The Go-Go Years (23 page)

The trouble was that, all unknowing, the Institute had built a flimsy lean-to with which to resist a coming hurricane. In the sixties, as Wall Street moved rapidly through the revolution that made it the first genuinely public securities market in the world's history, the crucial new element in stock trading was the financial and accounting naïveté of the millions of new investors. Naïveté led to a search for simplicity, and simplicity, as we have seen, was found in focusing attention on the bottom line. And this simplified view of business performance soon led accountants, including some of the best, to descend almost unawares from their pedestals of disinterestedness and become at times the willing accomplices of ruthless corporate managements and essentially dishonest promoters. In brief: to sell their souls.

The mechanics of accounting “creativity” did not end with the pooling-versus-purchase option in recording mergers. Indeed, such matters merely began there. To suggest the possibilities, let us review briefly the typical mechanics of a takeover. A conglomerate seeking to swallow another company would make a public bid, or tender offer, for any and all of the target company's shares. The offer would be at a price above the current market, to the delight and potential profit of the target company's stockholders. (Such stockholders came to love predatory conglomerates the way old-time New York City voters loved old-time Tammany Hall.) But there was a catch: the payment for the shares was seldom in cash. Instead, it was usually in the form of debt security—debentures or bonds, the famous “funny money” of the conglomerate years, perfectly good the day one accepted it but quite possibly nearly worthless a few years later when the conglomerate house of cards had collapsed. There were endless refinements. Sometimes a conglomerate, by buying a company with debentures, could arrange things so that
after the merger had been completed and the new company had settled in, it could transfer the cost of the purchase to the books of the taken-over company—that is, make it pay for its own enslavement. Sometimes, debentures alone were not thought to be sufficient inducement to the stockholders of companies being sought for acquisition, and in such cases conglomerates augmented the tender offer with a variety of extras, of which the principal ones were warrants and convertibility—what Professor Warren Law of Harvard called “the underwear of corporate securities.” A warrant is an option to buy a certain amount of a company's common stock at a set price anytime within a set period, while a convertible debenture is an IOU that has embedded within it a similar privilege. In both cases, the additional tidbit, or “sweetener,” is included in the tender-offer package in order to give the recipient the alluring prospect of getting his hands, presumably risklessly, on some of the conglomerate's ever-soaring common stock. The unfortunate effect of such grab-bag tender offers was to dilute the equity of the conglomerate's pre-existing stockholders—to water their wine. Another effect was to confuse everyone concerned, and it cannot be said that the confusion was always entirely accidental; often enough it was plainly intended to throw dust in the eyes of the average investor with his tunnel vision trained on the bottom line.

By following conservative practices and their consciences, accountants could have prevented most of this jiggery-pokery; they did not.

5

To what extent, then, and for what reasons, did the high and proud profession of accounting fall from grace in the matter of merger accounting? To begin with, those who set the tone were taken by surprise, so encased in the old ways that even in 1960
many accounting mentors still felt that earnings per share were scarcely their concern at all. The profession was preoccupied with the principle of disclosure; it failed to allow for the fact that in the new situation, with a vastly expanded securities market full of novices, truthful disclosure could be made to tell lies to the untutored and the unwary. As early as 1960 the A.I.C.P.A. did decide to commission a University of Illinois professor to do a research project on merger accounting; the professor made stern and stringent recommendations—and they were ignored. The years went by, and the Accounting Principles Board was silent. The great conglomerates waxed; immense sums of money and concomitant power came to be involved; accountants came to think legalistically rather than conscientiously, and to do more or less what they were told to do by corporate management. It was seldom so crass a matter as consciously “selling out” to management to keep a client's fee. Management kept pressing the accountants in sophisticated ways, mesmerizing them with new and exciting subtleties. Under such abstract and value-free pressure, accountants began to take on the corporate mentality, to think of themselves no longer as independent, critical, perhaps even judicial examiners, but as part of management, members of the corporate “team.” As Lee J. Seidler has said, “it was a question of role definition.” Accountancy was losing its soul, then, the way so many souls are lost—by definition and by degree.

Its backbone weakened. (The S.E.C. was a spine stiffener, but not a sufficiently strong one; its chief accountant, Andrew Barr, was an able and conscientious man but one who harbored obsolete attitudes; he was hung up, like so many of the accountants themselves, on the old notion of disclosure as panacea.) In December 1966, the Accounting Principles Board labored and finally delivered itself of a stiff opinion requiring that convertible debentures be accounted for partly as debt and partly as the equity into which they were, by definition, convertible. This overdue proviso hit directly at conglomerate bottom-line magic; the protests were so loud, so strident, and from such powerful sources that the A.P.B. felt the need to back down and suspend
its ruling. Considered morally, was not this as shocking an abdication of responsibility as if a judge, say, who had sentenced a Mafia member then reversed himself after having been threatened?

Not until 1970—when the conglomerates had collapsed, and the public had been shorn—would the A.P.B. muster its courage to take, too late, a strong and responsible line on merger accounting.

