It was October 2, 1976. General Electric had bid to acquire Utah International for $2 billion. Reported the New York Times:
The largest merger proposed in the nation’s history
will not be challenged by the Justice Department.
This got me thinking. We seemed to have become merger mad. If it kept up this way, where would it lead?
So I wrote an article for New York magazine set in the impossibly far-off future — March 3, 1998, to be exact. (Horrors! I’d be fifty by then.)
Now, like a time capsule, that day has actually arrived. I thought it might be fun to reprint the article here. (To see what really happened, pick up a copy of Fortune‘s famous “500” issue, out in mid-April.)
THE DAY THEY COULDN’T FILL THE FORTUNE 500
NEW YORK, March 3, 1998 — It wasn’t such an awesome decision, really, and it had to be made, so Carol J. Loomis, formerly one of Fortune‘s most gifted writers and now, in 1998, its managing editor, made the obvious choice: They would still call it “the Fortune 500,” even though this year there would be only 479 companies on it.
The day had finally come.
In prior years it had been possible to fudge a little: In 1991 the list had been broadened to include firms based outside the United States; in 1995 nonindustrial companies had been added to the list, where previously they had been accorded their own lists.
But now there was nothing for it, unless you wanted to include some of the Soviet bloc or Chinese state enterprises, a step which Fortune — every bit as much a capitalist tool as Forbes — simply would not take. (Not that the communist firms were really so different from the many noncommunist giants that were government-owned.)
First on Fortune‘s list again this year, it would surprise no one, would be Citicorp, with worldwide assets, expressed in American dollars, of $1.2 trillion. (Fortune had switched from sales to assets in making its rankings when nonindustrial companies were added to the list.) Over the past 22 years, Citicorp assets had grown at a more or less steady 15 percent, right on target. Buried somewhere in that total were this writer’s automobile loan (and 17 million others, worldwide), his mortgage (the lines between savings and commercial banks having long since been erased), and a vast computer network that, with others like it at the seven rival global megabanks, had largely eliminated the use of checks and significantly lessened the use of cash. The same Citibank computer network handled this writer’s brokerage transactions and travel arrangements, prepared his taxes, reminded him of upcoming birthdays and holidays, clipped his municipal bond coupons, evaluated his creditworthiness, and would doubtless have scrambled or unscrambled his eggs for him, as it did his bank statement, had he been of a mind to sign up for the service.
The remarkable thing was that Citicorp had managed to expand so dramatically, swallowing so many other banks and financial institutions in the process, and yet still keep its payroll down to the 50,000 or so who were needed to man the infant operation back in the mid-1970s. Where once there had been fifteen clerical people at a work station, now there was a thumbnail-size silicon chip. Tellers now were mostly electronic. Mail boys had been replaced by robots — beginning as long ago as 1975. The entire margin department of what had once been the brokerage firm of Harris, Upham & Company, files and all, was now contained in a Citibank computer cell the size of a pack of Salems. Almost all of the people on the payroll in 1998 were officers. Several hundred were in the $250,000-plus compensation range.
Second on Fortune‘s list this year would be Aramco, with stockholders on six continents but more than 80 percent of its shares in the hands of the Saudi royal family — which itself had spread lavishly over six continents. Once a largely American-owned oil operation, the global energy combine had most recently acquired a million square miles of Brazilian interior — 640 million acres — which Brazil, desperate to outbid Japan for an assured long-term source of energy, had reluctantly bartered. Valuing this land at $100 an acre, Saudi Aramco had in one falcon swoop added $64 billion to its asset base, putting it, too, over the trillion-dollar mark.
There followed the predictable list of megabanks, multinational energy combines, conglomerates, IBM, and AT&T in much the same order as in 1997. But it wasn’t the rankings so much as the process of growth itself that had started Loomis ruminating.
In a way, she couldn’t complain. Her bank service was excellent; her phone service — miraculous (it now cost only 35 cents for the first minute to call from New York to Tokyo, although the rates to Westchester and Long Island were still somewhat higher). Her hamburgers were uniformly nutritious and quality-controlled, her brokerage commissions were cheaper than they once had been, and many of the companies she dealt with, although subsidiaries of one or another giant, were left largely on their own so long as they produced adequate profits.
And yet she was troubled. Somehow it struck her wrong — and had as long ago as 1976 — that Marquis Who’s Who, the snob-appeal company, was just another arm of ITT; that Dannon Yogurt had sold out to multibillion-dollar Beatrice Foods; that Halston was part of Norton Simon; that Welcome Wagon was part of Gillette; that Simon & Schuster was part of Gulf + Western; that Indiana Farmer magazine was one of the American Broadcasting Companies. What had really killed her was when, years later, L. L. Bean had been merged into Spencer Gifts, a division of entertainment octopus MCA.
