Conglomerate Boom: The 1960s P/E Magic Bubble

Key Takeaways

• Late-1960s conglomerates bought unrelated firms to mechanically boost reported earnings per share.
• A high-P/E acquirer buying a low-P/E target with stock raised EPS without growing the business.
• Pooling-of-interests accounting and convertible securities hid the lack of real value creation.
• When the spell broke in 1968-1970, leading conglomerate stocks fell 80 to 95 percent.

Background

After World War II, US tax policy favored capital gains over dividends, and investors increasingly judged a company by one number: earnings per share. According to an account of the era summarizing John Brooks's book The Go-Go Years, never before had reported EPS mattered so much for a stock's price (Ockham's Notebook). That single-minded focus on EPS set the stage for everything that followed.

A new kind of company stepped into that gap. A conglomerate is a holding company that owns businesses across unrelated industries. The theory was that diversification across many product lines would smooth out the business cycle, and that talented managers could run anything. Both the tax code and antitrust policy of the time nudged firms toward buying outside their own industry rather than inside it, since horizontal and vertical deals drew more scrutiny (Saturday Evening Post).

The builders were outsiders to the old corporate establishment. James Ling ran Ling-Temco-Vought (LTV), Charles Bluhdorn ran Gulf and Western, Harold Geneen ran International Telephone and Telegraph (ITT), Charles "Tex" Thornton ran Litton Industries, and Henry Singleton ran Teledyne (Watchlist Investing; George Mason Law Review). Geneen became the public face of the movement, landing on the cover of Time magazine in September 1967, by which point ITT was the eleventh-largest corporation in the United States (George Mason Law Review).

The growth was staggering on paper. Between 1961 and 1968, ITT acquired or merged with more than 100 companies spanning baking, hotels, real estate, and wood and pulp (George Mason Law Review). Litton, founded in 1953 by Tex Thornton, reported higher earnings for 57 straight quarters, a streak spanning roughly 14 years (FundingUniverse; Encyclopedia.com). To investors watching EPS, these looked like the best-run companies in America.

What Happened

The wave built through the mid-1960s, crested in 1968, and broke across 1969 and 1970. The figures below trace the acute phase.

• 1964 to 1968: Large conglomerate acquisitions in manufacturing and mining rose from about 62 to 161 per year, while the average asset size of acquired firms grew from roughly $29 million to $68.5 million (FTC, MacIntyre 1968).
• 1967: Of large mergers, conglomerate acquisitions made up about 83 percent of the number and roughly 80 percent of the acquired assets (FTC, MacIntyre 1968).
• 1967 (September): Harold Geneen appeared on the cover of Time, marking the boom's peak prestige (George Mason Law Review).
• 1968: LTV acquired control of Jones and Laughlin Steel for about $428 million, then the largest conglomerate merger in US history, and the Justice Department promptly sued (Saturday Evening Post).
• 1968: Litton broke its 57-quarter streak with an earnings decline of roughly $11 million; the stock had been selling near 40 times earnings (FundingUniverse).
• 1969 (late) to 1970: The Justice Department, under antitrust chief Richard McLaren, filed three suits against ITT acquisitions: Hartford Fire Insurance, Grinnell, and Canteen (George Mason Law Review).
• 1969 (December 30): President Nixon signed the Tax Reform Act of 1969, whose provisions addressed interest deductions and conglomerate financing (US Senate Finance Committee).
• 1970 (August): The Accounting Principles Board issued Opinion No. 16, tightening the rules for pooling-of-interests accounting (FASB).
• 1970: James Ling was ousted from LTV; the stock, as high as about $169 a share in 1967, had collapsed to roughly $4.25 (Saturday Evening Post).

The unwind was brutal and broad. High-flying conglomerate and "go-go" stocks crashed between 50 and 75 percent in 1969 and 1970, against a Dow decline of about 20 percent over the same stretch (Ockham's Notebook). Litton's stock fell from a high near 120 3/8 in 1967 to about 8 1/2 by 1973, a drop of roughly 93 percent (Encyclopedia.com).

Why It Happened

At the center of the conglomerate boom was a piece of arithmetic that looked like growth but was not. The mechanism is sometimes called the "P/E magic" or "bootstrap" game, and it depends entirely on the gap between two companies' price-to-earnings ratios.

Consider a simplified version of the example used to illustrate it (Glen Arnold). Suppose a high-flying acquirer trades at 20 times earnings and a sleepy target trades at 10 times earnings, and each earns the same profit on the same share count. Because the acquirer's stock is twice as expensive per dollar of earnings, it can issue a relatively small number of its own pricey shares to buy all of the target's cheaper earnings. After the deal closes, the combined company has both firms' profits but only a modestly larger share count, so reported EPS jumps. In the worked example, the acquirer's EPS rose about a third, and the share price followed, even though neither business sold a single extra unit.

