The Theory of Financial Leverage and Conglomerate Mergers

by Edward Renshaw

Fall 1968

Volume 11
Issue 1

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In 1965 The Federal trade Commission counted 1,893 sizable mergers, compared to an average of only 1,162 between 1955 and 1959. Now, after a period of modest reduction in mergers which can be explained by a combination of tight money and declining stock prices, we seem to be in the midst of another merger spree. Current mergers could easily set a new record and perhaps reduce the number of firms which control two-thirds of all manufacturing assets from 500 companies in 1962 to less than 200 companies by 1975. One of the more striking aspects of current mergers is that one seems to be without an adequate theory to account for this phenomenon. Most mergers between large corporations are of the conglomerate variety and not something that can easily be explained by resorting to the concentration implied by monopoly theory. In 1966, 70 per cent of all sizable mergers were conglomerate, compared to 20 per cent ten years ago. While accountants and financial analysts argue over a useful definition of corporate income, conglomerate mergers have created an immediate need for new accounting theory.

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