Once upon a time, if you heard the name of a company, you knew what it made. And if you heard the name of a product, you knew who made it.
R. J. Reynolds meant Camels, Philip Morris meant Philip Morris, and both meant cigarettes. Consolidated Foods meant what it said. So did National Steel. Greyhound meant intercity buses. Colgate-Palmolive meant toothpaste and soap.
Today, such once-stable corporate personalities have been split in a wave of business mergers. Most of these are not old-fashioned mergers -- one company buying another in the same line of business. They are mainly conglomerate, unions of unrelated businesses, a kind of economic hopscotch aimed in part at corporate diversification.
Some companies are playing this takeover game for defensive reasons: they are in withering industries, and want to broaden their base. Others are also in it because they have large amounts of idle cash, and the stock market is depressed. Stocks -- whole companies -- are one of the cheapest things you can buy in America today.
As they buy and sell each other -- always for their own good reasons -- the merger wave-makers are changing the economy and country.
Their decisions affect areas as diverse as competition, efficiency, innovation, the growth rate of the economy, overseas trade, local philanthropy, and the viability of whole communities.
In some industries, the merger movement has increased economic concentration. It also may have lessened growth: instead of spending money to create new plants, companies buy old ones.
You have to look behind the logos today. Well-known R. J. Reynolds has lessened its dependence on tobacco by acquiring Burmah Oil & Gas and Del Monte. Before being bought, Del Monte had moved beyond bananas and green beans into building maintenance and security services.
Philip Morris, which had swallowed Miller Brewing in 1970, drank more deeply of the beverage market by buying Seven-Up Co.
Consolidated Foods got into panty hose by buying Hanes Corp.
National Steel, which earlier had hedged its bets on a shrinking industry by buying into aluminum, recycled aluminum profits into the nation's seventh-largest publicly owned savings and loan enterprise, the 86-branch United Financial Corp. of California.
Greyhound, following earlier detours into computers, meats and soaps, drove down another byroad to buy Verex, an insurer of home mortgages.
"And Colgate-Palmolive became the corporate casing of a salami venture by buying Riviana foods, a rice business that had eaten Hebrew National Kosher Foods.
These acquisitions cost a total of $2.4 billion. That was only froth on a merger wave of tidal force. It began to form in 1975. Since then, by the estimate of Chairman Harold M. Williams of the Securities and Exchange Commission, it has reshuffled the ownership of a stunning $100 billion in corporate assets.
In 1979 alone, says Chicago merger specialist W. T. Grimm & Co., 2,189 acquisitions brought a record $43.5 billion -- nearly one-quarter more than 1978's total, and double 1977's. Sixteen had a price tax exceeding $500 million, compared with six in 1978, and 83 cost at least $100 million, as against 80 in 1978 and 41 in 1977.
A simpler indicator of merger activity, is the courtship of a particular firm. One you've probably never heard of is NN Corp. of Milwaukee, an insurance holding company. At least 25 times since 1973, one or another conglomerate has approached NN. It's stayed independent up to now. Financial statements can reveal how far a company has departed from its original business. An example is United States Steel, which has diversified as far afield as real estate Steel-making accounted for 69.4 percent of all of USS's capital investment in 1976, the first year in which it broke out such data. In 1978 it was down to 59.1 percent and in 1979 53.6 percent, the Massachusetts Institute of Technology's Bennett Harrison told a reporter.
Some cash-rich independent firms have been understandably cynical toward cash-poor conglomerates that sweet-talk about the nonsinful synergies of marriage. But cash-rich suitors also have often been received as friends, lovers or polygamous partners of convenience. In many cases, stockholders of bought-up companies have done well.
Prominent among the cash-rich suitors have been major oil companies. Last year, for example, Exxon easily won the hearts of the stockholders of Reliance Electric Corp., the third-largest maker of electric motors, by paying them more than double the market price of their shares.
The purchase price was $1.16 billion. Yet two other 1979 acquisitions cost more than Exxon's. RCA Corp. paid $1.35 billion for C.I.T. Financial. Shell Oil, in a horizontal merger -- the kind that joins like businesses -- paid $3.65 billion for Belridge Oil.
Belridge's owners were pleased enough that they paid a marriage-arrangement fee of $14.6 million to Morgan Stanley & Co., the leading investment banking house. Was the fee out of line? It came to only 0.4 percent of the price tag on the biggest acquisition in U.S. history.
A company wanting to diversify sometimes looks for a comfy "fit" between its business and a target firm's. An often-cited example of a good fit was that between Raytheon, a high-technology firm, and Amana, a maker of home appliances. After buying Amana in 1965, Raytheon first pioneered and then took a substantial share of the microwave oven market.
Yet many conglomerates buy businesses that don't thrive in their care, fir or no fit. Part of the problem may be found in a quip by Lammot duPont Copeland, a former president of E. I. duPont deNemours: "Running a conglomerate is a job for management geniuses, not for mortals like us at duPont."
