MONEY Against investing in giantism
NICHOLAS DAVENPORT
Professor Galbraith, like me, dislikes the giant corporations. He has long been attack- ing them on account of their bad sociological effects. He does not mind so much their monopoly profits, if they have any left, which is doubtful, but he objects to the fact that they can manipulate a market, creating demand by mass advertising where none existed before, and can force the products of their 'technostructure' on to the consumer regardless of his real human needs. He be- lieves that in America the products of their advanced technology are overdeveloped and ruining the environment, that unneces- sary innovations are forced on the consumer regardless of his wants. It was significant that when the Monopolies Commission in 1967 persuaded the giant Unilever group in the ux to carry out an investigation into consumer psychology it was found that a majority of housewives bought an advertised detergent rather than a cheap one. (Which is another point in favour of—or is it against? —the Women's Liberation Movement.) I agree wholeheartedly with Professor Gal- braith's thesis and would add to it by ad- vancing the investment argument against the giant corporation. As an investor I am as scared of giantism as I am of diversification —for the following four reasons.
First, the giant corporation attracts the unwelcome attentions of governments simply because of its power and influence over the national consumer and the national market. The American government has imposed far- reaching anti-trust laws, so that it is no longer possible for two giant companies in any important industry, like oil or chemicals or food, to merge. In the UK the present government, believing strongly in the bene- ficent effects of competition, has promised to extend the powers of the Monopolies Commission. Although it is not so keen as
the Labour government was to resist a rise in prices made by giant companies it would not hesitate to intervene in the case of a product of such public importance and use as, say, bread. That is why I would always
avoid investing in the big bread companies whose profit margins are a matter of public concern. By contrast Marks and Spencer is an investor's dream because its textile and food products are so diversified that no government could be interested in its mar- gins (which are, indeed, low because of their huge turnover). The same objection applies to a universal commodity like margarine. The Unilever giant ran up against the gov- ernment in Italy, which imposed a margarine tax, and also against the EEC caucus which put a levy on the import of edible oil to protect locally produced butter and olive oil. I hasten to add that as Unilever has had two bad years and is now at the point of recovery I am not recommending an im- mediate sale of their shares, but with sales estimated this year at the enormous figure of £3,220 million and the operating profit at a mere £182 million the investment risks of giantism need no emphasis.
Second, apart from government interven- tions against the giant corporation, the inves- tor now has the worry of private crusades conducted through the mass media of com- munication. The most remarkable has been the crusade waged by Mr Ralph Nader against General Motors in condemnation of the safety of and the pollution from the American automobile. General Motors found it impossible to silence Mr Nader. The public supported him and the expense which will now be imposed on the big motor companies in respect of new safety devices and on the oil companies in respect of the elimination of lead from their petrol will be enormous. The Nader crusade stirred up a
public hatred for the giant soulless corpora- tion which inflicts the consumer with the unsafe, poisonous products of its advanced technology. It is not surprising that books appear like Graham Bannock's The Jugger- nauts seething with dislike, as one reviewer put it, 'of the dead hand of corporate con- formity'. This public bias may easily build up into an investment bias against giantism so that the shares of the big group may sell on a higher yield basis than the average.
My third objection is that the managers of the great corporations get carried away by their own importance and cannot resist taking over more and more companies simply to boost corporate growth and their own salaries. If their own shares are selling in the market on a price-earning ratio of, say twenty, they cannot resist the temptation to take over a smaller company selling on a price earning ratio of, say, under ten. Eventu- ally the giant group gets too big for its economic boots. Recently the managing director of a small subsidiary of a big group wrote: 'If I could sever all connections with the group I could probably put profits up by 25 per cent'. For a comparison between giant and small corporate profita- bility take British Leyland and Quinton Hazell. The giant motor manufacturer saw its profits disappear last year—it is now recovering sharply so don't sell the shares yet the comparatively small Quinton Hazell, which makes components for motor cars with a tenth of its labour force, goes on from strength to strength and increases its profits by 20 per cent or more a year It may, of course, have better management : the management of giants is always more difficult.
This brings me to my final objection to investment in giantism. Where the giant employs tens of thousands of workers it cannot avoid the current explosion in worker relations and pay. The Government was very displeased with the Ford Motor company for agreeing to advance wages by 16 per cent this year and another 16 per cent next year. But Ford had no option. Its computers worked out the cost of fighting a long strike with a complete shut-down in production against the cost of advancing the current wage rate by 16 per cent plus and an uninter- rupted twelve-month run in the factories. The computers clearly came out in favour of 16 per cent and to hell with Mr Heath's de-escalation policy. Of course, if the twelve- month agreement is broken, Ford will be in the soup, but that is a risk its shareholders must take. I for one would not be prepared to take such an equity risk. The equity of a motor giant is a gamble on labour relations at a time of revolution.
As an investor I would be worried also by the fear that Mr Heath's government will not tolerate for long the refusal of giant companies to toe the de-escalation line. In the United States about 40 per cent of the gross national product is controlled by two thousand giant companies in manufacturing, merchandising, transport and utilities. By the end of the century it is said that a thousand huge companies may control a quarter of the world's wealth. Are national govern- ments likely to allow this to happen? Sooner or later there will be restrictive legislation against corporate giants.
So I am loath to invest in giantism. The only exceptions I would make are the giant corporations which have to operate all over the world in order to provide us with the oil and minerals we need. Royal Dutch-Shell, wrz and the rest are the necessary giants with an investment halo.
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