ASSAULT ON THE CONGLOMERATES

IN half-serious flights of fancy, humorists have lately envisioned an economic future in which International Everything, Inc. and about a dozen similar finance-manufacturing-retailing combines take over half of the nation's business. Corporate consolidation has a long way to go to reach such extremes, but it is certainly moving in that direction at an accelerating speed. Never before have U.S. companies been caught in such a powerful and persistent tide of mergers, raids and takeover attempts. The volume of mergers doubled last year, when firms paid a record $43 billion--mostly in securities--to acquire 4,462 other concerns. The average price for a company jumped 40%, to almost 25 times its annual earnings. This year the volume of mergers will be larger, the prices higher and the controversy more intense.

A Matter of Taxes. About 90% of the action involves conglomerate corporations, those multi-industry companies whose desire to acquire often produces crazy-quilt mergers. Alarmed critics complain about shaky financial foundations, untested managements, dubious use of tax loopholes and overconcentration of economic power. Last week conglomerates ran into simultaneous and serious attack from both Congress and the Nixon Administration. The assault will almost certainly lead to new laws to control the conglomerate movement. "We're going after this," says a ranking White House adviser. "Otherwise, we'd have an economy like the Japanese, with certain large families owning everything."

The Federal Trade Commission is delving into the various economic implications of the conglomerate trend. Antitrust subcommittees in both the Senate and House plan probing inquiries of their own. The Justice Department is studying whether to recommend broader antitrust legislation to cope with conglomerates. Paradoxically, the trend has been fostered by Government antitrust barriers against mergers within the same field. More and more firms with little in common are getting together because it is the only legally safe way to merge.

Hoping to give investors a clearer view of conglomerates, the Securities and Exchange Commission is about to issue a tough new regulation requiring all multi-industry companies to disclose how each segment of their business is faring.

Last week, calling merger fights "a form of mid-20th century corporate warfare," SEC Chairman Manuel Cohen said: "The stakes are very high. Giant companies are threatened by small companies that issue paper--sometimes cynically referred to as 'funny paper'--as the incentive for the takeover."

Go Slow. The most immediate challenge to the new super corporations came from Arkansas Democrat Wilbur Mills, chairman of the tax-writing House Ways and Means Committee. Severely criticizing the economic soundness of mergers among wholly unrelated businesses, he suggested that Congress repeal tax laws that nourish such deals. "Companies should go slow in conglomerate mergers if they are depending on tax provisions for the success of their merger," he warned. In particular, Mills questioned the tax arrangements when merging corporations exchange debentures for common stock. Under present law, corporations can deduct from their income tax the interest that they pay out on the debentures--just as homeowners can deduct the cost of mortgage interest on their tax returns. In merger deals, such swaps cost the U.S. Treasury substantial revenue. Instead of paying dividends on common stock, companies pay interest on debentures. This saves them money--at the expense of every other U.S. taxpayer--because the debenture interest is taxdeductible, whereas dividends can only be paid out of a company's after-tax earnings.

Mills also attacked the financial packages offered by merger-bent companies. "Many securities offered in takeovers are highly speculative and could well resuit in substantial losses whenever there is a downturn in business conditions," he said. As for surprise takeover bids, he complained that they "artificially inflate stock prices." Citing a study by the Chicago consulting firm of W. T. Grimm & Co., he maintained that, in 66 such takeover attempts since the summer of 1967, bidders kited by $2.4 billion the stock prices of the companies that they were after.

A Question of Values. The current flurry of takeover battles indicates that there is ample cause for concern in many fields. For example, Manhattan's General Host Corp., a baking, food-freezing and tourism firm (1968 revenues: $200 million plus), last week claimed victory in a bitter fight to acquire Chicago's Armour & Co., which is ten times as large. To the meat packer's stockholders, General Host offered a package of warrants--options to buy its stock in the future--plus $60 in debentures for each Armour share. At 7% interest, each debenture should return $4.20 a year; Armour earned only $3.53 a share and paid a dividend of $1.60 in 1968, its best year ever. Armour Chairman William Wood Prince denounced the offer as a "printing-press raid." He tried to foil it in two federal courts, and attempted to consummate a defensive merger with Greyhound Corp. Richard C. Pistell, 41, the chairman of General Host, sweetened his offer slightly and, he said, picked up more than half the shares with an assist from Gulf & Western Industries, a major conglomerate, which sold him its own large holdings of Armour stock. The takeover would make Pistell, a onetime Nevada gold mine operator, the boss of one of the nation's biggest conglomerates.

For sheer gall, few takeover artists have rivaled Saul P. Steinberg, 29, chairman of 71-year-old Leasco Data Processing. Last year his Manhattan computer-leasing firm gained control of Reliance Insurance, a large multi-line company, and squeezed a $100 million dividend out of its coffers to finance other Leasco operations. Last week Steinberg admitted at Leasco's annual meeting that his takeover appetite has grown so big that he would like to swallow Chemical Bank New York Trust Co., the nation's sixth largest commercial bank (assets: $9 billion). Chemical Chairman William S. Renchard has promised to fend off "aggressors" vigorously.

On Wall Street, merger battles often give a dizzy lift to stock prices long before actual mergers can create any fundamental economic values to underpin them. For example, shares of Scientific Data Systems, a Southern California maker of high-speed computers, leaped 17 points, to 120, in one day last week on news of a tentative merger agreement with Xerox. This sort of thing perturbs some economists, who fear that the speculative fever could end in scandal or stock bust. As far as Congress is concerned, that only provides another reason to clamp down on conglomerates and their fancy financing.

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