Editing Conglomerate (company) (section)

===The conglomerate fad of the 1960s===
During the 1960s, the United States was caught up in a "conglomerate [[fad]]" which turned out to be a form of an [[economic bubble]].<ref name="Carlisle_Page107">{{cite book |last1=Carlisle |first1=Tobias E. |title=Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations |date=2014 |publisher=John Wiley & Sons |location=Hoboken, NJ |isbn=9781118747964 |page=107 |url=https://books.google.com/books?id=Nf38AwAAQBAJ&pg=PA107 |access-date=September 29, 2020}}</ref>

Due to a combination of low interest rates and a repeating [[bear-bull market]], conglomerates were able to buy smaller companies in [[leveraged buyout]]s (sometimes at temporarily deflated values).<ref name="Gilmore">{{cite news |last1=Gilmore |first1=Nicholas |title=The Forgotten History of How 1960s Conglomerates Derailed the American Dream |url=https://www.saturdayeveningpost.com/2018/11/the-forgotten-history-of-how-1960s-conglomerates-derailed-the-american-dream/ |access-date=September 28, 2020 |work=The Saturday Evening Post |publisher=Saturday Evening Post Society |date=November 1, 2018 |location=Indianapolis}}</ref> Famous examples from the 1960s include [[Gulf and Western Industries]],<ref name="Holland1989pp57-64,81-86">{{Harvnb|Holland|1989|pp=57–64, 81–86}}.</ref> [[Ling-Temco-Vought]],<ref name="Holland1989pp57-64,81-86"/>  [[ITT Corporation]],<ref name="Holland1989pp57-64,81-86"/> [[Litton Industries]],<ref name="Holland1989pp57-64,81-86"/> [[Textron]],<ref name="Holland1989pp57-64,81-86"/> and [[Teledyne]].<ref name="Holland1989pp57-64,81-86"/> The trick was to look for acquisition targets with solid earnings and much lower [[price–earnings ratio]]s than the acquirer.<ref name="Coxe_Page14">{{cite book |last1=Coxe |first1=Donald |title=The New Reality of Wall Street |date=2003 |publisher=McGraw-Hill |location=New York |isbn=9780071436311 |page=14 |url=https://books.google.com/books?id=whXvGI4m9m8C&pg=PA14 |access-date=October 11, 2020}}</ref><ref name="Carlisle_Page102">{{cite book |last1=Carlisle |first1=Tobias E. |title=Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations |date=2014 |publisher=John Wiley & Sons |location=Hoboken, NJ |isbn=9781118747964 |page=102 |url=https://books.google.com/books?id=Nf38AwAAQBAJ&pg=PA102 |access-date=September 29, 2020}}</ref> The conglomerate would make a [[tender offer]] to the target's shareholders at a princely premium to the target's current stock price.  Upon obtaining shareholder approval, the conglomerate usually settled the transaction in something other than cash, like [[debenture]]s, [[Bond (finance)|bond]]s, [[Warrant (finance)|warrants]] or [[convertible bond|convertible debentures]] (issuing the latter two would effectively dilute its shareholders down the road, but many shareholders at the time were not thinking that far ahead).<ref name="Brooks_Page161">{{cite book |last1=Brooks |first1=John |title=The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s |date=1973 |publisher=Allworth Press |location=New York |isbn=9780471357551 |page=161 |url=https://books.google.com/books?id=cEDFRo4Kab0C&pg=PA161 |access-date=September 28, 2020}}</ref> The conglomerate would then add the target's earnings to its earnings, thereby increasing the conglomerate's overall [[earnings per share]].<ref name="Carlisle_Page102" /> In finance jargon, the transaction was "[[Accretion (finance)|accretive]] to earnings."<ref name="Coxe_Page14" /> 

The relatively lax accounting standards of the time meant that accountants were often able to get away with creative mathematics in calculating the conglomerate's post-acquisition consolidated earnings numbers.<ref name="Brooks_Page158">{{cite book |last1=Brooks |first1=John |title=The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s |date=1973 |publisher=Allworth Press |location=New York |isbn=9780471357551 |page=158 |url=https://books.google.com/books?id=cEDFRo4Kab0C&pg=PA158 |access-date=September 28, 2020}}</ref> In turn, the price of the conglomerate's stock would go up, thereby re-establishing its previous price-earnings ratio, and then it could repeat the whole process with a new target.<ref name="Carlisle_Page102" /><ref name="Brooks_Page158" /> In plain English, conglomerates were using rapid acquisitions to create the illusion of rapid growth.<ref name="Carlisle_Page102" /> In 1968, the peak year of the conglomerate fad, U.S. corporations completed a record number of mergers: approximately 4,500.<ref name="Brooks_Page154">{{cite book |last1=Brooks |first1=John |title=The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s |date=1973 |publisher=Allworth Press |location=New York |isbn=9780471357551 |page=154 |url=https://books.google.com/books?id=cEDFRo4Kab0C&pg=PA154 |access-date=September 28, 2020}}</ref> In that year, at least 26 of the country's 500 largest corporations were acquired, of which 12 had assets above $250&nbsp;million.<ref name="Brooks_Page154" />

