Were the Acquisitive Conglomerates Inefficient?

This article challenges the conventional wisdom that the 1960s conglomerates were inefficient. I offer valuation results consistent with recent event-study evidence that markets typically rewarded diversifying acquisitions. Using new data, I compute industry-adjusted valuation, profitability, leverage, and investment ratios for 36 large, acquisitive conglomerates from 1966 to 1974. During the early 1970s, the conglomerates were less valuable and less profitable than stand-alone firms, favoring an agency explanation for unrelated diversification. In the 1960s, however; conglomerates were not valued at a discount. Evidence from acquisition histories suggests that conglomerate diversification may have added value by creating internal capital markets. Copyright 2001 by the RAND Corporation.