Antitrust Bulletin December, 1996

1. THE ITT CASE Here was a large-scale conglomerate par excellence-a firm

that had spent billions acquiring more than 150 companies during the 1960s in

order, according to the firm's president, to escape the status of a "one product

company."(105) Its conglomerate acquisition binge catapulted the firm to tenth

on the Fortune 500 list; by 1968, Ill boasted of operations "from the Arctic to

the Antarctic and quite literally from the bottom of the sea to the moon. .

."(106)

But where did it lead? Did it unleash spectacular gains in efficiency,

technological progressiveness, or international competitiveness? Hardly. A

decade after its acquisition spree, ITT was mired in mediocre performance and

bureaucratic bloat. Its stock, which formerly traded in the $ 70 range, had

sunk to the $ 30 range,(107) and Wall Street subjected the firm to merciless

criticism. One investment manager characterized the firm's performance as "15

years of pure junk."(108) "Harold Geneen [the architect of ITT's conglomerate

giantism] was an absolute disaster as an operating manager," said another. "You

have only to look at the record-he could acquire companies but he couldn't

manage them."(109) Geneen bequeathed to his successor "a debt-laden corporation

struggling to pay the bills for its many mergers and acquisitions."(110)

In response to this judgment of the financial markets, ITT embarked on a

bold departure in "re-engineering" itself: deconglomeration! It divested some

one hundred subsidiary businesses during the 1980s.(111) In 1995, when the

number of formerly acquired operations divested by the firm exceeded 200, ITT

disclosed another bombshell: In an effort to further improve its performance,

ITT would divide itself into three independent and separately traded firms--a

decision lustily hailed on Wall Street.(112) Ironically, ITT did voluntarily

what even the most zealous "populist" would scarcely have dared to propose.

2. AN OVERVIEW The ITT case cannot be dismissed as anecdotal or episodic

evidence. Other case studies of major conglomerates--e.g., Gulf+Western,(113)

General Mills,(114) Kodak,(115) Big Oil(116)--merely reinforce the indisputable,

empirically documented conclusion that the conglomerate acquisition binge has

been a monumental flop.(117) The "new" conglomerates of the 1960s and 1970s

became the organizational nightmares of the 1980s, and by the 1990s were

consumed with the daunting challenge of de-conglomerating themselves. Sailing

forth under the banner of "synergy" (i.e., "2 + 2 = 5"), they had run aground on

reverse synergy ("2 + 2 = 3"). What was billed as the sleek new wave of the

future had, according to Business Week, been transmogrified into a collection of

"multiproduct, multidivisional, multilocational hydras."(118) Conglomerate

giants discovered (according to Fortune) that "the cost of complexity outweighs

the savings from size,"(119) They "have since been thoroughly discredited,"(120)

and synergy "is now on the losing side."(121)

In the light of experience, it seems unlikely that vigorous action against

conglomerate megamergers would have entailed any significant efficiency losses.

On the other hand, it seems quite likely that government inaction did cause such

losses. Considered in opportunity cost terms, society paid a price for failing

to attack conglomerate giantism: Billions of dollars spent on paper

entrepreneurialism were, at the same time, billions of dollars not spent on

building new plants, implementing new state-of-the-art manufacturing techniques,

undertaking new research and development projects, or bringing new products to

market. Two decades of putting conglomerates together and then taking them apart

were, at the same time, two decades during which America's toughest foreign

competitors were singlemindedly forging ahead. Reckless conglomeration was

hardly a recipe for maintaining American industrial leadership in the world.