All this complex company reorganization had very real consequences for people who worked for companies that were either acquired by conglomerates or were seen as likely to be acquired by them.  Acquisitions were a disorienting and demoralizing experience for executives at acquired companies—those who were not immediately [[layoff|laid off]] found themselves at the mercy of the conglomerate's executives in some other distant city.<ref name="Brooks_Page177">{{cite book |last1=Brooks |first1=John |title=The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s |date=1973 |publisher=Allworth Press |location=New York |isbn=9780471357551 |page=177 |url=https://books.google.com/books?id=cEDFRo4Kab0C&pg=PA177 |access-date=September 28, 2020}}</ref> Most conglomerates' headquarters were located on the [[West Coast of the United States|West Coast]] or [[East Coast of the United States|East Coast]], while many of their acquisitions were located in the country's interior.<ref name="Brooks_Page177" /> Many interior cities were devastated by repeatedly losing the headquarters of corporations to mergers, in which independent ventures were reduced to subsidiaries of conglomerates based in New York or Los Angeles.<ref name="Brooks_Page177" /> Pittsburgh, for example, lost about a dozen.<ref name="Brooks_Page177" /> The terror instilled by the mere prospect of such harsh consequences for executives and their home cities meant that fending off takeovers, real or imagined, was a constant distraction for executives at all corporations seen as choice acquisition targets during this era.<ref name="Brooks_Page175">{{cite book |last1=Brooks |first1=John |title=The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s |date=1973 |publisher=Allworth Press |location=New York |isbn=9780471357551 |page=175 |url=https://books.google.com/books?id=cEDFRo4Kab0C&pg=PA175 |access-date=September 28, 2020}}</ref>

The chain reaction of rapid growth through acquisitions could not last forever. When interest rates rose to offset rising inflation, conglomerate profits began to fall.  The beginning of the end came in January 1968, when Litton shocked Wall Street by announcing a quarterly profit of only 21 cents per share, versus 63 cents for the previous year's quarter.<ref name="Brooks_Page181">{{cite book |last1=Brooks |first1=John |title=The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s |date=1973 |publisher=Allworth Press |location=New York |isbn=9780471357551 |page=181 |url=https://books.google.com/books?id=cEDFRo4Kab0C&pg=PA181 |access-date=September 28, 2020}}</ref> This was "just a decline in earnings of about 19 percent", not an actual loss or a corporate scandal, and "yet the stock was crushed, plummeting from $90 to $53".<ref name="Carlisle_Page107" />  It would take two more years before it was clear that the conglomerate fad was on its way out.<ref name="Brooks_Page181" /> The stock market eventually figured out that the conglomerates' bloated and inefficient businesses were as cyclical as any others—indeed, it was that cyclical nature that had caused such businesses to be such undervalued acquisition targets in the first place<ref name="Coxe_Page14" />—and their descent put "the lie to the claim that diversification allowed them to ride out a downturn."<ref name="Carlisle_Page106">{{cite book |last1=Carlisle |first1=Tobias E. |title=Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations |date=2014 |publisher=John Wiley & Sons |location=Hoboken, NJ |isbn=9781118747964 |page=106 |url=https://books.google.com/books?id=Nf38AwAAQBAJ&pg=PA106 |access-date=September 29, 2020}}</ref> A major selloff of conglomerate shares ensued.<ref name="Coxe_Page15">{{cite book |last1=Coxe |first1=Donald |title=The New Reality of Wall Street |date=2003 |publisher=McGraw-Hill |location=New York |isbn=9780071436311 |page=14 |url=https://books.google.com/books?id=whXvGI4m9m8C&pg=PA15 |access-date=October 11, 2020}}</ref> To keep going, many conglomerates were forced to shed the new businesses they had recently purchased, and by the mid-1970s most conglomerates had been reduced to shells.<ref>{{cite web |url=http://www.referenceforbusiness.com/history2/49/Hitachi-Ltd.html |title= Hitachi Ltd – Company Profile; Information, Business Description, History, Background Information on Hitachi, Ltd |access-date=2010-08-25 |url-status=live |archive-url=https://web.archive.org/web/20100212035433/http://www.referenceforbusiness.com/history2/49/Hitachi-Ltd.html |archive-date=2010-02-12}}</ref> The conglomerate fad was subsequently replaced by newer ideas like focusing on a company's [[core competency]]<ref name="Sherman_Page_155">{{cite book |last1=Sherman |first1=Andrew J. |title=Mergers and Acquisitions from A to Z |date=2018 |publisher=AMACOM Books |location=New York |isbn=9780814439036 |page=155 |edition=4th |url=https://books.google.com/books?id=KD9RDwAAQBAJ&pg=PA155 |access-date=June 19, 2024}}  Google Books incorrectly indicates that this book was authored by Thomas Nelson, but the first page of this work indicates that the correct author is Andrew J. Sherman.</ref> and unlocking [[shareholder value]] (which often translate into [[Corporate spin-off|spin-off]]s).<ref name="Christensen_Page_243">{{cite book |last1=Christensen |first1=Clayton M. |last2=Raynor |first2=Michael E. |author1-link=Clayton Christensen |author2-link=Michael E. Raynor |title=The Innovator's Solution: Creating and Sustaining Successful Growth |date=2003 |publisher=Harvard Business Review Press |location=Boston |isbn=9781422196571 |page=243 |url=https://books.google.com/books?id=I5nBAgAAQBAJ&pg=PA243 |access-date=June 19, 2024}}</ref>