How 1960s conglomerates manufactured growth out of accounting arithmetic
In the 1960s a company could appear to grow fast without making anything better. It bought firms whose shares were cheap relative to their profits, paid in paper instead of cash, and added their earnings to its own. Per-share profit jumped, its stock rose, and the cycle began again with the next target.
A conglomerate is a parent company that owns a spread of unrelated businesses, each legally separate but steered from the top. The pitch is scale, market muscle and spreading risk across industries. In the United States during the 1960s, cheap borrowing and loose accounting turned that pitch into a bubble. Names like Litton Industries, Textron, ITT and Gulf and Western swallowed firm after firm, and 1968 alone saw roughly 4,500 mergers, a record.
The human cost landed far from Wall Street. Most conglomerates were run from New York or Los Angeles, while many of their purchases were in the country's interior. Executives at acquired firms were laid off or answered to bosses in distant cities, and places like Pittsburgh lost about a dozen corporate headquarters. Fear of being next kept managers everywhere distracted with takeover defences.
The unravelling began in January 1968, when Litton reported quarterly profit of 21 cents a share against 63 cents a year earlier. It was no scandal, yet the stock plunged from 90 dollars to 53. Rising interest rates cut profits, investors realised the sprawling businesses were just as cyclical as any others, and by the mid-1970s most had been reduced to shells. Index funds, available from 1976, also let ordinary investors diversify cheaply without a conglomerate.
Not every conglomerate was a mirage. Berkshire Hathaway used spare insurance cash to buy businesses across many industries, and financial services made up about 45 per cent of General Electric's earnings in 2005. Asia kept the model alive in its own forms: Japan's keiretsu link firms through cross-shareholdings and a central bank, while Korean chaebol such as Samsung and LG are family-run and passed down generations.
Source: Conglomerate (company)
