The systematic analysis of success and failures of early mergers made by Shaw Livermore tells much the same story. Livermore selected from an initial list of 328 mergers occurring between 1888 and 1906 156 that were large enough to affect the market structures of the industries in which they operated. He defined success in terms of “earning power on capitalization,” and then placed these companies into four categories: failures, successes, marginal successes, and those that were successfully rejuvenated.52 He also distinguished between successes and outstanding successes and between early and late failures. Livermore’s listings have been placed into the industrial categories that the U.S. Census defines as two-digit groups in its Standard Industrial Classification. The results, listed in table 6 (p. 340), indicate in what industrial groups mergers were concentrated and in which they succeeded or failed. Table 6 also indicates whether a company became integrated or remained a single-function activity by continuing only to manufacture. In that table a manufacturing company was considered integrated if it had its own branch sales offices and its own purchasing organization and/or controlled sources of raw and semifinished materials.
One fundamental fact emphasized by table 6 is that of the mergers Livermore studied, all but 8 were in manufacturing or processing. Three of the 157 were mergers of mining companies and 2 of these 3 were failures. Of the 4 others not in manufacturing, 1 was in distribution. That merger, Associated Merchants, resulted from the attempts of the heirs of H. B. Claflin, a pioneering mass marketer, to dispose of their holdings.53 The other 3 included a New York realty company that dealt in business properties, the Bush Terminal Company, which operated railroad terminal facilities on the Brooklyn waterfront, and the Morgan-sponsored Inter- national Mercantile Marine Company. The last was a failure.
The basic finding indicated by table 6 is that which the historical nar- rative has already suggested. Successful mergers occurred in the same type of industries in which the integrated firm had appeared in the 1880s. There were fewer mergers and more failures in labor-intensive industries where the concentration of production did not significantly reduce costs and where distribution did not involve high-volume flows or did not require special services. Thus, Livermore lists no mergers in the apparel industry, only 1 in furniture, 3 in printing and publishing, and 3 in lumber.54 In the textile group where nearly all the mergers failed, with 1 o out of 12 failing quickly, only 1 was marginally successful. Another, American Woolen, Livermore characterized as a “limping’’ failure. In leather none of the 4 were successful; in asphalt (listed in group 29) 2 failed and 1 remained marginal. In the machinery trades failures dominated in industries that did not require specialized services in the selling of products or a complex technology in making them. These included mergers for the production of wringers, shears, bicycles, woodworking and laundry machinery, and simple agricultural implements such as forks, hoes, and seeders.
On the other hand, successful mergers were most numerous in the high- volume, large-batch, or continuous-process industries and in those needing specialized marketing services. These were particularly successful in food and in complex but standardized machines. They were also numerous in the chemical, stone-glass-clay, and primary metals groups—industries in which enterprises used capital-intensive, energy-consuming technologies and distributed standardized products to many customers.
Table 6 further emphasizes that mergers were rarely successful until managerial hierarchies were created—that is, until production was con- solidated and its administration centralized and until the firm had its own marketing and purchasing organizations. As the table indicates, the suc- cessful firms had integrated. Moreover, the firms which Livermore lists as rejuvenated moved from failure to success only after they had changed their strategy and their structure. Nearly all the rejuvenations occurred after the managers failed to make profits through a strategy of horizontal combination. These enterprises, like Corn Products and Distillers-Securi- ties, revived themselves by means of administrative centralization and vertical integration. Although information is not complete for all the mergers studied by Livermore, it does seem safe to say that by 1 9 1 7 nearly all the successful consolidations had integrated production with distri- bution.
Livermore’s review of successes and failures in the nation’s first merger movement is based on limited data and is not conclusive. But it does em- phasize that merger itself was not enough to assure business success. Dur- ing the 1890s mergers had become a standard way of creating large multi- unit industrial enterprises. Those formed to control competition or to profit from the process of merger itself often brought short-term gains. But they rarely assured long-term profits. Unless the newly formed consolidation used the resources under its control more efficiently than had the constituent companies before they joined the merger, the consolidation had little staying power. Few enjoyed continuing financial success until they had followed the example of the pioneering mergers and created an organization that was able to coordinate a high-volume flow of materials through the processes of production and distribution, from the
suppliers of raw materials to the ultimate consumers. By using resources more intensively and by improving information and cash flows, the man- agers of these enterprises reduced unit costs. At the same time, by assuring prompt delivery, by advertising, and by providing distributors and cus- tomers with specialized services, they created further formidable barriers to entry. Yet changes in strategy and organization were in themselves not sufficient. Unless the enterprise used the technologies of mass production and served mass markets, it had little opportunity to achieve such cost re-ductions and to raise such barriers to entry.
The experience of the early American mergers thus provides some sug- gestive documentation for a basic contention of this study. Modern busi- ness enterprise became a viable institution only after the visible hand of management proved to be more efficient than the invisible hand of market forces in coordinating the flow of materials through the economy. Few mergers achieved long-term profitability until their organizers carried out a strategy to make such integration possible and only after they created a managerial hierarchy capable of taking the place of the market in coordinating, monitoring, and planning for the activities of a large number of operating units. The history of the large industrial enterprises in the years between the merger movement of the turn of the century and the entry of the United States into World War I convincingly documents this basic proposition.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.