Your Money : ‘Conglomerate’: It Doesn’t Have to Be a Dirty Word
Henry Singleton, who died last week at age 82, knew a little bit about creating wealth.
The Los Angeles conglomerate he co-founded in 1960, Teledyne Inc., once boasted the highest-priced stock on the New York Stock Exchange, after Warren Buffett’s Berkshire Hathaway.
Investors who got in on the ground floor rode Teledyne stock from mere pennies to nearly $400 a share by the late 1980s.
Even by today’s Internet stock standards, that was astounding wealth creation.
And unlike so many of today’s Net stock stars, Teledyne wasn’t a “virtual” business--it was a real one, composed of bricks-and-mortar operating units that Singleton acquired one by one. They also made real money.
In the company’s heyday, and the heyday of conglomerates in general, Wall Street loved the idea of business diversification across product lines that had nothing to do with one another.
Teledyne’s main businesses were aviation and electronics, specialty metals, insurance, industrial products and consumer products.
Within those broad groupings were companies involved in hundreds of products, many of which certainly qualified as niche items: titanium alloys, denture materials, hydrocarbon analyzers, swimming pool sanitizing systems and even rock breakers for the mining industry.
The appeal of conglomerates was largely based on the theory that a downturn in one
business sector would be offset by strength in others.
But by the mid-1980s, the conglomerate concept was going out of style on Wall Street. The myriad businesses were too difficult to analyze, critics said. Moreover, corporate raiders thought a better idea was to tear apart a company and sell off the pieces for more than what the entity as a whole was worth.
Singleton, after watching Teledyne shares stagnate from 1987 to 1990, took a major step to deconstruct the company in 1990 when he spun off the firm’s insurance unit, Unitrin, which by then accounted for 20% of total sales.
The timing was arguably bad, however. With one-third of Teledyne’s business, ex-Unitrin, tied to aerospace, fear of mounting defense cutbacks left the slimmed-down Teledyne with few friends on Wall Street.
After a 5-for-1 stock split in March 1990, Teledyne traded at $72 a share. By the end of that year, with Unitrin spun off, the latter’s shares were trading at $31, while Teledyne traded at a mere $15. The sum of the parts, $46, was far less than what the whole had been worth.
But by 1991, at age 74, Singleton may have felt there was little else he could do to restore Teledyne’s mystique with investors. He retired as chairman that year.
Whether the company and its disparate units had simply grown unwieldy may always be a matter of debate, but the fact is that earnings were in a steep decline after peaking in 1988.
It got worse: Investors who stayed with Teledyne in the 1990s suffered through a massive scandal involving allegedly inflated bills to the Pentagon. The stock lagged far behind the broad market and traded for just $20 at the end of 1994. Even adjusting for stock splits and the insurance spinoff, as an investment Teledyne was a shadow of its former self.
Then, in a reversal of fortune that probably few Teledyne shareholders in the 1970s and ‘80s could have imagined, the onetime predator became prey by the mid-1990s: Teledyne wound up the target of a hostile takeover bid from WHX Corp. in 1995. To escape, it merged with Allegheny-Ludlum to form Allegheny Teledyne in 1996.
The successor firm, now based in Pittsburgh but still operating in many of Singleton’s original businesses, has hardly been a barnburner in recent years. Sales (about $4 billion a year) and earnings have basically shown little growth since 1996. The stock, at $19.25 on Friday on the NYSE, is no higher today than it was three years ago.
Whether Singleton’s once-grand empire can ever be a true growth enterprise again may depend on Thomas A. Corcoran, the 55-year-old Lockheed Martin executive who was named chief executive of Allegheny Teledyne last Thursday.
Although popular wisdom is that the conglomerate business model remains in disrepute on Wall Street--and that what investors want today are highly focused companies--there are several exceptions to the rule.
General Electric is perhaps the shining example of how a conglomerate, managed well, can still command a premium in the stock market. Chairman Jack Welch oversees a $100-billion (annual sales) company whose products range from jet engines to lightbulbs to financial services to NBC-TV.
Few major companies have generated such consistent earnings growth in the 1990s--which is why GE’s stock is priced at about 36 times estimated 1999 earnings per share, well above the blue-chip average price-to-earnings ratio of about 28.
Tyco International, taking a page from Singleton’s book, has built itself up via acquisitions in recent years and now operates scores of individual companies in security services (including ADT Inc.), health care (including U.S. Surgical), electronics (led by connector maker AMP Inc.) and valves and tubing.
Exeter, N.H.-based Tyco’s sales have nearly doubled since 1994, to $12.3 billion last year. Operating earnings have nearly tripled since then. The stock, in turn, has rocketed from $26.44 at the end of 1996 to $99.75 now on the NYSE.
Another conglomerate whose shares have performed very well in the 1990s is Textron Inc. of Providence, R.I., whose businesses include helicopters, auto parts, commercial finance and fastening systems.
Textron’s operating earnings have risen for nine consecutive years, and the company’s stock, up 573% since 1989, has far exceeded the 284% rise in the Standard & Poor’s 500 index in that period.
Those successes with the basic Singleton business model, however, have been offset by some major disasters among the large remaining conglomerates.
Tenneco Inc., whose brand names include Monroe auto parts, Hefty plastic bags and E-Z Foil aluminum bake ware, has struggled in its auto businesses and suffered a sharp slide in earnings since 1996.
Meanwhile, Cendant Corp., a hot up-and-comer in 1996 and ’97 as Chairman Henry Silverman built a sprawling business made up of hotel franchising, car rentals, tax preparation services and real estate brokerage, was stung by accounting fraud at one of its major purchases, CUC International.
The company is still occupied with shareholder lawsuits from the fraud debacle, which caused Cendant’s stock to collapse. The final settlement costs of the suits remain anyone’s guess--and a heavy weight on the stock price.
The Cendant snafu points up perhaps the greatest risk with the conglomerate model: that central management will ultimately fail to keep close enough track of so many unrelated businesses, or will fail to execute as well in multiple industries versus devoting all of its efforts and resources to a single industry.
That is why investors have generally favored focused businesses in this decade--Intel in semiconductors, for example; Cisco Systems in computer networking; American Express in financial services.
But as GE, Tyco and Textron have shown, Henry Singleton’s concept of building wealth via a diversified platform of well-chosen businesses is still viable in the 1990s. Indeed, when it works, it works very well.
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Tom Petruno can be reached at tom.petruno@latimes.com.
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Conglomerates: A Mixed Bag
Wall Street has generally favored focused businesses in the 1990s, but some highly diversified companies have prospered. A look at the stock performance of seven major conglomerates since 1996:
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Ticker 52-wk 52-wk Fri. Gain since Stock symbol high -low close 12/31/96 Tyco Intl. TYC $105.88 $40.25 $99.75 +277% General Electric GE 120.00 69.00 116.41 +135% United Technol. UTX 75.94 35.88 67.25 +103% Textron TXT 98.00 52.06 82.81 +76% Allegheny Teledyne ALT 24.19 14.00 19.25 -16% Cendant CD 22.63 6.50 18.25 -25% Tenneco TEN 37.44 19.44 20.38 -55% S&P; 500 index 1,420 923 1,357.24 +83%
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Source: Bloomberg News
