An understanding of the conglomerate phenomenon is impeded if all conglomerates are treated as though they were indistinguishable one from another. Some types may pose genuine public policy problems, others have had an invigorating competitive influence, and still others have had essentially neutral effects. Those that combine mixtures of the first two types pose the most troublesome public policy issues.
The main emphasis here is on conglomerates of the revitalizing kind —by which I mean divisionalized firms that are provided with the strategic planning and internal control capability described in Section 3.2 of Chapter 8 and are diversified in sufficient degree to warrant assignment to the con- glomerate category.99 The reasons for delimiting the discussion in this way are two. First, the potentially beneficial consequences of conglomerates have been relatively neglected in the discussions by public agencies of this phenomenon. Although the staff of the U.S. Federal Trade Commission appears to be moderating its position on conglomerates,100 its earlier posi- tion,101 as well as that expressed by officials in the U.S. Justice Department102 and developed in congressional staff studies,103 was to regard the conglo- merate as a dubious if not altogether disreputable form of organization. If, however, the conglomerate is a more complex and many sided phenomenon than official statements reveal, a more balanced assessment requires that other aspects of the issue be more fully exposed.
The second reason for focusing on conglomerates that have attractive internal efficiency characteristics is that, over the long pull, their superior viability properties should manifest themselves in terms of differential survival. Those conglomerates that rely on loophole exploitation, “irregular” security issues, follow-the-crowd fadishness, accounting chicanery, and the like for their successes will eventually exhaust the well and be sorted out as loopholes are closed104 and the test of continuing viability is faced. Although the earnings reported in any one year can be altered greatly by choosing judiciously among a wide variety of “defensible” accounting procedures, the test of earnings over several successive periods is less subject to cosmetic adjustment in this way. The problems associated with the issue of special debt and equity instruments are likewise revealed over time as maturities become due and/or changes in the condition of the environment require the firm to face adversity. Conglomerate structures that lack financial and structural rationality and want for sound management will — as a group at least, although there will be individual exceptions— decline relatively. If the selection mechanism is working well, they will be required to adapt appropriately, shrink relatively, or face extinction.10 Accordingly, attention is directed from the outset toward an examination of those types of conglomerates that are believed to have sound structural and management properties.
Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.