Textron Initiates the Trend Toward Conglomeration Summary

  • Last updated on November 10, 2022

Textron acquired its first nontextile firm, Cleveland Pneumatic Tool Company, initiating a trend toward conglomeration that would help define American corporate activity in the next few decades.

Summary of Event

The conglomeration era of the 1950’s and 1960’s was initiated in the late 1940’s. It was a short-lived business movement of questionable consequences, but it did change the composition of and rankings within the list of the largest U.S. companies. The conglomeration era is considered to have begun on July 8, 1948, when Textron, a major producer of synthetic fabrics, acquired a firm that was not in the textile industry. The purchase meant that Textron was now a conglomerate, a participant in several disparate industries. Royal Little, the founder and directing force at Textron until his retirement in July, 1961, has been described as the “father” of the conglomeration movement. Although he relished the title and basked in the glory that accompanied it, he freely acknowledged that the description was not entirely accurate. Textron Conglomeration in business Textron-Cleveland Pneumatic merger[Textron Cleveland Pneumatic merger] Cleveland Pneumatic Tool Company Mergers, business [kw]Textron Initiates the Trend Toward Conglomeration (July 8, 1948) [kw]Conglomeration, Textron Initiates the Trend Toward (July 8, 1948) Textron Conglomeration in business Textron-Cleveland Pneumatic merger[Textron Cleveland Pneumatic merger] Cleveland Pneumatic Tool Company Mergers, business [g]North America;July 8, 1948: Textron Initiates the Trend Toward Conglomeration[02570] [g]United States;July 8, 1948: Textron Initiates the Trend Toward Conglomeration[02570] [c]Manufacturing and industry;July 8, 1948: Textron Initiates the Trend Toward Conglomeration[02570] [c]Business and labor;July 8, 1948: Textron Initiates the Trend Toward Conglomeration[02570] [c]Economics;July 8, 1948: Textron Initiates the Trend Toward Conglomeration[02570] Little, Royal Farley, Eliot Green, Lawrence E.

A “conglomerate” in business is defined as a large corporation formed by the merger or acquisition of a number of companies in unrelated and widely diversified industries. Conglomeration was the latest development in a merger-and-acquisition trend that began in the late nineteenth century. The first merger phase, beginning in the post-Civil War period, led to concentrations in single industries (trusts and monopolies) and was prompted by efficiencies resulting from large-scale manufacturing and the marketing of a limited product line. Mergers involved both horizontal (within a product category) and vertical (relations between manufacturers, suppliers of raw materials, and distributors of commodities) growth and produced a significant number of trusts and near-monopolies by the end of the nineteenth century. They also resulted in the passage of legislation to regulate such growth.

The second phase in the evolution of American corporations developed in the period following World War I and was prompted primarily by technological changes and the development of new products and manufacturing processes. In most cases, the new products and processes had some relationship to the original product line; firms grew internally and by acquiring emerging firms in the new product fields. The third phase—growth by acquisition, the phase of conglomeration—came after World War II. There were some indications of this trend in the late 1940’s and early 1950’s, with the movement reaching the rampant stage in the 1960’s.

The move toward conglomeration was precipitated by a number of factors. In 1948, the Federal Trade Commission Federal Trade Commission , reacting to an increased level of merger activity, undertook a study to consider the advisability of passing additional antitrust legislation. The threat of this legislation and of government intervention may have dampened same-industry mergers in the late 1940’s. Public resistance to growth that suggested monopoly power encouraged those companies and entrepreneurs that were determined to grow to seek another means of expansion. There was also some concern about avoiding the cyclical nature of single-industry firms; diversification was seen as a means of maintaining a stable balance sheet.

In the case of Textron, however, it was not the fear of antitrust activities that motivated Royal Little. Beginning as early as 1943, he had moved Textron (the company took that name in 1944) toward full vertical integration in textiles, and he envisioned a company that would weave textiles for production into garments carrying a Textron brand label. Toward this end, he had acquired a number of textile firms. Unfortunately, he acquired these firms in a haphazard and opportunistic manner, more concerned with bargain prices and tax advantages than the place of the component in the integrated firm. As a result, Textron became a jumble of barely related textile firms that could not be fully integrated.

Little came to be regarded as the “junk man” of the textile industry. Moreover, the fortunes of the parent company tended to be highly cyclical, and its stock was generally undervalued by investors. This made it difficult for Little to negotiate acquisitions that involved an exchange of company stock, rather than paying in cash.