That is the whole trick. There was, in the words of one account, "an apparent growth in earnings that is entirely an optical illusion" (Glen Arnold). Real output did not change. Only the accounting did. As long as the acquirer kept buying lower-P/E companies with its high-P/E stock, EPS kept rising, the stock kept climbing, and the rising stock made the next acquisition even cheaper to fund. George Soros later used this loop as his textbook case of reflexivity, where rising prices and rising fundamentals feed each other until the cycle reverses (Glen Arnold).

Two accounting and financing tools made the illusion easier to sustain. The first was pooling-of-interests accounting. Under pooling, a merger was recorded as if the two firms had always been combined, at their old book values, with no goodwill and no markup of assets. That kept reported earnings high and avoided the future charges that purchase accounting created. The method's abuse, including partial pooling, retroactive pooling, and issuing extra classes of stock, became the leading accounting controversy of the decade (FASB).

The second tool was creative securities. Acquirers paid with convertible preferred stock, convertible debentures, and warrants rather than plain common shares. These instruments let the acquirer keep reported EPS high and growing while deferring the dilution that ordinary shares would have shown immediately (Watchlist Investing; Ockham's Notebook). To a retail investor watching only the bottom line, the earnings looked clean. The complexity was the point.

The whole structure rested on one fragile condition: the acquirer's stock had to stay expensive. The day the market stopped paying a premium multiple, the math ran in reverse. No high-P/E currency meant no more accretive deals, and without new deals the "growth" simply stopped. Litton's 1968 stumble was the pin. After 57 straight quarters of gains, a single earnings decline showed that the engine could sputter, and a stock priced at 40 times earnings has a long way to fall once investors doubt the streak (FundingUniverse). Rising interest rates made high-multiple, deal-dependent stocks even less attractive, and the antitrust suits and new tax and accounting rules removed the regulatory tailwinds that had encouraged the buying in the first place.

By the Numbers

• ITT acquisitions, 1961-1968: more than 100 companies across unrelated industries; ITT was the 11th-largest US corporation. (George Mason Law Review)
• Large conglomerate acquisitions per year: rose from about 62 in 1964 to 161 in 1968; average acquired-firm asset size grew from about $29 million to $68.5 million. (FTC, MacIntyre 1968)
• Conglomerate share of large mergers, 1967: about 83 percent by number and roughly 80 percent of acquired assets. (FTC, MacIntyre 1968)
• Litton streak and break: 57 consecutive quarters of higher earnings, ended by a roughly $11 million earnings decline in 1968; stock had sold near 40 times earnings. (FundingUniverse)
• Litton stock: from about 120 3/8 in 1967 to about 8 1/2 in 1973, a decline of roughly 93 percent. (Encyclopedia.com)
• LTV stock: from about $169 a share in 1967 to roughly $4.25 by Ling's 1970 ouster; LTV reported a loss of about $10.59 per share in 1968. (Saturday Evening Post; Encyclopedia.com)
• LTV / Jones and Laughlin Steel: acquired for about $428 million in 1968, then the largest conglomerate merger in US history. (Saturday Evening Post)
• The bust: leading go-go and conglomerate stocks fell about 50 to 75 percent in 1969-1970, versus about a 20 percent Dow decline. (Ockham's Notebook)

Aftermath

The collapse reshaped law, accounting, and corporate strategy. On antitrust, the Justice Department's suits against ITT's acquisitions of Hartford Fire, Grinnell, and Canteen signaled that pure diversification was no longer a safe harbor, even when the merging firms did not compete (George Mason Law Review). The threat of enforcement, more than any single court ruling, helped cool the appetite for unrelated deals.

On accounting, the Accounting Principles Board issued Opinion No. 16 in August 1970, setting strict criteria a deal had to meet to use pooling-of-interests, and Opinion No. 17, which required goodwill to be amortized over a period of up to 40 years (FASB; APB guidance). Together these reforms made it far harder to merge two companies and have the combination flatter reported earnings. Decades later, FASB Statement No. 141 abolished pooling entirely in 2001, replacing both methods with a single purchase, later acquisition, method.

On tax, the Tax Reform Act of 1969, signed December 30, 1969, addressed the interest deductions and financing techniques that conglomerates had used (US Senate Finance Committee). Removing some of the tax incentive for debt-and-convertible-fueled buying took away part of the fuel.

The companies themselves largely survived but never reclaimed their mystique. LTV forced James Ling out in 1970 and spent years selling off the empire he had assembled (Saturday Evening Post). Litton kept operating but at a fraction of its former valuation. The broader lesson took hold on Wall Street: a holding company is worth the sum of its businesses, not a premium for the act of assembling them, and the word "conglomerate" itself became a discount rather than a badge.

Lessons for Investors

1. Earnings-per-share growth can be manufactured. The conglomerates proved that EPS can rise with no increase in real output, purely because a high-P/E company bought a low-P/E one with stock. When you see fast EPS growth, check whether it came from selling more or producing more, or simply from deals. The first is value; the second can be an accounting artifact.

