Conglomerate Boom of the 1960s

The conglomerate boom of the 1960s was a spectacular merger mania driven by a simple arithmetic trick: if you bought a smaller company with a lower price-to-earnings ratio using stock with a higher multiple, you could immediately boost your earnings per share without any underlying business improvement. Companies like ITT, Litton Industries, and LTV assembled vast empires across unrelated industries by repeating this trick, and markets rewarded them lavishly. When the accounting games collapsed and the underlying businesses proved to have little synergy, the conglomerate model imploded spectacularly.

The Go-Go years

The early to mid-1960s were flush with cheap credit, rising corporate tax rates (which made acquisitions more tax-efficient than organic investment), and investor appetite for growth at any size. The Federal Reserve was accommodative; competition from overseas manufacturing was not yet a fact of American life; and the stock market seemed to believe that mergers created perpetual value.

Into this environment stepped a new breed of corporate raider and deal-maker. Men like Jimmy Ling at LTV, Hal Geneen at ITT, and Roy Ash at Litton Industries pioneered a strategy: acquire smaller, slower-growing businesses in entirely different industries and roll them up into a holding company. The magic came from arithmetic, not operations.

The EPS illusion

Here is the mechanics. Suppose Company A trades at a P/E of 20 and earns $1 per share. Its stock price is $20. Company B is a sleepy industrial firm earning $0.50 per share at a P/E of only 10, so its stock is $5. If Company A uses $10 worth of its stock (half a share) to buy Company B, and pays in stock, the combined entity now has earnings of $1.50 per share. On the surface, the new holding company earned $1.50 instead of $1—a 50% increase in earnings per share.

But nothing has changed operationally. No factory was upgraded, no distribution network was optimized, no technology was shared. Company B’s earnings were $0.50 before and remain $0.50 after. The entire gain is a function of buying a cheaper multiple and financing it with a dearer one. If enough investors noticed, they would realize that the conglomerate’s own P/E should actually decline because the new business was lower-quality. Instead, the market repeatedly rewarded these deals as miracles of management.

The conglomerate’s accountants then helped matters along by using pooling-of-interests accounting, which meant the acquired company’s balance sheet was merged into the new holding company without a goodwill write-up. This method allowed them to hide the true financial footprint of acquisitions and inflate return on equity figures.

The assembly line

Once investors caught the drift—that conglomerate stocks could grow earnings without actually growing anything—capital poured in. Stocks like LTV and ITT shot upward, earning their CEOs heroic reputations as visionaries. They used those soaring stock prices as currency to acquire dozens of firms at a time. LTV bought everything from steelmakers to meatpackers. ITT acquired hotel chains, insurance companies, and telecommunications firms. Litton bought manufacturers, appliance makers, and office equipment companies.

By 1967–68, the roll-ups had become frenzied. There was barely time to integrate one acquisition before the next was announced. The logic no longer required synergy; it only required that the acquired company had lower earnings multiples and could be bought with stock that the market valued highly. Some executives openly acknowledged the financial engineering. Asked how he managed such rapid growth, Ling famously replied (roughly): “We don’t manage for earnings, we manage for growth in earnings per share.”

The unraveling

The model depended on two things: cheap stock currency and investor amnesia about what “real” earnings looked like. Both evaporated in the bear market of 1969 and especially 1973–74.

When stocks fell, conglomerates’ access to cheap capital dried up. They could no longer buy cheaper firms with overvalued stock. Worse, investors began to dissect the earnings numbers and ask: how much of this growth is actually internal? How much is acquisition accounting?

The answers were brutal. Many of the acquired businesses had stagnant or declining operating income. They had simply been dressed up with financial flattery. ITT, despite Hal Geneen’s reputation for operational excellence, found that many of its sprawling acquisitions were drags on performance. LTV faced a steelmaking crisis that no amount of historical rollup accounting could hide. The conglomerate discount—where a diversified holding company trades below the sum of its parts—became the permanent state of affairs.

By the late 1970s and early 1980s, investors and takeover artists realized that conglomerates were broken. The smart money now came from breaking up conglomerates and selling the pieces separately. Firms like Hanson Trust made fortunes by acquiring badly managed holding companies, spinning off the divisions, and capturing the value that had been lost to administrative bloat and hidden losses.

The lasting lesson

The conglomerate boom was a masterclass in how accounting and narrative can temporarily override economic reality. Thousands of managers and directors genuinely believed they had discovered a perpetual growth machine. Millions of investors felt they owned brilliant enterprises. The entire edifice rested on the proposition that you could buy growth without earning it.

It couldn’t work. A holding company that strings together unrelated businesses and uses acquisition accounting to hide underlying mediocrity is not a business—it is a shell. Eventually, the market prices shells at a discount, or it ignores them. The conglomerate model did not disappear entirely, but after 1973, the glamour was gone.

The episode also left a scar on the American corporate landscape. Diversification, once thought to be a virtue of big business, became a liability. Investors increasingly preferred companies with focused strategies and authentic operational synergies. The modern principle that companies should stick to their knitting, or divest non-core businesses, is partly a hangover from the conglomerate debacle. In a way, the market learned an expensive lesson: you cannot engineer growth. You can only manage what you actually own.

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