In 1948, Textron’s corporate charter limited the firm to textiles and related activities. Therefore, in order to acquire Textron’s first nontextile property without violating the letter of the charter, Little had to take a circuitous route: He went through the company’s pension holdings. In 1948, the Textron Pension Trust of Boston (the Sixty Trust)—established to provide pensions for Textron’s salaried employees—acting under the direction of Lawrence E. Green, trustee of the pension fund, purchased all the outstanding capital stock of the Cleveland Pneumatic Tool Company. The transaction was completed on July 8.

Cleveland Pneumatic in 1948 was the leading manufacturer of airplane landing struts. The acquisition was a “friendly takeover,” and the sale was announced by Harold C. Schott Schott, Harold C. , president of the Cleveland company. The pension trust borrowed $900,000 from Textron to leverage the $6.8 million purchase price. Green, who would later become chairman of the board of Cleveland Pneumatic, completed the purchase in cooperation with Little and Eliot Farley, a cofounder of Textron and chairman of the board of directors. According to Little, it was Farley, twenty-five years earlier, who had originally proposed diversification as a means of increasing return on investment and suggested that the company be called “Disassociated Industries.” In a real sense, then, it was Farley who was the progenitor of the conglomeration movement; Little deserves credit for recognizing and implementing a good idea.

The decision to acquire Cleveland Pneumatic was not a fundamental change in Little’s policies or business behavior and did not mark an abrupt departure by Little and Textron from their long-range plan to develop Textron into a fully integrated textile firm. Within a month of the purchase of Cleveland Pneumatic, Textron announced that it would construct five new textile plants in Puerto Rico. At the time, Little viewed the Cleveland purchase as an opportunity to acquire a soundly managed and profitable firm for a relatively modest price. His use of trust funds was also consistent with his past practices. By 1948, he had become notorious for establishing and using charitable trusts in a questionable manner and had been the subject of a congressional inquiry.

In the succeeding years, Textron would continue to acquire textile firms, and in 1950 the Textron Pension Trust, again acting as a surrogate for Textron, acquired a second nontextile firm. Little brought about the purchase of Pathé Industries Pathé Industries , Inc., a newsreel and real estate firm with property in Cleveland, because the firm had experienced large losses that could provide tax advantages for the parent firm, not because it was a component in a diversification plan. This was thus another opportunistic purchase. It was not until the mid-1950’s that Textron moved fully to diversify and conglomerate.

By the early 1950’s, after numerous setbacks in textile operations, Little concluded that diversification would provide Textron stockholders with a better return on investment. In his book How to Lose $100,000,000 and Other Valuable Advice How to Lose $100,000,000 and Other Valuable Advice (Little)[How to Lose One Hundred Million Dollars and Other Valuable Advice] (1979), Little stated that the decision to diversify was made in late 1951 and was based in large part on the firm’s lack of success in textiles. Little had concluded that it was not possible for Textron to compete in textiles with mills in the South. He compared Textron to such firms as Burlington, Lowenstein, and J. P. Stevens, which were family-owned firms that poured profit into new plants and machinery, rather than into the dividends required of publicly owned textile firms. Little noted that the cyclical nature of the industry, in addition to some admittedly bad decisions by management, made the decision to diversify inevitable. The apparent success of the purchases of Cleveland Pneumatic Tool in 1948 and Pathé in 1950 provided additional impetus to the decision to diversify.

At the company’s annual meeting in 1952, Textron shareholders were asked to approve amendments to the articles of association that would allow the directors to move Textron assets into nontextile operations. The shareholders approved the changes, and Little moved to reorganize Textron to provide for greater management flexibility. He became chairman of the board and chief executive officer, and Robert L. Huffines, Jr., Huffines, Robert L., Jr. a former Burlington executive with a wealth of textile experience, was brought in as president and given overall management of the firm’s textile operations. This allowed Little to concentrate on mergers and acquisitions, which he did with great enthusiasm. In the mid- and late 1950’s, Little and Textron acquired a number of small companies manufacturing a wide variety of nontextile products.

By this time, Little had a clearer vision of the objectives and direction of diversification. He would seek to eliminate the effects of business cycles on the parent company through wide diversification, avoiding monopoly and antitrust issues by not acquiring companies in related businesses. Little determined that acquisitions should be limited to firms to which Textron’s experience in manufacturing would be useful and to leading firms in relatively minor industries.

Following these guidelines, in 1953 Textron acquired the Burkart Manufacturing Company Burkart Manufacturing Company , a firm with a history dating back to 1877 that was a major supplier of pads for automobile, train, and airplane seats. Because Textron’s balance sheet was not particularly healthy in 1953, Little was forced again to employ the questionable device of using a charitable trust, in this case Textron’s profit-sharing Market Square Trust, to purchase the fixed assets of Burkart with a lease-back arrangement.