The day The New Yorker, too, went to MCA — MCA had long been looking for a profitable magazine to acquire — had been even more depressing. Loomis had canceled her plans for a weekend out in Long Island’s sludge-free zone and just moped around her apartment.
This relentless conglomeration troubled Fortune‘s managing editor, but she couldn’t say for sure that, on balance, it had been a bad thing. As for the executives who had built and now directed these giants, she considered most of them brilliant, ethical, tremendously hardworking men and women. They had played by the rules — and won.
Part of the problem, Loomis reflected, was just that — competition. Competition in industry was not like competition in an athletic league. In an athletic league, teams are of equal size and get to start out with a clean slate at the beginning of each new season, no matter how badly they have been clobbered. In a competitive economy, the strong tend to get stronger and the weak tend, over the long run, to go out of business.
The brokerage industry in the 1970s was just one example. In the spirit of free enterprise, the U.S. government had stepped into the securities industry to require price competition. As a result, commissions were cut, weak firms were liquidated or merged into stronger ones, and what had been a highly fragmented, largely inefficient industry became by the end of the decade a handful of efficient firms. (Their absorption in the following decade into still larger financial concerns simply completed the process.)
The same thing happened with the airlines in 1979, when the government lifted its price and route regulation, only there had been fewer companies in the industry to begin with.
And it happened throughout the economy generally when the government began cracking down in earnest on what the courts had come to define as “tacit price fixing.” The crackdown — at first — was hailed with great enthusiasm by all but the tacit price fixers themselves. It was given much of the credit for slowing inflation to a crawl — but then most of the blame for plunging the country, and with it the rest of the world, into depression. The Econolypse of ’81, it was called, although it actually stretched well into 1986. Truly aggressive competition had led to truly horrendous bankruptcies, which in turn led to a self-fulfilling lack of confidence in the future.
Vigorous competition was a requisite for a healthy economy, Loomis reflected, but winners posed a bit of a problem.
She recalled a ditty Malcolm Forbes had spotted which illustrated the problem neatly:
You’re gouging on your prices if You charge more than the rest.
But it’s unfair competition If you think you can charge less.
A second point that we would make to help avoid confusion:
Don’t try to charge the same amount — that would be collusion!
You must compete. But not too much, for if you do, you see,
Then the market would be yours — and that’s monopoly!
— R. W. Grant, Tom Smith and His Incredible Bread Machine
It wasn’t only competition, by any means, that had led to a world of 479 giant enterprises. It was largely the process of conglomeration — of old family managements selling out for estate reasons; of young entrepreneurs selling out to cash in big; of financially straitened companies merging into solid ones (particularly during the Econolypse); of acquisitive managers spying opportunities for synergy (at best) or for easy growth (at least); and of empire builders collecting assets as Midas once collected money.
My God, she thought, just look at what had happened! In the last three decades, small-town banks by the thousands had become BankAmerica branches (81,000 in all on six continents). Luncheonettes and family delicatessens had folded in droves under competitive pressure from McDonald’s and McDeli’s (two of eleven McCorp Corp. subsidiaries), from Jack-in-the-Box (a Ralston Purina subsidiary), and from Burger King (a Pillsbury subsidiary). Local groceries had given way to Grand Unions or to 7-Elevens. (Along with Gristedes and many others, the 7-Eleven chain was even in 1976 an arm of Southland Corporation. Grand Union was a branch of the British-based Cavenham empire. Abroad, Southland and Cavenham were partners.)
Small proprietorships had become branches of subsidiaries of divisions of subsidiaries of conglomerates. And this was before taking any notice of the interlocking directorships between the sprawling giants.
What some called diversification Loomis had as long ago as the mid-1970s thought of as corporate dilettantism. General Tire operated radio and TV stations and an airline (Frontier) and bottled Pepsi-Cola; General Electric was acquiring Utah International, a California-based mining conglomerate with major interests in Australia; General Motors grew coffee in Brazil; General Mills owned Parker Brothers; Parker Pen owned Manpower; Manpower operated service stations under contract to Shell; Greyhound, once a bus line, was in the meatpacking and computer-leasing businesses; LTV, the steelmaker and aerospace firm, was a major factor in meatpacking, too; and Esmark, the largest meat packer of them all, was making dental supplies and panty hose and drilling for oil in the North Sea.
In 22 years the pace of conglomeration had, if anything, picked up. Take publishing. By 1976, many small newspapers had been consolidated into chains, such as Britain’s Thomson Organization (148 newspapers and 138 magazines); most airline magazines had been consolidated into a single publishing company, East/West Network; and a company called Professional Sports Publications was putting out programs — once highly local affairs — for no fewer than 27 pro teams. But in 1983 all three of these — the Thomson chain, East/West, and Professional Sports — were picked up in rapid succession by publishing behemoth McGraw-Hill.
