A cash flow theory of conglomerate mergers

Edward Barry Leviton, Binghamton University--SUNY


There have been three periods of intensive merger activity in the United States. The first merger movement of major significance occurred at the turn of the century, and its peak years were between 1898 and 1902. This early merger movement in many respects was the most significant of the merger waves. It saw the transformation of many industries, initially characterized by many small and medium sized firms, into those in which one or a few very large firms dominated. Nelson has said that in this period the pattern of concentration characteristic of twentieth-century American business was formed and matured. The second large merger movement took place during much of the 1920s. It affected a number of new and emerging industries and, at the same time, represented attempts to solidify the industrial concentration (oligopolistic organization achieved by the first merger wave). The third and latest merger movement divides into two periods: a relatively modest merger took place from 1943-1947, while the most recent phase of merger activity began in the early 1950s and increased in intensity up until its abrupt decline in the late 1960s.

The basic concern of this study is an attempt to discover the underlying economic rationale behind the emergence of the conglomerate form of merger which became prominent during the most recent merger wave. In order to better understand the task before us the inquiry begins with a review of the most important characteristics of the merger waves of the past.