Conglomerate Boom

The Conglomerate Boom

Synergy Generates Energy

The market shook off its losses and settled down to ponder its next move. It was not too long in coming.

Part of the genius of the financial market is that if a product is demanded, it is produced. The product that all investors desired was expected growth in earnings per share. And if growth wasn’t to be found in a name, it was only to be expected that somene would find another way to produce it. By the mid-sixties of the 20th Century, creative entrepreneurs had discovered that growth was a word and the the word was synergism.

Synergism is the quality of having 2 plus 2 equal 5. Thus, it seemed quite plausible that two separate companies with an earning power of $2 million each might produce combined earnings of $5 million if the businesses were consolidated. This magical, mystical, surefire profitable new creation was called a conglomerate.

While antitrust laws at that time kept large companies from purchasing forms in the same idnustry, it was possible for a while to purchase firms in other industries without inerference from the Justice Department.

New York, Chinatown, Mosco street. Photo by Elena.

The consolidations were carried out in the name of synergism. Ostensibly, mergers would allow the conglomerate to achieve greater financial strength (and thus greater borrowing capabilities at lower rates); to enhance markteing capabilities through the distribution of complementary product lines; to give greater scope to superior managerial talents; and to consolidate, and thus make more efficient, operating services such as personnel and accounting departments. All this led to synergism – a stimulation of sales and earnings for the combined operation that would have been impossible for the independent entities alone.

In fact, the major impetus for the conglomerate wave of the of the 1960s was that the acquisition process itself could be made to produce growth in earnings per share. Indeed, the managers of conglomerates tended to possess financial expertise rather than the operating skills required to improve the profitability of the acquired companies. By an easy bit of legerdemaind, they could put together a group of companies with no basic potential.

(Source: Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.)