When corporations get big, they do so in predictable ways. They might acquire competitors in the same field in the hopes of controlling a critical share of the market. It’s a strategy that monopolies like Standard Oil perfected over a century ago.
There’s also vertical integration, where a company acquires suppliers or distributors and retailers to better control production from raw materials to end consumer. Think Ford Motor Company in the 1920sThen there’s diversification, where companies go into other different fields. That accurately describes today’s big, diversified companies.
But for the most part, the different pieces of contemporary mega firms have some subtle relationship to one another. Most of the constituent companies might be defense contractors, for example, or represent different applications of a core business such as computing power.
In the immediate postwar era, though, large corporations adopted a very different version of diversification. The new paradigm was ostensibly born of a desire to balance seasonal fluctuations in the core business, or the vicissitudes of the business cycle. When one part of the company struggled, another flourished. Or so the theory went.
In reality, the new emphasis on eclecticism was driven by a desire to avoid government scrutiny. In 1950, Congress passed the Act, which sought to strengthen enforcement of antitrust laws, particularly any attempt at vertical integration that might squelch competition. For corporations seeking to get bigger without risking regulatory scrutiny, the response was obvious: acquire utterly unrelated business. The farther afield the new acquisition, the better.
So began a very strange chapter in the nation’s business history. “An asbestos products concern went into aviation equipment. Dry batteries went into glasses. Carbon steel went into beer. Coal mining went into underwear. Textiles went into airborne radar equipment. Recovery of placer gold went into wine.” And so on.
But these initial feints at diversification could not compare to the scale of the acquisitions the following decade. In the 1960s, “conglomerate” became a household word, one that showed up in popular culture as shorthand for the incomprehensible bigness of American business.
As historian Richard has shown, these new corporate combines popularized a curious babble of buzzwords. The vaporous concept of synergy, for example, became one of the most common ways to rationalize the marriage of companies manufacturing everything from chewing gum to aircraft propellers.
The reality was more complicated and interesting. The era’s most iconic conglomerates LTV, Litton Industries, Gulf and Western, and International Telephone and Telegraph were generally run by impresarios who didn’t really have much of a grand vision for their motley enterprises. Instead, they relied on financial legerdemain and a philosophy of endless acquisition to keep their enterprises growing.
Typical of the breed was James Ling, who founded LTV, in 1961. A high-school dropout who spent time in the Navy before teaching himself the rudiments of electrical engineering, Ling managed to parlay $3,000 into a gargantuan conglomerate.
His strategy was consistent: Borrow money from unconventional sources, typically banks in Europe. Use the cash to finance a corporate takeover. Merge the two companies via a swap of securities and then spin off parts of the new unit as separate subsidiaries, each of which issued stock, with LTV retaining control of 70% to 80% of the shares. Lather, rinse, repeat.
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