In some cases, conglomerates have sold back acquisitions to buyers, including -- conspicuously -- heirs of the founders of the acquired firms. This was true of Colgate-Palmolive, which recently disgorged Hebrew National, and of Beatrice Foods and Hart Ski. Started in World War II by three high school dropouts, Hart Ski prospered; was bought in 1968 by Beatrice, which lost money on it; was sold in 1977 to a group including a son of one of the founders, and began to prosper anew.
Acquisitions may make perfect sense for many firms -- particularly those too big to be gobbled up by anyone else. In the period of 1971-1978, for example, none of the top 50 industrials -- firms such as the major oil companies, General Motors, IBM -- was acquired.
For many likely targets, however, acquisition is such a repugnant prospect that their managers disrupt their normal activities to develop elaborate defensive strategies, such as retaining a "White Knight" to gallop to the rescue by acquiring control of the target before a raider can.
The takeover game has become a managerial preoccupation. It has to be.
Even among the 1,000 largest industrial firms, nearly 400 consider themselves vulnerable to takeover, and 450 have developed formal defensive strategies, according to a late 1978 survey by the National Association of Accountants.
Some firms have reacted to takeover attempts by bolting the doors, calling the regulatory cops at the SEC and state capitals, going to court, hiring private investigators to dig for scandal, and mounting guerrilla warfare.
To stay out of the clutches of financier Victor Posner (Sharon Steel) in 1976, Foremost-McKesson (foods, drugs, liquors) got an injunction against further purchase of its stock. When the injunction ran out, Foremost was ready with a contingency plan to be bought up by friendly private investors.
In 1978, Occidental Petroleum made a bid, ultimately unsuccessful, for Mead Corp. Launchingi a swift counteroffensive the paper firm's two top officials sent Mead share owners a letter recalling that Occidental and its chairman, Armand Hammer, had some nasty brushes with the securities laws.Phrases such as "criminal violations" and "fraudulent course of conduct" were underlined.
Some firms contrive to make a takeover illegal. Daylin Inc. (women's wear, health foods, home improvement items) did that in defeating a $129 million takeover bid by W. R. Grace (chemicals, natural resources). It offered $68 million for a firm in some of the same lines of business as Grace, thus making Grace -- if it actually were to buy Daylin -- a potential antitrust violator.
Other firms, suspecting that their allure is mainly in their large cash dowries, spend them on acquisitions of their own, hoping thereby to repel unwanted suitors. This device was used in 1978 by Carrier Corp., a maker of heating and air conditioning equipment. Facing a takeover by United Technologies Corp. (UTC), Carrier bought Jenn-Air (appliances) for $82 million. It didn't work: UTC swallowed 49 percent of Carrier for $476 million.
An abundance of restless cash in corporate tills has been a major catalyst for partners, there being meager rewards for letting cash sit idle or for paying it out to stockholders.
In 1978, before buying Reliance Electric, Exxon could have bought -- using only its cash and liquid assets -- a 50 percent share of more than a dozen of the 500 leading industrial corporations on the Fortune magazine list, including Anheuser-Busch, E. I. duPont, Goodyear Tire & Rubber and J. C. Penney. IBM could have done the same.
Exxon paid cash for Reliance, and Shell paid cash for Belridge. RCA, completing its acquisition of C.I.T. last January, paid $662 million of the purchase price in cash. Thus the cash outlay in just three mergers totaled $5.47 billion. This was in keeping with a trend. In 1976, about 54 of 100 acquisitions were financed entirely with cash. In 1968, by contrast, only 16 of 100 were paid for -- even in part -- in cash.
For many corporations, obviously, buying up existing companies is simply the most appealing option. These firms may not be bargains according to classical economics, which holds that the market price reflects true value. But many of them -- at least one-third of those listed on the New York Stock Exchange, according to SEC Chairman Williams -- are selling below book value. And the cost of starting new companies from scratch, particularly in a roaring inflation, may be excessive.
The use of $100 billion to rejuggle existing corporate assets is troubling because, as Northwestern University's F. M. Scherer put it, "The real growth upon which our nation's prosperity depends comes only from making real investments."
He acknowledged to the Senate antitrust subcommittee that the evidence is inconclusive, but said: "One cannot help wondering, where would the case to finance 'growth' through takeovers have gone if massive conglomerate mergers had been prohibited? How much real investment was displaced by the mere financial investment that mergers entail?"
Without equivocation, the SEC's Williams says that the $100 billion "could have been devoted to new production and employment opportunities." This money, he emphasized, does not "flow back as new capacity, improvements in productivity, innovation, new products or new jobs."
Yet the merger wave hasn't furthered over-all concentration of the economy, according to data from congressional hearings, the Federal Trade Commission, and other sources. Instead, according to the FTC's Bureau of Competition, the wave has prevented the deconcentration that normally would have occurred in an expanding economy.
