occurred in many industries, which was thought to be a more pressing threat to competition than mergers, which now were mainly vertical or conglomerate transactions. Just as in the first merger wave, the second merger period witnessed the formation of many prominent corporations that still operate today. These include General Motors, IBM, John Deere, and Union Carbide.
The 1940s
Before we proceed to a discussion of the third merger period, we will briefly examine the mergers of the 1940s. During this decade, larger firms acquired smaller, privately held companies for motives of tax relief. In this period of high estate taxes, the transfer of businesses within families was very expensive; thus, the incentive to sell out to other firms arose. These mergers did not result in increased concentration because most of them did not represent a significant percentage of the total industry's assets. Most of the family business combinations involved smaller companies.
The 1940s did not feature any major technological changes or dramatic development in the nation's infrastructure. Thus, the increase in the number of mergers was relatively small. Nonetheless, their numbers were still a concern to Congress, which reacted by passing the Celler-Kefauver Act in 1950. This law strengthened Section 7 of the Clayton Act. (For further details on the Clayton Act, see the following section and Chapter 3.)
Third Wave, 1965–1969
The third merger wave featured a historically high level of merger activity. This was brought about in part by a booming economy. During these years, often known as the conglomerate merger period, it was not uncommon for relatively smaller firms to target larger companies for acquisition. In contrast, during the two earlier waves, the majority of the target firms were significantly smaller than the acquiring firms. Peter Steiner reports that the “acquisition of companies with assets over $100 million, which averaged only 1.3 per year from 1948 to 1960, and 5 per year from 1961 to 1966, rose to 24 in 1967, 31 in 1968, 20 in 1969, 12 in 1970 before falling to 5 each year in 1971 and 1972.”29
The number of M&As during the 1960s is shown in Figure 2.1. These data were compiled by W. T. Grimm and Company (now provided by Houlihan Lokey Howard & Zukin), which began recording M&A announcements on January 1, 1963. As noted, a larger percentage of the M&As that took place in this period were conglomerate transactions. The Federal Trade Commission (FTC) reported that 80 % of the mergers that took place in the 10-year period between 1965 and 1975 were conglomerate mergers.30
Figure 2.1 Third Merger Wave, Merger and Acquisition Announcements, 1963–1970. The Third Merger Wave Peaked in 1969. The Decline in the Stock Market, Coupled with Tax Reforms, Reduced the Incentive to Merge. Source: Mergerstat Review, 2014.
The conglomerates formed during this period were more than merely diversified in their product lines. The term diversified firms is generally applied to companies that have some subsidiaries in other industries but a majority of their production within one industry category. Unlike diversified firms, conglomerates conduct a large percentage of their business activities in different industries. Good examples are Ling-Temco-Vought (LTV), Litton Industries, and ITT. In the 1960s, ITT acquired such diverse businesses as Avis Rent A Car, Sheraton Hotels, Continental Baking, and other far-flung enterprises, such as restaurant chains, consumer credit agencies, home building companies, and airport parking firms. Although the third merger wave is associated with well-known conglomerate firms such as ITT and LTV, many corporations of varying sizes engaged in a diversification strategy. Many small and medium-sized firms also followed this fad and moved into areas outside their core business.
As firms with the necessary financial resources sought to expand, they faced tougher antitrust enforcement. The heightened antitrust atmosphere of the 1960s was an outgrowth of the Celler-Kefauver Act of 1950, which had strengthened the antimerger provisions of the Clayton Act of 1914. The Clayton Act made the acquisition of other firms' stock illegal when the acquisition resulted in a merger that significantly reduced the degree of competition within an industry. However, the law had an important loophole: It did not preclude the anticompetitive acquisition of a firm's assets. The Celler-Kefauver Act closed this loophole. Armed with tougher laws, the federal government adopted a stronger antitrust stance, coming down hard on both horizontal and vertical mergers. Expansion-minded firms found that their only available alternative was to form conglomerates.
The more intense antitrust enforcement of horizontal mergers was partially motivated by the political environment of the 1960s. During this decade, Washington policymakers, emphasizing the potential for abuses of monopoly power, worked through the FTC and the Justice Department to curb corporate expansion, which created the potential for monopolistic abuses. Prime advocates of this tougher antitrust enforcement were Attorney General John Mitchell and Assistant Attorney General Richard McLaren, the main architect of the federal government's antitrust efforts during the 1960s. In his book Managing, Harold Geneen, then chief executive officer of ITT, has described the difficulty his company had in acquiring companies when McLaren was in office.31 McLaren opposed conglomerate acquisitions based on his fears of “potential reciprocity.” This would occur, for example, if ITT and its other subsidiaries gave Hartford Insurance, a company ITT acquired, a competitive edge over other insurance companies. ITT was forced to compromise its plans to add Hartford to its conglomerate empire. It was able to proceed with the acquisition only after agreeing to divest itself of other divisions with the same combined size of Hartford Insurance and to not acquire another large insurance company for 10 years without prior Justice Department approval. Years later the European Commission would voice similar arguments for opposing takeovers in the 2000s.
With the election of Richard M. Nixon toward the end of the decade, Washington policymakers advocated a freer market orientation. Nixon supported this policy through his four appointees to the U.S. Supreme Court, who espoused a broader interpretation of concepts such as market share. The tough antitrust enforcement of the Justice Department came to an end in 1972, as the Supreme Court failed to accept the Justice Department's interpretation of antitrust laws. For example, in some cases the Supreme Court began to use a broad international market view as opposed to a more narrow domestic or even regional market definition. Consequently, if as a result of a merger, a firm had a large percentage of the U.S. market or a region of the nation but a small percentage of the international market, it could be judged to lack significant monopolistic characteristics. By this time, however, the third merger wave had already come to an end.
The rapid growth of management science accelerated the conglomerate movement. Schools of management began to attain widespread acceptability among prominent schools of higher education, and the master of business administration degree became a valued credential for the corporate executive. Management science developed methodologies that facilitated organizational management and theoretically could be applied to a wide variety of organizations, including corporations, government, educational institutions, and even the military. As these management principles gained wider acceptance, graduates of this movement believed they possessed the broad-based skills necessary to manage a wide variety of organizational structures. Such managers reasonably believed that they could manage a corporate organization that spanned several industry categories. The belief that the conglomerate could become a manageable and successful corporate entity started to become a reality.
Because most of the mergers in the third wave involved the formation of conglomerates rather than vertical or horizontal mergers, they did not appreciably increase industrial concentration. For this reason, the degree of competition in different industries did not significantly change despite the large number of mergers. Some 6,000 mergers, entailing the disappearance of 25,000 firms, took