In 1954, Textron purchased the Dalmo Victor Company, a manufacturer of airborne radar antennae, and the MB Manufacturing Company of New Haven, Connecticut, a manufacturer of vibration eliminators for piston-engine aircraft. In 1955, Textron purchased the Homelite Corporation of East Port Chester, Connecticut, using the assets of the same pension trust that had financed the purchase of Cleveland Pneumatic Tool in 1948.

These acquisitions did not end Textron’s involvement in textiles. In a major takeover battle, Little and Textron were able to take control of the American Woolen Company American Woolen Company in 1954. American Woolen was the world’s largest producer of woolen fabrics, with plants scattered throughout New England. In 1954, the company was losing approximately $1 million per month but was rich in cash and assets. Little went after the company because of its potential value in financing further diversification for Textron. The surviving company was Textron, renamed as Textron American. Little noted that combined sales of the new combination would be $189 million, with $40 million of that in nontextile operations.

By 1958, Textron had acquired twenty-four nontextile firms and was organized into seventeen major divisions. Sales for nontextile firms approached 75 percent of Textron’s total sales for that year. A recession in 1958 contributed to slippage in total sales, but earnings for Textron improved significantly. This confirmed to Little the wisdom of diversification.

Textron went on to acquire other companies and grew into a multibillion-dollar corporation employing more than fifty thousand people and manufacturing a variety of products. Little and Textron had demonstrated that a conglomerate could grow faster and was less vulnerable to business cycles than one-industry firms.

Significance

Textron’s success provided a model for other firms and entrepreneurs and encouraged a rush of acquisitions and mergers during the coming years. Conglomeration became the dominant pattern of growth for corporate America through the 1960’s and 1970’s. The conglomeration movement faded in popularity as serious management problems emerged in the 1980’s. Although conglomeration as a means of growth is still practiced, it is no longer regarded as a sure means of achieving corporate prosperity. Top-level managers are unlikely to have the expertise to run businesses in diverse industries to their potential, making some elements of conglomerates weaker than they would be as independent firms. Textron Conglomeration in business Textron-Cleveland Pneumatic merger[Textron Cleveland Pneumatic merger] Cleveland Pneumatic Tool Company Mergers, business

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Aufderheide, Patricia, et al. Conglomerates and the Media. New York: Norton, 1997. Study of the effects of the conglomeration movement on media industries, from Hollywood to telecommunications to journalism. Bibliographic references.
  • citation-type="booksimple"

    xlink:type="simple">Federal Trade Commission. Report of the Federal Trade Commission on the Merger Movement. Washington, D.C.: Government Printing Office, 1948. A summary report describing mergers and acquisitions in a historical context and in the recent (1940’s) past. Particularly useful for analysis of trends and developments after World War II.
  • citation-type="booksimple"

    xlink:type="simple">Little, Royal. How to Lose $100,000,000 and Other Valuable Advice. Boston: Little, Brown, 1979. An anecdotal treatment of the author’s career in business. Divided by years and topics, especially useful in describing Textron deals. A straightforward and candid approach that takes the mystery out of wheeling and dealing in business. Excellent source.
  • citation-type="booksimple"

    xlink:type="simple">Sobel, Robert. The Rise and Fall of the Conglomerate Kings. New York: Stein and Day, 1984. Contains an excellent introductory chapter that describes the origins of the conglomerate movement. The chapter on Royal Little is thorough, acknowledging his role as a “pioneer” in the conglomerate movement but also recognizing his buccaneer style of entrepreneurship. Good comparisons to other conglomerates of that period and their managers.
  • citation-type="booksimple"

    xlink:type="simple">Spruill, Charles R. Conglomerates and the Evolution of Capitalism. Carbondale: Southern Illinois University Press, 1982. Useful brief treatment of the diversification movement. Helpful tables and figures; extensive bibliography.
  • citation-type="booksimple"

    xlink:type="simple">Vance, Stanley C. Managers in the Conglomerate Era. New York: Wiley-Interscience, 1971. A more scholarly treatment of diversification and conglomeration. Introductory chapters describe the origin and implementation of the conglomerate movement. Good treatment of issues, problems, and results of mergers and acquisitions.
  • citation-type="booksimple"

    xlink:type="simple">Wasserstein, Bruce. Big Deal: The Battle for Control of America’s Leading Corporations. New York: Warner Books, 1998. Study of the consolidation, merger, and acquisition of American corporations and conglomerates. Details the effects of conglomeration on corporate competition. Bibliographic references and index.
  • citation-type="booksimple"

    xlink:type="simple">Winslow, John F. Conglomerates Unlimited: The Failure of Regulation. Bloomington: Indiana University Press, 1973. A good overview of the status of the merger movement in the early 1970’s. Includes thoughtful and well-written analysis of the merger and acquisition process. The last section is an excellent examination of the breakdown of the regulatory process.

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