Jack of All Trades, Master of None
A Look at Litton Industries in the Mid-20th Century
This is a guest post written by Jonathan Chen, an undergraduate at Stanford University. Jonathan interned at Andvari Associates this past summer and was instrumental in laying the significant groundwork for a future case-study on Litton Industries. If you’d like to contact Jonathan, e-mail him at jonathanychen [at] stanford.edu or reach out to me personally.
Please enjoy.
This is the story of Litton Industries’ early growth, success, and conglomeration.
Litton’s Beginnings
In 1953, Electro Dynamics Corp. was founded by Charles “Tex” Thornton, Roy Ash, and Hugh Jamieson. Thornton is the main protagonist of the story. He first gained extraordinary management experience in the military during World War II where he became one of the youngest full colonels in the Army Air Forces. After the war, Thornton put his experience to work at both Ford Motor Company and then Hughes Aircraft where he introduced modern management techniques. Both companies enjoyed growth in profits and sales with the help of Thornton. At Hughes Aircraft, Thornton helped the company grow from $1.5 million in sales to $200 million in just five years. However, Hughes’s managers and directors did not want to spend the money Thornton wanted to spend on research and development to keep pace with new innovations. Thus, Thornton left Hughes with the goal of starting his own company. Roy Ash and Hugh Jamieson followed Thornton from Hughes.
Lacking capital, Thornton made his sales pitch to investors and bankers. Thornton approached many, even Joseph Kennedy, but wound up gaining the backing of investment banking firm Lehman Brothers. Thornton recalled in 1963 what he said to the people at Lehman:
“I told them that I wanted to start a company that would become a strong blue chip in the scientific and technological environment of the future. It would be a balanced company—not just engineering, not just manufacturing, not just financial. You can’t win a ball game with only a pitcher and a catcher, and you can’t have a strong company unless it’s balanced.”
With brash projections of achieving $100 million in revenues in five years from a stand-still start, Thornton ultimately wooed Lehman Brothers. They backed him with $1.5 million raised from their own clients by selling a combination of stocks and bonds in Thornton’s new venture: Electro Dynamics Corp. With capital in hand, the company’s first—and last—step was the acquisition of an electronics company by the name of Litton Industries. Soon after, Electro Dynamics changed its name to Litton Industries.
In the 1950s, the electronics industry experienced an unprecedented boom. The invention of the transistor in 1947 spurred growth and innovation throughout the electronics industry. Television ownership in the United States exploded from just over 1 million sets in 1949 to more than 44 million by the end of the 1950s. Computers, once the domain of academic and military research, began making their way into businesses with the introduction of commercial models like IBM’s 701 in 1952 and the 650 in 1954. The electric typewriter market was also flourishing, with major players like IBM and Remington Rand developing new and successful models. Recognizing these technological trends, Thornton saw a golden opportunity to create enormous wealth and value. Knowing that small electronics firms were often absorbed by larger competitors, Thornton was determined to expand his company rapidly.
Litton was the first acquisition of many. In its first three years, the newly renamed Litton acquired 13 companies. By its 6th year, that number would grow to 27. Using cash whenever possible, the rate of acquisitions by Litton was remarkable and remains a rarity even seventy years later.
At the time of the Cold War, Litton had grown to become a stellar defense and electronics company. And the company continued to its rapid pace of organic and inorganic growth. From $9 million in annual sales for FY1955 it reached almost $200 million in sales in FY1960. In 1961, Litton was the fastest growing company on the New York Stock Exchange. Litton had become one of the largest defense contractors for the United States, doing more than 50% of its business with the government.
In the 1960s, Litton began looking beyond its core businesses. Being heavily dependent on government military spending, management decided Litton needed to diversify. With acquisitions of a number of unrelated firms, Litton would grow to serve close to 400 product and service markets. It would have more than 1,900 facilities around the world that made typewriters, microwaves, office equipment, furniture, and frozen foods. Litton had become a serious conglomerate.
The most significant acquisitions by Litton include:
FY1954 - Litton Industries - Vacuum tube producer
FY1956 - Triad Transformer and Utrad - Electronics
FY1958 - Monroe Calculating Machine - Office equipment
FY1959 - Western Geophysical - Oil exploration
FY1962 - Ingalls Shipbuilding - Defense/Military shipbuilding
FY1965 - Royal McBee - Typewriters
FY1965 - Profexray - X-Ray equipment
FY1967 - Stouffer’s - Frozen Food
“An entrepreneur tends to bite off a little more than he can chew hoping he’ll learn quickly how to chew it.”
–Roy Ash, Litton Industries co-founder, and President from 1961-1972
Thoughts on Litton the Conglomerate
As long as I’ve been alive (not very long), conglomerates have been far from the ideal business model. Whenever I’ve heard talks of a conglomerate, it’s usually coupled with the word “discount”. Excluding arguable exceptions like Berkshire Hathaway, U.S. conglomerates have historically failed for an array of reasons, eventually breaking up into several smaller entities or shutting down outright. General Electric (GE) is one such example.
