Corporations: Marriage of the Giants

Even old Henry Ford, accustomed as he was to thinking big, would have been impressed by his grandson’s latest feat. In one of the largest industrial mergers in U.S. history, Ford Motor Co. last week proposed to buy outright control of Philadelphia’s Philco Corp. Terms: one share of Ford for each 4½ shares of Philco common, $101.50 in Ford common (plus cash equal to accrued dividends) for each share of Philco preferred. Estimated cost to Ford: $110 to $120 million.

Provided Justice Department trustbusters do not intervene—Ford did not feel them out before announcing the deal—Ford will get good value for its money. Besides ranking as one of the nation’s leading makers of radios, phonographs, TV sets and home appliances, Philco has branched out into radar, high-frequency radio and television transmission equipment. Thanks to a first-rate scientific team, Philco has also firmly established itself in the expanding field of solid-state physics. It built the Courier communications satellite, contributed components for the Discoverer and Midas satellites. Within the past six months, the company has received $53 million in defense contracts, mainly for missile guid ance systems.

Weakened but Worthwhile. What weakened Philco and made it a likely prospect for acquisition was lagging consumer demand for home appliances, plus the unexpectedly high development costs of Philco’s new computers; in 1961’s first half, Philco lost $4,400,000 on sales of $196 million. Nonetheless, well-run Ford was sufficiently impressed with Philco’s management that no major shakeups are planned; Philco will operate as a semi-autonomous Ford subsidiary.

Diversification by acquisition is a new trend for Ford. It began this year, when Ford bought the spark-plug plant of Toledo’s Electric Autolite Co. for $28 million. Philco fits nicely into Ford’s future. The Philco line of home appliances will make Ford competitive with General Motors in that field. Philco could also be called upon to build some equipment, e.g., radios and other electrical components, for Ford cars.

A Place in Space. Most important to Ford, however, are Philco’s defense and space capabilities. Ford’s military sales last year represented only .8% of its total turnover. Philco, which last year did 30% of its business with the Government, will afford Ford a strong foothold not only in military electronics but also in space. The airframe makers, who, in alliance with the Air Force, have largely knocked the Army-automaker axis out of the missile business, may yet find Detroit coming back for a second round.

Big as it was, the Philco purchase was almost certainly only the forerunner of still more Ford acquisitions. To carry off the Philco deal, Ford intends to issue 4,500,000 new shares of common stock. (So as not to dilute stockholders’ equity, the company will buy an equal number of shares from the Ford Foundation and retire them.) And there is plenty more purchasing power where that came from. Since it went public five years ago, Ford has issued less than one-seventh of its authorized shares. Hence, besides its $930 million cash backlog, Ford has more than 100 million potential shares it can draw on to pick up other companies.