made here to Page 74 where the data are
summarized. The warning given earlier concerning the limitations of
sell-off data is equally applicable here.
The significance of the test to the hypothesis now under con-
sideration rests with the ability of the relevant data to show that