Nov 16, 2007 04:30 AM Bill Carrigan
Conglomerate (con·glom·er·ate)
(1) To form or gather into a mass or whole.
(2) A corporation consisting of several companies in different businesses. Such a structure allows for diversification of business risks, but the lack of focus can make managing the diverse businesses more difficult.
Conglomerates were popular in the 1960s due to a combination of low interest rates and a series of rolling bear and bull markets, which allowed the conglomerates to buy companies in leveraged buyouts, sometimes at temporarily deflated values. Famous examples of the 1960s conglomerates include Ling-Temco-Vought, ITT Corporation, Litton Industries, Teledyne, and Gulf and Western Industries.
In 1969, investors found conglomerates were not growing any faster than the individual companies had before they were bought out and share prices plummeted, sparking a bear market, and there was a general feeling conglomerates were to blame.
Conglomerate (con·glom·er·ate)
(1) To form or gather into a mass or whole.
(2) A corporation consisting of several companies in different businesses. Such a structure allows for diversification of business risks, but the lack of focus can make managing the diverse businesses more difficult.
Conglomerates were popular in the 1960s due to a combination of low interest rates and a series of rolling bear and bull markets, which allowed the conglomerates to buy companies in leveraged buyouts, sometimes at temporarily deflated values. Famous examples of the 1960s conglomerates include Ling-Temco-Vought, ITT Corporation, Litton Industries, Teledyne, and Gulf and Western Industries.
In 1969, investors found conglomerates were not growing any faster than the individual companies had before they were bought out and share prices plummeted, sparking a bear market, and there was a general feeling conglomerates were to blame.
The last great Canadian conglomerate was Canadian Pacific Ltd., which built the railway that linked Canada's Prairies to the west coast in the 1880s and later expanded into a conglomerate. Affectionately known as CP, the company had investments in railways, ships, hotels, coal mines and oil.
With the purchase of one CP share, an investor could gain a diversified stake in the Canadian economy.
Unfortunately, investors again believed that CP was worth more in pieces and in 2001 the company announced plans to split itself into five publicly traded companies.
Today's conglomerates tend to focus on one sector. Some examples would be media (Time Warner Inc.), consumer (Berkshire Hathaway Inc.), industrial (General Electric Company and Onex Corp.), financial (Power Financial Corp.), transportation (Bombardier Inc.) and steel (ThyssenKrupp AG).
One could argue that many of this generation's conglomerates represent investor opportunity to participate in the various market sectors, much like the new sector-exchange-traded funds.
Let us assume an investor seeks to participate in the long-term growth of Canada's financial services industry. A quick study indicates Power Financial (TSX-POW) is delivering higher long-term returns relative to the performance of the TSX Financial Services Index.
Let us now assume an investor seeks to participate in the long-term growth of Canada's industrial products industry. The investor could purchase shares of one or two industrial companies or elect to purchase shares of Onex (TSX-OCX).
A quick study indicates the industrial conglomerate is delivering higher long-term returns relative to the performance of the S&P/TSX Capped Industrials Index.
Our chart this week is of Onex's monthly closes covering 15 years.
Technical studies on the long-term charts of growth companies such as Microsoft Corp. and Intel Corp. reveal the same pattern – an early growth, middle growth and final growth stage spanning a 30-to-50-year period.
When a growth company completes the final growth period, it must re-invent itself or convert to a "value" company. The other alternative is to find a buyer or shrink to junk status.
Our chart displays the start-up years of Onex in the early 1990s and the subsequent first growth spurt of the late 1990s. The first growth period was followed by four years of consolidation that lead to the current second growth period.
Technical studies have shown the second period of corporate growth to be the longest in terms of duration and price magnitude so kick back and enjoy the ride.
Bill Carrigan is an independent stock-market analyst.
