Conglomerates and Mr Crosland MONEY
NICHOLAS DAVENPORT
When he was in the political wilderness, Mr Anthony Crosland wrote two very good books on socialism—The Future of Socialism in 1956 and The Conservative Enemy in 1962. In both he decried the part played by the equity share- holder in the growth economy—'the function- less shareholder' was one of his phrases—and in both he took objection to their unrestricted rewards. (He called in both for a general gifts tax, a capital gains tax and an annual tax on capital wealth.) The poacher has now turned gamekeeper, for, as President of the Board of Trade, he is in charge of the Companies Acts and protector of the rights of shareholders as defined by them.
It was therefore interesting to read between the lines of his recent speech to the Leeds Chamber of Commerce when he explained why he referred the proposed mergers between Uni- lever and Allied Breweries and between Rank and De La Rue to the Monopolies Corn?
mission. 'Large scale mergers,' he said, 'may raise legitimate anxieties amongst the em- ployees concerned; they give rise to capital gains on a sometimes enormous scale; they may raise serious problems of management, of financial power, of market domination.' It was clear that his socialist conscience was pricking him. He was shocked by the huge Stock Ex- change profits which the taken-over share- holders were making. He was scared by the re-emergence of the power of finance-capitalism which in his books he had hopefully buried.
Two weeks ago I had suggested that the Government wonld run into increasing difficulty in its management of a mixed economy if it failed to define clearly what the private sector could or could not do. It is not against the merger movement on the whole. As Mr Cros- land said: 'This has been on balance a bene- ficial trend which has led to badly-needed re- structuring of many of our industries.' (Of 320 cases examined by the Board of Trade since 1965 only twelve have been referred to the Monopolies Commission.) But the Government appears to be harbouring an objection to what is known in the City as the 'conglomerate' merger, that is, mergers between companies whose activities do not overlap but cove4 widely different businesses and diverse' activities.
Hitherto the Board of Trade has only referred to the Monopolies Commission companies which are either direct competitors or engaged in closely similar activities. But Unilever and Allied Breweries, being engaged in quite dif- ferent trades—the same applies to Rank and De La Rue—are a conglomerate merger which the Monopolies Commission has never yet tackled because the basic questions of mono- poly do not arise. On what basis should the commission review such mergers? Mr Crosland has given it no rules to work on. What should the rules be?
Conglomerates are a well-known animal in the City—reptile would be a better name having regard to the huge size of the reptiles in the Jurassic age—and the City judges them on the - strict test of management ability. It has no ob- jection to size if the management knows its job. Mr Jim Slater of Slater Walker Securities, who is the chief exponent of the conglomerate merger, made some telling points recently in the Financial Times. He would encourage con- glomerate takeovers provided they produce 'organic growth' and he would recommend legislation to ensure that companies reveal the exact financial effect of acquisitions in each year's accounts, so that shareholders may dis- tinguish between organic growth and acquisi- tion growth. That is a wise suggestion.
The essential feature of a conglomerate is a common financial control and strong central management. Mr Slater's conglomerate last year acquired Crittall-Hope, the largest window manufacturers in the country. It immediately sold the loss-making subsidiaries in this country, in Germany and in Canada. It integrated its re- search and development activities and elimi- nated the duplication of factory and sales depots. As a result its profits were more than doubled. Wonderful for its shareholders but also excellent for the country! Mr Weinstock is doing the same for the GEC, AEI and EEC merger. Any part of the business which is not likely to return an adequate profit on the capital employed is being closed down or sold off. It arouses employee opposition but eco- nomically is sound.
One remains sceptical of the conglomerate if only because there is a shortage of management talent in this country capable of making them a financial success. When the talent is available I see no economic objection and I would have thought it wrong of the Board of Trade to hold up the Unilever! Allied Breweries merger seeing. it,is manifest that they did have sufficient man- agement talent to make the conglomerate a' financial success. Success or failure will soon be reflected in the market price of the shares in the open capital market. If it is a success the equity will be quoted on a high price/earnings ratio': if it is a failure on a low price/earnings ratio. This is where the 'functionless' share- holders perform a very useful function. They will get rid of their conglomerate shares if suc- cess is not apparent. The open market will decide and its decision will probably be a more rational one than that of the man in Whitehall.
The attitude of the IRC to conglomerate mergers is not known. Sometimes the IRC be- haves like the rogue elephant in the business jungle, backing one side against another, some- times on personal grounds—as in the Rank- Cambridge Instrument fight—but basically the lac is only interested in non-conglomerate mergers where it can line up manufacturing and rketing interests in the same line of business, TMs is the kind of industrial restructuring, which the IRC was designed to push but it has, never clearly stated its aims and maintains a' bewildering flexibility which leaves private en- terprise in the frightening dark. What is clear is that the Government does' nth really know where it is going in the private sector. It has just refused to refer to the Mono- polies Commission either the Schweppes offer for Cadbury or the bid by American General Foods for Rowntree, although they both look like conglomerates. Mr Crosland seems scared of private financial power and of private share- holder profits. Surely the capital gains tax will take care of the latter and the open capital mar- ket of the former. The old-fashioned socialist must give up his horror of equity profits. You, cannot run a private sector of the mixed economy on losses and funk.
Previous page
