Conglomerate Boom: What It Is, How It Works, Example

What Was the Conglomerate Boom?

The conglomerate boom was a period of rapid growth in the number of conglomerates, or big corporations made up of many companies spanning multiple and often unrelated fields or industries.

Understanding the Conglomerate Boom

The boom in conglomerate formation occurred in the period following World War II, thanks in part to low-interest rates that helped finance leveraged buyouts. A series of economic tailwinds came together to create an environment that supported a flourishing middle class. The conglomerate boom was coincident with the period now regarded as The Golden Age of Capitalism.

The conglomerate boom occurred in the 1960s thanks to low-interest rates and a market that fluctuated between bullish and bearish, providing good buyout opportunities for acquiring companies.

The trigger for the conglomerate boom was the Celler-Kefauver Act of 1950 which banned companies from growing through acquisitions of their competitors or suppliers. Hence, organizations began looking elsewhere for growth and acquired companies in unrelated fields.

These companies were packaged as a firm-as-portfolio model. However, when interest rates began to rise again in the 1970s, many of the biggest conglomerates were forced to spin off or sell many of the companies they'd acquired, particularly when they'd only done so to raise more loans and had failed to increase the efficiency of the companies they'd absorbed.

The Federal Trade Commission (FTC) also became concerned with the power wielded by conglomerates and began investigating their accounting books, leading many firms to break up. This was accompanied by the popularity of "bust-up" takeovers after Ronald Reagan came to power. Financiers bought large conglomerates and sold their constituent parts for a profit. Some held on and proved that conglomerates can be advantageous, particularly if they are well-diversified. For example, Berkshire Hathaway is a conglomerate holding company that has operated very successfully for years.

Conglomerates Today

Today, especially in advanced economies like the U.S., the bargaining power of conglomerate corporate forms is overtaken by advancements in capital markets. For example, many monoline, private companies have access to the same, if not more, levels of capital as even the biggest conglomerates of yesteryear.

As such, as a business or growth strategy, becoming a conglomerate doesn't offer the same economies of scale as it once did. 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 be publicly traded. The rise of venture capital and private equity has played a big role in this shift.

Furthermore, many businesses today prefer to specialize in what they know best, while leasing, licensing, or partnering with other complementary businesses. This has cut into the once sacred operational economies of scale believed to permeate throughout conglomerates.

Conglomerate Boom Example

Ling-Temco-Vought (LTV) was a conglomerate that came of age during the 1960s boom. The Dallas-based company began life as an electrical contracting firm in 1947 founded by entrepreneur James Ling.

A former Navy man, Ling had a flair for risk. In 1959, he bought Altec Electronics, a maker of stereo systems, and followed it up by acquiring Temco Aircraft, a missile company. By 1970, LTV had become the fourteenth largest industrial company in the USA. Subsequent acquisitions by the company were a diverse set and included a pharmaceuticals company, a wire and cable company, and a sporting goods company.

The company's stock valuation reached new highs, enabling Ling to further draw on capital for more acquisitions. "It Is Theoretically Possible for the Entire United States to Become One Vast Conglomerate Presided Over by Mr. James L. Ling," declared the Saturday Evening Post in 1968. Ling's companies produced revenues through clever accounting practices but no profits.

But the house of cards quickly unraveled. The Justice Department cracked down on LTV after its acquisition of a steel company. Its share price tumbled 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 through the 1980s, selling off its assets and rebranding itself as a steel company. Eventually, LTV closed down in 2000.