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The poor record of conglomerates is well documented. In a study of the merger programs that 58 large firms pursued between 1972 and 1983, McKinsey & Co. concluded that in at least 28 of the cases the acquisitions did not earn enough money for the company to justify the purchase price. In only six instances did the merger program seem to be a clear-cut success. Companies stumbled most frequently when they bought firms in a totally different industry. F.M. Scherer, a Swarthmore College economist who surveyed 6,000 mergers from 1950 to 1977, discovered that the profitability of most acquired companies slumped after they were taken over and that fully one-third of the conglomerate acquisitions of the 1960s were later sold. Says he: "We typically found managerial failure. The acquirers didn't know how to manage their acquisitions."
Many of today's consolidations are fundamentally different from conglomerate mergers. Companies are now snapping up firms in fields linked to their own rather than amassing jumbles of unrelated enterprises. Conglomerates were based on the idea that "if you're a good manager, you can manage anything," says Alfred Rappaport, professor of accounting and information systems at Northwestern's graduate school of management. "That wasn't necessarily true." Now, adds Rappaport, the thinking is "Let's go back to the core where we have the technology and the knowledge and a comparative advantage. Let's stick to things where we're better than the rest." As a result of this change in attitude, says Scherer, "mergers of today have somewhat better chances of success than did the conglomerates."
Still, some companies continue to range outside their industries. Ford Motor last week agreed to acquire San Francisco-based First Nationwide Financial, owner of the ninth-largest U.S. savings and loan, for nearly $500 million in cash. The purchase will expand Ford's credit business, which now includes financing the purchase of new cars. General Motors and Chrysler are also increasing their lending activity.
When executives do venture into new fields through mergers, they are now more likely to adopt a hands-off policy toward the acquired companies. IBM last year completed the $1.9 billion purchase of Rolm Corp., a Silicon Valley maker of telecommunications equipment. The button-down computer giant has since left its freewheeling subsidiary largely alone. "We didn't come here to fill up the swimming pool with gravel," an IBM official assured Rolm employees, who have happily retained their corporate hot tubs, saunas and water-polo team. General Motors has vowed to pursue a similar strategy with Hughes Aircraft, which the automaker acquired in June for about $5 billion. GM said it bought Hughes for its technical know-how, and will refrain from meddling in the California company's business.