Founded in 1892 by Thomas Edison, GE grew into one of the world’s largest conglomerates, and was often the largest company in the world throughout 1993 to 2005. Operating in television, household appliances, aviation, energy, healthcare, and more, GE began underperforming in the late 2000s and began to sell its divisions and assets. The company recently finished its split into GE Aviation, GE Healthcare, and GE Vernova in April 2024. Beyond General Electric, historic examples of conglomerate breakups can be seen in the stories of Sara Lee, ITT, and Textron. When tracing the story of Litton Industries, I hoped to understand why economists, investors, and Litton’s management were so confident in conglomeration.
The post-World War II era of Litton’s beginnings was a time of unprecedented economic growth and technological innovation. The 1960s in particular was known as a decade of rapid workforce growth, high GDP growth, and fairly low and stable interest rates. And in the history of business strategy, the 60s was the period of the conglomerate boom. Litton was considered a leading example of the benefits of the conglomerate model at the time. In its early years, Litton’s aggressive acquisition strategy led to record-breaking revenue growth. Revenues reached $500 million in FY1963 and $1 billion in FY1966, just twelve years after its first acquisition. Media coverage constantly praised its acquisitions and managerial strategy as innovative and forward-thinking. Thornton’s visage was even featured on the cover of the popular TIME magazine for the October 4, 1963 issue.
In the 1960s, Litton continued to benefit from strong investor confidence. Its stock price even reached a point where the business was valued at 75 times earnings. Fortune magazine touted Litton’s rapid growth and aggressive acquisition strategy, while business journals published in-depth stories of Thornton’s management philosophy and success. Litton seemed to be unstoppable.
Benefits of the Conglomerate
Supporters of the strategy employed by Thornton and Litton argued (or rationalized) there were several benefits:
Risk Diversification – Operating in unrelated industries would lead to more predictable earnings and reduced cyclicality
Capital Allocation – Belief that Litton could allocate capital more efficiently than external markets by funneling profits into areas with greater potential
Management Expertise – Belief that strong management techniques were applicable across all industries
Financial Leverage – Issuing high-priced shares to acquire companies with lower PE ratios created value
In the optimistic economic environment at the time, Litton succeeded in expanding relentlessly in a manner that is nearly impossible today. Antitrust focused more on preventing monopolies within industries, which made the conglomerate strategy appear to be the next best growth strategy. Furthermore, the rapid growth of new and emerging industries, with fewer established competitors, was additional fuel to the flames. And due to Litton’s skyrocketing valuations and investor confidence, the business benefited from a strong positive feedback loop of stock growth through acquisitions.
Beginning of the End of the Conglomerate
It wasn’t until the late 60s and early 70s that perceptions started to shift against Litton and other conglomerates. The economic downturns and rising interest rates of the time began to expose the problems of the conglomerates when it came to management, capital allocation, and financial transparency. Litton’s share price hit an all time high in 1967 and then steadily declined 97% to a low in 1973. In the ensuing decades, Litton would divest its non-core businesses. Over a period of nearly fifty years, hundreds of acquisitions, and then many divestitures, the company wound up exactly where it began: as a technology company catering to the U.S. government and military.
Please subscribe and stay tuned for a follow-up on the latter half of Litton’s life as well as a full-fledged case study on this important, yet forgotten, business.
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Sources and Further Reading
Oldfield, Barney. The Litton Adventure That Was. Lincoln, Neb. : Kinman-Oldfield Family Foundation, 2006.
Rodengen, Jeffrey L. The Legend of Litton Industries. Write Stuff Syndicate, 2000.
Sobel, Robert. The Rise and Fall of the Conglomerate Kings. Beard Books, 1999.
Lay, Jr., Bernie. Someone Has to Make It Happen. Publisher Englewood Cliffs, N.J., Prentice-Hall, 1969.
“Personality: ‘Alter Ego’ in the Presidency”, New York Times, September 10, 1961.
“Litton Industries Is One of Fastest Growing Companies”, New York Times, November 25, 1962.
“An Appetite for the Future”, TIME, October 4, 1963.
“A Glimpse Behind the Scenes at Litton Industries”, New York Times, March 22, 1968.
Fundinguniverse.com. “History of Litton Industries, Inc. – FundingUniverse,” 2024. http://www.fundinguniverse.com/company-histories/litton-industries-inc-history/.
Disclaimers
The content of this publication is for entertainment and educational purposes only and should not be considered a recommendation to buy or sell any particular security. The opinions expressed herein are those of Douglas Ott in his personal capacity and are subject to change without notice. Consider the investment objectives, risks, and expenses before investing.
Investment strategies managed by Andvari Associates LLC, Doug’s employer, may have a position in the securities or assets discussed in any of its writings. Doug himself may have a position in the securities or assets discussed in any of his writings. Securities mentioned may not be representative of Andvari’s or Doug’s current or future investments. Andvari or Doug may re-evaluate their holdings in any mentioned securities and may buy, sell or cover certain positions without notice.
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