Land of the giants
PORTFOLIO JOHN BULL
The Nixon administration's attack on 'con- glomerate' companies, which reached a peak earlier this week with the Justice Department's move against Ling-Temco-Vought, is bound to have a considerable influence on the debate about mergers going on in Whitehall and Westminster. The Monopolies Commission is at present examining two proposals which the Americans would describe as 'conglomerate mergers,' the Unilever bid for Allied Breweries and the Rank bid for De La Rue. It is im- portant, therefore, to see whether American experience in this field provides lessons for US.
Ling-Temco-Vought is the creation of a forty- six year old Texan, Jimmy Ling, who in twelve years has built a small electrical contracting company into a giant complex which is now among the ten largest American corporations. Inside the Ling empire are the seventh largest steel corporation, Jones and Laughlin; an air- line, Braniff Airways, an aircraft manufacturer, a par rental firm, and one of the big four meat- packers, Wilson. The method has been a series of brilliant takeover deals. using paper rather than cash, selling on a glamour rating con- ferred by Wall Street in return for under- utilised assets. LTV is only one (perhaps the most successful) of a string of thrusting com- panies which have grown by acquisition.
Conglomerates, then, are companies which unite widely differing activities under one roof. There is a good sort and a bad sort. The good ones supply stringent financial control and discipline to their subsidiaries and grow in- ternally as well as by acquisition. The bad sort simply grows by acquisition and depends upon financial manipulation to keep earnings per share moving up; once the process stops the whole structure may fall down. In this country we have one outstanding example of a good conglomerate, Slater Walker Securities.
Many aspects of the American conglomerate movement are, however, foreign to us. In the first place, American anti-trust law hinders mergers between companies in similar or adjacent fields or between companies which stand next to each other in an industrial pro- cess (vertical integration). By and large, con- glomerate mergers have been the only type open to American companies. In this country, on the other hand, the advantages of horizontal and vertical integration have been endlessly preached, though lately there has been some worry about, for instance, the vertical structure which Sir Frank Kearton is building fbr Courtaulds. Second, American tax laws are peculiarly favourable to conglomerate mergers; the use of convertible stocks and warrants has been open to abuse. There is much less worry here about the type of consideration used in takeovers.
All the same, some of the dangers which the Americans have noticed in their own merger movement are relevant to thinking here. What is called the chain letter effect can be achieved on the London Stock Exchange. If a company whose shares are selling at twenty-five times earnings takes over one whose shares are selling at only fifteen times earnings, then the earnings per share of the company which makes the bid are bound to rise. This is growth by arithmetic, and when the bidding company runs out of deals, earnings per share cease to expand and what is left may be a collection of companies
with no common interests and no management. It is also the case that operating results and financial performance can be disguised. Mr Jim Slater himself has called for legislation to ensure that all companies show the exact financial effect of acquisitions in each year's accounts and give precise details of the profit performance of all companies under their con- trol in an appendix to their accounts. The result would be, he argues, that each multi-market company (polite word for conglomerate) would then get the investment rating it deserves. There is much to be said for Mr Slater's suggestion.
My two portfolios have been stable over the past week. Next week I shall re-examine the case for holding British Petroleum in the light of its Alaska find and its 1968 profits figure,- I shall also have another look at J. Lyons. whose recent profits forecast was encouraging.
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