Rival publishing giant Macmillan, meanwhile, after a brush with bankruptcy in 1982, had been acquired by Mobil/Marcor, the oil-and-retailing giant, and had, with this new backing, gone on to acquire MCA, Morton Salt, and Motown Records. Analysts began to wonder whether strategic planners at Mobil/Marcor/Macmillan had decided, in a moment of corporate whimsy, to go after only M’s — when without warning the company turned around and acquired Belgium.
(Why not? The Belgians were a practical people, and Mobil’s terms had been good. If countries could own companies — as, for example, Britain owned British Steel or Iran owned the Iranian National Oil Company — why couldn’t companies own countries?)
Carol Loomis closed her eyes. All she could see were corporate logos, corporate slogans, corporate letterheads. Then she had a vision of a Gulf Stream IV zooming across the sky at supersonic speed with Harold Geneen, still deferring retirement, waving from the window. Geneen, whose ITT would be nineteenth on this year’s list, with assets of $122 billion, was one of the original, and most adroit, conglomerateurs. Charlie Bluhdorn was another, and he, too, had not let up. A vigorous 72, he had in the past eight years added to Gulf + Western, among others: Perdue Farms, the Lefrak Organization, Federated Department Stores (which included, as of 1976, Rich’s, Bloomingdale’s, I. Magnin, Burdine’s, Bullock’s, and Filene’s, and had subsequently added Abercrombie & Fitch, Franklin Simon and Zayre), Bally Manufacturing, and the E. & J. Gallo Winery. All had gone kicking and screaming to Gulf + Western, which the average man on the street still mistook for some kind of far-flung railroad. Financiers marveled at how Bluhdorn, cursed as always with a pitifully low stock market multiple, had managed to pull off these acquisitions, but pull them off he had.
The antitrust division of the Justice Department, which enjoyed a confidence rating of 8 percent of the public even in 1976, could not begin to cope with the conglomeration of the world economy. Its big effort of the late 1970s and early 1980s, the crackdown on tacit price fixing, valiant though it was, had brought on the Econolypse and, with it, a spate of colossal desperation mergers. (It was the Econolypse that finally cemented Chrysler to Volkswagen, for example.) To the extent Justice wasable to keep firms from acquiring related concerns, it merely forced them to go outside their fields of legitimate expertise in search of growth.
Beyond that, lawyers in the Justice Department were ridiculously outnumbered and undercompensated vis-à-vis their corporate counterparts. And much of the conglomeration had been achieved abroad, where U.S. antitrust regulations did not apply. A favorite merger haven, particularly after Mobil acquired it, was Belgium. Just as U.S. firms had once favored Delaware as their state of incorporation, so now multinational firms tended, for technical purposes anyway, to be headquartered in Belgium.
As for other regulators, well, they had gradually been made to see private industry’s point of view. For example, there had been the marathon bargaining session late into the night of March 3, 1983, when the bankers agreed, for their part, not to foreclose on the cities, and the President agreed, for his, to see to it that the banks be allowed to cross state lines. (“The President is still the President,” opined one dismayed columnist, “but Citibank’s Walter Wriston, apparently, is chairman of the board.”)
Conglomeration, competition, automation, economies of scale, corporate elephantiasis . . . in 1964 there were 1.2 million egg farms in the United States (statistics like this stuck in Loomis’s head; she didn’t know why), and by 1976 the ranks had been thinned to 200,000, of which 4,000 accounted for 90 percent of production. By 1997, seven major producers accounted for 98 percent of total production, and all but one were subsidiaries of larger firms.
It was all damnably efficient, damnably rational, and Loomis found it damnably depressing.
She turned her attention back to the list. There were more than 479 companies in the world, she knew she would have to explain in her preface. There were still tens of thousands of firms that ranged from one-man shops up to what once would have been considered a fairly good-sized company. But the gap between these and the 479 giants was enormous. It would have looked silly to put even a company with $248 million in assets on the list, when the next largest, United Immortality (hospitals, nursing homes, artificial organs, blood banks, sperm banks, vitamins, pharmaceuticals, and health foods) — number 479 — had assets of nearly $7 billion.
There were still small companies, and any man or woman with enough gumption and modest backing could still try to build his or her own business. But as the giant corporate sector of the world economy had ballooned, the independent entrepreneurial sector had shrunk nearly to nothing as a proportion of the whole.
Loomis had worried over this problem on and off for 30 years and had never come up with much of an answer. The problem was so abstract, and corporate momentum so overwhelming, that no one had done much of anything at all — and this was the result. And Carol Loomis was not even sure that it was bad. But it troubled her.
PS – Three weeks after the foregoing appeared in New York magazine, in December 1976, New York was itself, without warning, acquired by media conglomerateur Rupert Murdoch.
Quote of the Day
I have loved. And been loved. And all the rest is background music.~Stelle Ramey
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