Why More Industries Say: "I Do"

NOT since the 19203 has U.S. business been so caught up with the urge to merge. Among U.S. firms, mergers jumped from 846 a year in 1955 to 1,050 last year. At that increasing rate, 1960 promises to set a new postwar record for corporate marriages. Hardly a week goes by without a flurry of announcements. Mergers--and rumors of mergers--are rampant among companies in the food, airline, railroad, paper, chemical, electronics and machinery industries. What caused the big jump?

Today's mergers are different from those in two previous waves: at the turn of the century, and in the '205. In the first, the trusts swallowed up every company they could to build monopolies and stifle competition. In the second, small companies got together to meet the competition of the giants.

One big reason for the new wave is the tax laws. The man with a family-owned company today often goes out actively to seek merger with a bigger company. He thus not only gives himself a chance for capital gains in his lifetime but averts a possible sacrifice sale in case of his death. Profit-making companies also look on the tax losses on the books of a money loser as a big inducement to merge, since the loss can be used at the Internal Revenue Service desk to offset the taxes on their own profits.

Mergers are also prompted by the fear of being caught with a single product in an age of rapid technological changeand widespread diversification. "There is a realization now as never before that new products are a vital source of new profits,'1 says Partner Wilson Randle of Booz, Allen & Hamilton, management consultants. "You can get a new product through research and development--or you can go out and buy it. Research and development might take three or four years. A merger can do it overnight." There are also personal reasons for mergers. Example: Chicago's Consolidated Foods recently bought out a family firm whose owner sold it so that he could finally have his brother-in-law fired.

In earlier days, a corporation was expected to stick to what it knew best. But stringent antitrust laws now discourage fast-growing companies trom mergers with companies too close to their own fields. Result: many companies are forced to move into an entirely different line in an effort to increase their profit margins. Once :hey have made such a move, they find it even easier to continue diversiying. Providence's Textron, caught in the ailing textile industry, has set a record since 1955 of 29 mergers into such fields as electronics, automotive parts, aluminum products and optical equipment. Textiles, once Textron's sole source of income, now account for only 16% of company sales--and company profits have tripled.

In the merger-happy food industry, Consolidated Foods has made 20 mergers since 1951, has increased its return on its capital investment from 7-5% to 10%.

Some 60% of all mergers are, like Consolidated's, still within the same basic industry. But there is a growing trend toward going outside, buying new products, or new management or scientific brains, by taking over small companies. Instead of starting from scratch to set up a new computer division, for example, Remington Rand bought up two electronics firms, one of which brought along the already proven Univac

Most economists agree that mergers offer no sure solution to the troubles or shortcomings of a company. Nor do they guarantee growth and a big rise in earnings. But they can often help a bright and growing firm to grow even faster. In comparing 50 acquisitive firms with 50 nonacquisi-tive firms, Booz, Allen found that merger-minded firms increased sales 70% v. 40% for the nonacquisitive firms. But their earnings did not keep pace with their increased assets, as did the earnings of nonmerging firms.

Like marriages, of course, mergers do not always work. Elgin Watch merged with American Microphone Co. in 1955, divorced the company three years later because of economic incompatibility. Says Ralph Nelson, a member of the research staff of the National Bureau of Economic Research: "Some companies are getting their fingers into so many pies that I'm pessimistic they can make the conglomeration work."

Nonetheless, mergers are generally beneficial in an expanding economy. They are most numerous when business is good, help protect companies against a recession. They also contribute to expansion by encouraging the release of money tied up in a matured industry, such as textiles, into a young growth industry, such as electronics. Rather than stifling competition, they often intensify it. By its mergers, Remington Rand forced IBM to work harder to develop its own computers until IBM now heads the field. Mergers can thus be a tonic to corporations so long as they are not used as a substitute for healthy internal growth.

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