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.
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.
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
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
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
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
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.,
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
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
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.
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.
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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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