2. A self-reinforcing loop is a warning, not a moat. The boom ran on reflexivity: a rising stock made acquisitions cheaper, which raised EPS, which lifted the stock again. That loop feels unstoppable on the way up, but it reverses the moment the premium multiple fades. Any strategy that only works while the share price keeps climbing carries its own undoing.

3. Understand how a company pays for its growth. Convertible preferreds, debentures, and warrants let the 1960s conglomerates keep reported EPS high while deferring dilution. If you cannot tell from the income statement how much future dilution a deal created, you do not yet understand the earnings. Read the financing terms, not just the headline number.

4. Accounting choices change the story, so read the footnotes. Pooling-of-interests made mergers look like organic growth and hid the cost of acquisitions. The rules that allow such choices change over time, but the principle does not: where management has discretion over how results are reported, assume the flattering option was chosen and adjust accordingly.

5. Diversification at the corporate level is not free. The promise was that owning unrelated businesses would smooth earnings and that great managers could run anything. The bust showed that bolting together a steel mill, a hotel chain, and an insurer rarely creates value the owners could not get by holding the pieces separately. When you can replicate a company's "diversification" yourself by holding several stocks, the conglomerate premium is suspect.

Frequently Asked Questions

What was the conglomerate boom in simple terms? The conglomerate boom was a late-1960s US merger wave in which holding companies like ITT, LTV, and Litton bought many unrelated businesses, paying with their own high-priced stock. The deals mechanically boosted reported earnings per share, which lifted the shares further, until the cycle broke in 1968-1970.

Why did the conglomerate boom happen? Investors of the era judged companies mainly by earnings per share, and a high-P/E acquirer could raise its EPS just by buying a low-P/E company with stock. Pooling-of-interests accounting and convertible securities hid the lack of real growth, while tax and antitrust rules nudged firms toward unrelated deals.

How much money was lost in the conglomerate bust? Leading conglomerate and go-go stocks fell roughly 50 to 75 percent in 1969-1970, against about a 20 percent Dow decline. The worst-hit names collapsed far more: Litton fell about 93 percent from its 1967 high, and LTV dropped from about $169 a share in 1967 to roughly $4.25 by 1970.

Could the conglomerate boom happen again today? The exact accounting trick is harder now because pooling-of-interests was abolished in 2001 and goodwill rules are stricter. But the deeper pattern, using cheap or expensive stock as a currency to buy earnings and dress up growth, recurs whenever investors fixate on a single headline metric.

What is the main lesson from the conglomerate boom? Financial engineering is not value creation. Earnings that grow only because of acquisitions, accounting choices, or a rising share price will reverse when any of those props is removed, so trace reported growth back to real output before paying a premium for it.

Sources

1. Federal Trade Commission. W. R. MacIntyre, Conglomerate Mergers: The Quest for Guidelines (1968). https://www.ftc.gov/system/files/documents/public_statements/683761/19681010_macintyre_conglomerate_mergers_the_quest_for_guidelines.pdf
2. Financial Accounting Standards Board. APB Opinion No. 16, Business Combinations (issued August 1970). https://storage.fasb.org/apb16.pdf
3. George Mason Law Review. Politics, Policy, and Antitrust: Revisiting the ITT Affair. https://lawreview.gmu.edu/forum/politics-policy-and-antitrust-revisiting-the-itt-affair/
4. US Senate Committee on Finance. Tax Reform Act of 1969 (H.R. 13270), hearing records on interest deductions and conglomerates. https://www.finance.senate.gov/download/1969/09/29/tax-reform-act-of-1969-hr-13270-part-a-testimony-to-be-received-monday-september-29-1969-part-b-additional-statements-topics-public-utilities-depreciationearnings-and-profits-etc-general-interest-deductions-conglomerates-installment-method-tax-exempt-organzationsadvertising-income-multiple-surtax-exemptions
5. The Saturday Evening Post. The Forgotten History of How 1960s Conglomerates Derailed the American Dream. https://www.saturdayeveningpost.com/2018/11/the-forgotten-history-of-how-1960s-conglomerates-derailed-the-american-dream/
6. Encyclopedia.com. Conglomerates (history, Litton and LTV figures). https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-labor/businesses-and-occupations/conglomerates
7. FundingUniverse. History of Litton Industries, Inc. https://www.fundinguniverse.com/company-histories/litton-industries-inc-history/
8. Glen Arnold (ADVFN). George Soros's Reflexivity Model Illustrated by the Conglomerate Boom. https://uk.advfn.com/newspaper/glenarnold/59609/george-soros-s-reflexivity-model-illustrated-by-the-conglomerate-boom
9. Watchlist Investing (Adam Mead). The First Conglomerates. https://www.watchlistinvesting.com/p/63-the-first-conglomerates
10. Ockham's Notebook (Medium). The Go-Go Years, on John Brooks's account of the 1960s. https://medium.com/@OckhamsNotebook/the-go-go-years-forgotten-1960s-hold-lessons-for-investors-9594014b3ba2

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.