Challengers, Elites, and Owning Families: A Social Class Theory of Corporate Acquisitions in the 1960s - Statistical Data Included

Administrative Science Quarterly, March, 2001 by Donald Palmer, Brad M. Barber

This paper analyzes data on 461 large U.S. industrial corporations to determine the factors that led large firms to participate in the wave of diversifying acquisitions that peaked in the late 1960s. We elaborate and test a class theory of corporate acquisitions, maintaining that firms pursued acquisitions in this period when they were commanded by well-networked challengers who were central in elite social networks but relatively marginal with respect to social status, isolated from the resistance of established elites, and free from control of owning families. We also consider a wide range of factors highlighted by alternative accounts of acquisition likelihood, including resource dependence, institutional pressures, and principal-agent conflicts. The results provide support for our main theoretical arguments, even when controls related to alternative explanations are taken into account.

I am a conglomerate. Me personally.

--Meshalum Riklis, founder of Rapid American, an active acquirer in the 1960s, as quoted in Forbes (March 15, 1971)

Corporate acquisitions entail the absorption of one firm by another. The diversifying acquisitions of the 1960s brought together firms producing in different industries that were not linked by buyer-supplier relations. Corporate acquisitions have important economic, social, and political consequences and, for this reason, have been the focus of much past research (cf. Pfeffer, 1972; Burt, 1980; Haunschild, 1993; Haunschild and Beckman, 1998; Davis and Stout, 1992; Davis, Diekmann, and Tinsley, 1994; Zey, 1994). The diversifying acquisitions of the 1960s are considered particularly important, and a number of scholars have attempted to explain them because they ushered in a new conception and form of corporate control (Williamson, 1975; Fligstein, 1990; Palmer et al., 1995).

Much organization theory implicitly treats organizations as actors and managers as instruments through which organizations pursue their interests. Individual managers' attributes are therefore assumed to be irrelevant to organization behavior. Consistent with this approach, the earliest explanations of corporate acquisitions assumed that corporations are situated in environments composed of resource dependence relations, which generate uncertainty and constraint (hereafter, uncertainty) to which firms are averse. In this view, acquisitions are one device to avoid or reduce resource-dependence-based uncertainty. Thus, corporate managers and directors (hereafter, corporate elites) pursue acquisitions to the extent that their firms are exposed to resource-dependence-based uncertainty (Pfeffer, 1972; Pfeffer and Salancik, 1978; Burt, 1980).

Perrow (1972) has criticized such anthropomorphizations of organizations, offering in their place what he called the tool view, which assumes that managers are actors and organizations are instruments through which managers pursue their interests. Consistent with Perrow's critique, but ignoring his point about managerial self-interest, recent organization theory explanations of acquisitions assume that corporate elites are situated in environments composed of institutionalized rules, norms, and cognitive frameworks that define the parameters of acceptable business practice. In this view, acquisitions are one of many important business practices regulated by institutional constraints. Thus, corporate elites pursue acquisitions to the extent that the institutional environment in which they are situated prescribes them (Fligstein, 1990; Fligstein and Brantley, 1992; Haunschild, 1993; Haunschild and Beckman, 1998). Yet this new institutional view, like the resource dependency perspective, assumes that managers ac t in accordance with environmental prescriptions. Neither of these perspectives is helpful in understanding what motives underlie the acquisitions of an active acquirer like Riklis, for example, who is quoted in the epigraph above. The hubris of such a statement indicates that to have a full explanation of the acquisitions of the 1960s, we need to bring managerial self-interest and individual attributes into the study of acquisitions as a corrective.

Our theoretical approach, therefore, also conceptualizes corporate elites as actors, but we assume that these actors possess interests that arise not solely from their position in organizational and institutional environments but also from their position in a multidimensional social class structure. In our view, acquisitions are often innovative and sometimes deviant means by which corporate elites can improve their wealth and status. Corporate elite members pursue acquisitions to the extent that their position in the class structure provides them with the interest and capacity to increase their wealth and status in this way.

We examine how the class position of a firm's top managers and directors influenced its propensity to engage in diversifying acquisitions in the 1960s, while controlling for factors implicated by resource dependence and institutional theory, as well as alternative economic accounts--in particular, agency theory. More specifically, we test the proposition that firms commanded by well-networked challengers, who were central in elite social networks but relatively marginal with respect to social status, isolated from the resistance of established elites, and free from the constraint of owning families, were particularly active acquirers in this period. In the process, we show how a social class theory fills the gaps in previous work on corporate acquisitions.