Title Page
 Table of Contents
 The significance of the hypoth...
 Tests of the diversification, diversification...
 Tests of the growth rate, aggressiveness...
 Tests of the hypotheses that conglomerates...
 The conglomerate: Its nature and...
 Biographical sketch

Group Title: study of the behavioral characteristics of conglomerates
Title: A study of the behavioral characteristics of conglomerates
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Permanent Link: http://ufdc.ufl.edu/UF00098206/00001
 Material Information
Title: A study of the behavioral characteristics of conglomerates
Physical Description: x, 199 leaves : illus. ; 28 cm.
Language: English
Creator: Wood, Thomas D., 1931-
Publication Date: c1971
Copyright Date: 1971
Subject: Conglomerate corporations -- United States   ( lcsh )
Accounting thesis Ph. D   ( lcsh )
Dissertations, Academic -- Accounting -- UF   ( lcsh )
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
Thesis: Thesis - University of Florida.
Bibliography: Bibliography: leaves 195-198.
General Note: Manuscript copy.
General Note: Vita.
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Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: alephbibnum - 000565825
oclc - 13586299
notis - ACZ2245


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Table of Contents
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    The significance of the hypotheses
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    Tests of the diversification, diversification through acquisitions and continuity of acquisitions hypotheses
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    Tests of the hypotheses that conglomerates retain management of acquired firms and the structure of conglomerates
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    The conglomerate: Its nature and implications for the future
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    Biographical sketch
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Full Text

A Study of the Hehavioial
Characteristics )f Conglomerates





Copyright By




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.


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



Thomas David Wood

March, 1971

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

through acquisitions.

3. Acquisitions are a continuing phenomenon.

4. Conglomerates have high earnings per share growth

rate objectives.

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.

5S bid.

:; ._ ,__,- ". '_ 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

or rejected.

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

through acquisitions.

3. Acquisitions are a continuing phenomenon.

4. Conglomerates have high earnings per share growth

rate objectives.

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

relevant data.

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.



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.

3 bid.

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-

tages are:

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

on hand.

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
Rate Goals

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 -,
1967), 67.

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

$28 000
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.

18Ibid., 14.

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

easily sold.

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,
1966), 80.

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

take place.28

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.



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-

tries .

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.




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
Through Acquisitions

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


Specified Sales Level 4

Specifications with Respect to Earnings of
Firms Acquired:

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

Other Requirements:

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
Technology G
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-


Conglomerate Acquisitions

A. J. Industries Dristwhit Metals
Robert Gordon Appliance
Jessup Wood Products

Allied Products Sterling Bolt
Coz Chemical
General Bronze

AMK John Morrell
Chicago Railway Equip.

Bangor Punta Smith and Wesson
Waukesha Motor Co.

Field or Industry

Metals Fabricating
Applia nces
Wood Products

Industrial Fittings

Meat Packer
Railway Equip.

Gun Manufacture
Marine Products
Engines and Radiators

Conglom erate

City Investing

Clark Equipment



Moore & McCormack
Rheem Mfg. Co.
Motel 6, Inc.
Home Insurance Co.

Refrigeration Engineering

Chicago Malleable Steel


Field or Industry

Steamship Iine
Industrial Equip.
Motel Chain

-Refrigeration Com-
Steel Components

Railroad Equip.

Eaton, Yale and American Monorail Transportation
Towne E.N.V. Engineering Engineering Service

Glen Alden Schenley Whiskey
Stanley-Warner Apparel
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



A. J. Industries 16
Allied Products 18
"Auto" Sprinkler 20
Bangor Punta 23
Bendix 27
Boise Cascade 32
Chromalloy 38
City Investing 15
Clark Equipment 11
Dresser 13
Eagle-Picher 12
Eaton, Yale & Towne 16
FMC 33
Genesco 34
Glen Alden 15
W. R. Grace 69
Gulf & Western 81
Houdaille 20
Indian IHead 32
Int'l. Silver 12
Int'l. Tel. & Tel. 49a
Walter Kidde 50
Lear-Siegler 43
Lehigh Valley 23
Ling-Temco-Vought 26
Litton 70
MSL 23
Midland Ross 17
National General 9
N. A. Rockwellc 15
Ogden 27
Parker-iHannifin 17
Republic Corp. 37
SCM 13
Seilon 9
TRW 38
Teledyne 109
Textron 76
Transaemrica 21d
UMC 22

1968 1967

7 1
3 5
2 12
3 7
5 4
2 9
13 7
6 7
2 1
2 3
4 2
1 1
3 5
1 3
9 8
7 7
1 2
5 5
2 1
9 9
11 12
8 3
7 3
3b 5
9 12
4 1
3 1
4 4
7 3
1 1
27 7
1 5
7 4
39 28
4 4
6 1

1966 1965 1964

2 2 1
3 3 5

.6 13 11
6 12 11
1 3 1
4 3
2 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
4 2
4 2
3 1 2
6 8 5
4 6 5
1 2 3

1963 1962 1961

1 2 1

1 1
2 1
2 2

1960 1969 Prior To 1959

4 2

2 1

1 2
1 2
3 1
1 1
5 4
4 1
1 1

3 3
2 4

1 1

1 2

6 9
1 1
3 6


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-
nancial journals.


1963 1962 1961 1960 1959 Prior To 1959

1 1
2 1

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

insurance company.

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

own parts.

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

acquisitions began.

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

metal fields.

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.


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
Rate Goals

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

in GNP.

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


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.


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.


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

Appendix VIII.

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

to persevere.

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
Bangor Punta
Glen Alden
W. R. Grace
Gulf & Western
Indian Head
Int'l. Silver
Int'l. Tel. & Tel.
Lehigh Valley
Midland Ross
National General
N. A. Rockwell
U.S. Industries


Prior To
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 1
1 2 1 3

2 1

2 4 2


2 2 5
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.

1 1
1 1


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

have acquired.

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
City Investing
& 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 &
City Investing
Litton & Ling-Temco-
National General & AMK

TRW & Gould National
"Automatic" Sprinkler &
Jim Walter Corp.





Edgecomb Steel
Piper Aircraft
Schenley Ind.

Crucible Steel
Harley Davidson
United Fruit

Sinclair Oil

Home Insurance

Great America
Great American
Holding Co.

U.S. Pipe





Chris Craft
Glen Alden

Colt Ind.


City Investing


National General


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
Allied Products
"Automatic" Sprinkler
Bangor Punta
Boise Cascade
City Investing
Clark Equipment
Eaton, Yale & Towne
Glen Alden
W. R. Grace
Gulf & Western
Indian Head
International Silver
International Tel. &Tel
Walter Kidde
Lehigh Valley
Midland Ross
National General
N. A. Rockwell

I" I'' *''*
* i '





2 7 1

3 8
2 7 1
4 2 2
5 12 2
3 22 5
2 17 4
1 6
9 2
3 1 2
3 6
17 2
1 23 4
1 1
1 3 6
5 4 1
3 3 2
4 2
21 2
1 30 4
8 5
2 6 1
2 4 1
27 10
1 2
2 1
1 4 4
4 11
6 2
1 27
2 3

1 9



1 10
1 2
2 23


4 3
2 2
1 1 1 2 1
2 4 1
4 5 8 1
6 7
9 3
15 4
1 1 2 5 3
3 4
6 3
3 1
1 5 1
5 12 1
3 21 9
1 2 1 2
1 52 14
1 1 1 1 12 5 3 1
4 2
5 1 1
20 35 1 1
7 25 1
8 19
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
7 1
1 2


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.



3 13 1
1 6 1 69 10
5 5
1 9
5 2
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

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