What was the conglomerate boom?
The conglomerate boom was a period of rapid growth in the number of conglomerates or large corporations made up of many companies spanning multiple, often unrelated fields or industries.
- The conglomerate boom refers to a period in the American economy, during the 1960s, when large corporations bought several companies in multiple or unrelated fields.
- Low interest rates and a volatile stock market were the main reasons for the conglomerate boom.
- High interest rates and the Reaganomy ended the era of conglomerates in the American economy.
Understanding the conglomerate boom
The boom in conglomeration came in the post-World War II period, thanks in part to low interest rates that helped finance leveraged acquisitions. A series of economic tailwinds came together to create an environment that supported a burgeoning middle class. The rise of the conglomerates coincided with the period now considered the Golden Age of capitalism.
The conglomerate boom came in the 1960s thanks to low interest rates and a market that fluctuated between bullish and bearish, providing good buying opportunities to acquire companies.
The trigger for the conglomerate boom was the Celler-Kefauver Act of 1950, which prohibited companies from growing through acquisitions of their competitors or suppliers. Therefore, organizations began looking elsewhere for growth and acquired companies in unrelated fields.
These companies were packaged as a business model as a portfolio. However, when interest rates began to rise again in the 1970s, many of the larger conglomerates were forced to spin off or sell many of the companies they had acquired, especially when they had only done so to obtain more loans. and they had failed to do so. increase the efficiency of the companies they had absorbed.
The Federal Trade Commission (FTC) also became concerned about the power wielded by conglomerates and began investigating their ledgers, leading to the failure of many companies. This was accompanied by the popularity of “explosive” acquisitions after Ronald Reagan came to power. Financiers bought large conglomerates and sold their constituent parts for a profit. Some were maintained and showed that clusters can be advantageous, especially if they are well diversified. For example, Berkshire Hathaway is a conglomerate holding company that has been operating very successfully for years.
Today, especially in advanced economies like the United States, the bargaining power of corporate conglomerate forms is outstripped by advances in capital markets. For example, many private monoline companies have access to the same, if not more, levels of capital than even the largest conglomerates of yesteryear.
As such, as a business or growth strategy, becoming a conglomerate does not offer the same economies of scale as before. In fact, it’s not uncommon for people to refer to the private market as the new public market – to raise significant capital, a company no longer needs to go public. The increase in venture capital and private capital has played an important role in this change.
Additionally, many companies today prefer to specialize in what they do best, while renting, licensing, or partnering with other complementary businesses. This has affected the once sacred operational economies of scale believed to permeate conglomerates.
Cluster boom example
Ling-Temco-Vought (LTV) was a conglomerate that came of age during the boom of the 1960s. The Dallas-based company began life as an electrical contracting company in 1947 founded by businessman James Ling.
Ling, a former sailor, had a talent for risk. In 1959, it bought Altec Electronics, a manufacturer of stereo systems, and went on to acquire Temco Aircraft, a missile company. By 1960, LTV had become the fourteenth largest industrial company in the United States. The company’s subsequent acquisitions were a diverse set and included a pharmaceutical company, a wire and cable company, and a sporting goods company.
The company’s stock valuation reached new highs, allowing Ling to use more capital to make more acquisitions. “It is theoretically possible for the entire United States to become one large conglomerate chaired by Mr. James L. Ling,” declared the Saturday Evening Post in 1968. Ling’s businesses produced income through smart accounting practices, but without profit.
But the house of cards quickly fell apart. The Justice Department cracked down on LTV after the acquisition of a steel company. His stock price fell from $ 169 in 1967 to $ 4.25 in 1970, when James Ling was ousted from the company he founded. LTV survived in one form or another during the 1980s, selling off its assets and rebranding itself as a steel company. Finally, LTV closed in 2000.