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RISE OF CONGLOMERATES

Third Merger Wave

Beginning in the late 1950s and running through the 1960s, a third period of rapid corporate expansion enveloped the nation. Unlike the first two (in the 1890s and the 1920s), when companies either combined horizontally with firms involved in the same business or vertically with suppliers or customers, conglomerates combined companies in completely unrelated industries. This new corporate strategy was based on the the assumption that the firm would be protected by diversification during times of economic fluctuation—if the market was down for one product, it may not be for another. Such mergers accounted for 60 percent of all corporate combinations in the 1960s.

International Telephone and Telegraph

International Telephone and Telegraph (ITT) conglomerate strategy was fairly typical of the decade. Originally a telecommunications firm operating in foreign countries, ITT's chief executive officer, Harold Geneen, became concerned about the possibilities of growth overseas. To protect the company, he instituted a policy of expanding the firm's domestic holdings through acquisition. Between 1961 and 1968 ITT purchased fifty-two companies with combined assets of __BODY__.5 billion. Firms added to the ITT family included Avis (rental cars), Continental Baking (Wonder Bread, Twinkies), Canteen Corporation (food sales), Levitt and Sons (home construction), Sheraton Corporation (hotels), and Hartford Fire Insurance. As a result of this diversification, only 20 percent of ITT's total revenues in 1974 derived from the original telecommunications division.

Tobacco Industry

The tobacco companies had a special reason to use the conglomerate strategy. By the 1930s the industry was dominated by four major firms, R. J. Reynolds, American Tobacco, Liggett and Myers, P. Lorillard, and a smaller newcomer, Philip Morris. In the 1960s the industry was threatened by new research relating cigarettes to cancer, a ban of cigarette ads on television, and mandatory warning labels on cigarette packages and advertising. Given this environment, executives of all the tobacco companies chose to diversify by investing in nontobacco businesses. American Tobacco purchased Jim Beam, Master Lock, Franklin Life Insurance, and Sunshine Biscuits. In 1969 it even changed its name to American Brands. R. J. Reynolds bought American Independent Oil, Chun King, Del Monte, and Morton Foods. P. Lorillard became part of the Loews conglomerate, and Liggett and Myers bought Alpo dog food and Izmira Vodka. Among Philip Morris's acquisitions were Miller Brewing Company and Seven-Up.

Peak and Decline

The conglomerate wave reached its peak in 1968. Three factors account for the declining interest in this corporate form. While the Justice Department began to take a more aggressive stance against conglomerates, profits of such companies failed to live up to expectations. Finally, the recession of the early 1970s curtailed the conglomerate expansion until it was revived again in the 1980s.