For this result, many experts put some of the blame on what they see as a tilt in the federal tax code toward mergers and bigness.
Effective tax rates have been lower for big firms: in late 1976, firms with assets of at least $1 billion paid $34.5 percent, while firms with assets under $10 million paid 9.5 points more. The code also invites retention of earnings, which then can be used for acquisitions, and lets stockholders in acquired firms who accept stock rather than cash defer taxation.
One key index of concentration is the proportion of manufacturing and mining assets held by industrial firms.
Last year, when there were about 217,000 of them, the top 200 controlled 59 percent, compared with 53 percent in 1955. The number with assets of at least $10 billion was 12, as against five in 1965.
At the peak of the pyramid, a mere 40 of the 217,000 corporations accounted in 1973 for an estimated 31 percent of all industrial assets.
Also by 1978, 71 industrial firms had at least 50,000 employes (including 22 with at least 100,000), compared with 32 in 1958, 51 in 1967 and 61 in 1972. 2
In retailing, the top 40 firms accounted for 29 percent of all assets. In food processing, the top 50 of 32,000 firms accounted for nearly 60 percent of the assets and almost 90 percent of the profits. In copper, oil companies owned 40 percent of domestic production facilities.
The current merger wave is the latest in a series.
The initial one, running from 1895 to 1904, saw more than 3,000 companies vanish through consolidations in industries such as distilling, railroads, steel and tobacco.
Over the next decade, 2,300 more companies disappeared into 319 industrial trusts, and 2,400 more were absorbed by 127 utilities.
For Congress, this was proof that the Sherman Act of 1890 was insufficient to prevent the creation of monopolies. So, in the Clayton Act of 1914, it included an antimerger provision intended to curb monopoly power "in its encipiency."
The provision proved to be no barrier to a new wave of mergers -- 4,583 of them -- between 1925 and 1929. Most were horizontal -- matings of firms in similar lines of business. Some were vertical, in which customers or suppliers were acquired. Relatively few were conglomerate.
In 1950, after a new surge, Congress, in the Celler-Kefauver Act, amended the 1914 law to forbid any merger where the effect "may be substantially to lessen competition, or tend to create a monopoly."
There's no doubt of the sponsors' intent to reach conglomerate mergers, which had begun to flourish and which, lacking theoretical limits, could forever let large firms be swallowed by larger ones, and larger ones by still larger ones. In a 1966 column, Art Buchwald foresaw the day when Samson Securities, owner of every company west of the Mississippi River, and Delilah Corp., owner of every company east of the Mississippi, would seek to merge.
But enforcement agencies and judges saw no threats to competition -- as conventionally defined -- in a merger of a firm making, say, agrochemicals with a company making zippers. The result was that conglomerate mergers proliferated while horizontal and vertical mergers languished.
At one point, the Supreme Court sent an apparent signal inviting an attack on certain conglomerate mergers. The Kennedy and Johnson administrations ignored the signal, but an aggressive incoming Nixon administration swiftly filed lawsuits to block five of them.
By this time, the 1960s conglomerate merger wave was cresting. In 1968 alone, 210 acquisitions gathered up nearly one of 10 firms with assets of at least $10 million. Attorney General John N. Mitchell was warning that the "danger . . . to our economic, political and social structure cannot be overestimated."
The lawsuits were built on a theory, offered by the late Richard W. McLaren, head of the Justice Department's Antitrust Division, that competition could be substantially lessened -- and Celler-Kefauver violated -- by certain conglomerate mergers. He specifically cited the type that joins two very large (assets exceeding $250 million) diversified firms, each a leader in a concentrated industry.
Such a merger, McLaren argued, "increases concentration in the concentrated markets in which [the two firms] may both compete," "serves also to entrench existing competition in concentrated markets wherein only one competes as a leading producer," and eliminates "potential competition between the existing producer in a concentrated market and the other firm as a potential entrant thereto."
Trial judges rejected McLaren's argument. He had expected them to, but believed he had a serious chance to win in the Supreme Court. His test case was to be three acquisitions by International Telephone and Telegraph. But no test occurred because in September 1971, in an atmosphere of political intrigue at the White House and Justice Department, he agreed to settle with ITT out of court.
By then, the merger wave of the 1960s had fallen into a trough. It had been foreordained to do this, because it had been propelled by unstable forces, such as speculation in "glamor" stocks, "creative" accounting and the egos of corporate "Napoleons," as they were called by the late Henry Simons, a University of Chicago economist.
But the ITT settlement lowered the last potential high barrier to conglomerate mergers. The new wave began to roll in 1975. This time, it isn't 'Chinese' money and corporate Napoleons. "It's the establishment doing it to itself," Salomon Brothers' partner Ira Harris has said. CAPTION: Graph, Number of corporate mergers and acquisitions valued at $100 million or more, The Washington Post