This sorrowful digression may appropriately end with a contrast between the current attitudes toward accountants in Great Britain and in the United States. Accountants have long enjoyed higher standing in the British business and social hierarchy than in the American one. In the late sixties, thirteen members of the House of Lords were professionally qualified accountants, as were nine members of the House of Commons, including the Chancellor of the Exchequer himself; on this side of the Atlantic, not a single accountant was to be found among the 535 members of Congress. Moreover, every major British government investigating body customarily includes at least one chartered accountant, while their presence on comparable bodies in the United States is rare. It is lawyers in whom we Americans traditionally invest our hopes for legislative and fiscal leadership; Congress and government commissions swarm with them; the ordinary citizen, finding his aspirations to wisdom falling short in almost any discussion, will often resort to the apologetic phrase, “Well, of course, I'm not a lawyer”—as if a law degree conferred a mantle of authority and expertise over our national life. Seidler, a perceptive scholar and practitioner of accountancy, conducted an informal poll on the subject of relative social status in 1969. On a visit to London, he asked twelve nubile young women, “If you had your choice, which would you prefer to marry, a doctor, a lawyer, or an accountant?” Accountants came out on top, as it were, not only with the young ladies themselves but also as the choice for them of their fathers; lawyers were second, and doctors last. Back home, Seidler carried out a similar survey among a number of unmarried American girls, and the British results were precisely reversed.
Accountants, it is true, often make appreciable money in America; but within the democratic frame they are generally thought of, and generally think of themselves, not as hereditary leaders but as bright and ambitious new men taking advantage of a calling celebrated for permitting upward social mobility.

As to performance, or reputation for performance: All through the conglomerate era British accountants seem generally to have preserved their traditional standing as the unassailable consciences of private business management. Seidler asked a number of British stockbrokers, security analysts, and Stock Exchange officials, “Assume that at the conclusion of an audit there was a substantial disagreement between a large firm of accountants and the management of a large corporation over a point of accounting principles … under what circumstances, other than a demonstration of the sheer logic of its stand, might the client influence the auditor to accept its view?” The resounding and unanimous response was, “None.” Asked the same question, a comparable group of American financial men almost all replied that the accountants would, in the majority of cases, yield to the client's wishes regardless of the accounting principles involved. One respondent put the matter bluntly: “Accountants are unable to bite the hand that feeds them.” It need hardly be emphasized that any accountant thus morally disabled is not just worthless to the public he is supposed to protect, but worse than worthless.

Seidler concluded, “Excluding considerations of social justice, it does appear that the result of the higher social position of the British accountants has been to make them a stronger profession, both relative to other professions and in terms of their relationship with clients.” A faintly snobbish view? Perhaps. Aristocrats can and sometimes do compromise with principle in any country; and, contrariwise, one of the glories of the United States has always been the stubborn conscience of many men who by birth and circumstance could not well afford it. But the conglomerate accountants of the sixties, or too many of them, were not among those men.

6

James Joseph Ling, born in 1922 in Hugo, Oklahoma, of South German ancestry, had a rootless, drifting, poverty-ridden childhood during which he showed no special talent for anything much. After his mother's death when he was twelve, he was sent to live with an aunt in Louisiana; after two years in Catholic high school there (he liked to beat the nuns at chess) he dropped out and became one more depression-years kid on the bum, wandering aimlessly under the dust-darkened skies of Oklahoma and Texas. At nineteen he arrived in Dallas and went to work as an electrician. In 1944 he joined the Navy and became an electrician's mate, stringing power lines and recovering equipment from sunken ships in the Philippines. Released from service in 1946, he went back to Dallas and, with $2,000 savings, set himself up in business as an electrical contractor.

Later he would say, in nineteen-sixties jargon, “I don't know what turned me on”—but assuredly something did. After several ups and downs, his little company grew to have an annual gross of $1.5 million. In 1955 he decided to sell stock in it to the public; when Wall Street underwriters just laughed at him, he and some associates sold the stock themselves, handing out prospectuses from a booth at the Texas State Fair. They peddled 450,000 shares at $2.25 each. The astonishing success of this venture was the turning point of Ling's life; he learned from it that pieces of paper can be exchanged for cash. Armed with the cash, he made his first corporate acquisition—LM Electronics, a West Coast firm on which his down payment was $27,500—and changed his own company's name to Ling Electronics. Thus the once and future king of conglomerators was on his way.

His deals over the succeeding decade were so complex, innovative, and ultimately bewildering that to describe them
comprehensibly at book length would be a literary tour de force, and to describe them in a few words impossible. In essence, though, they were all geared to the crucial discovery that Ling had made at the Texas fair—that people like to buy stocks and that their overpayments for stock can be capitalized by the issuer to his advantage. His basic tool was leverage—capitalizing with long-term debt to increase current earnings. In 1958 he gained entry to Wall Street when White, Weld and Company undertook a private placement of Ling Electronics convertible bonds. Then the deals came faster and more bewilderingly. In 1959 he took over Altec, University Loudspeakers, and Continental Electronics; in 1960, Temco Electronics and Missiles (government contracts, the big time now); in 1961, Chance Vought Corporation, an aviation pioneer. So overextended personally that at one point he had to sell all but eleven shares of his own company's stock, Ling nevertheless bulled ahead. By the end of 1962, he controlled an aerospace and electronics complex (by then called Ling-Temco-Vought) capable of competing for contracts with any other in the country. Then, in 1964, he suddenly launched what he whimsically called Project Redeployment, in which he began selling to the public shares in the companies he had acquired. It looked like a stunning reversal of policy, but in fact it was more of the same—all part of Ling's basic scheme to take advantage of the public's and the financial institutions' insatiable appetite for common stocks. He would sell off, say, a quarter of the shares of a Ling-Temco-Vought subsidiary; the magic of Ling's name would propel the price of the shares well up in the market, and the three-quarters that Ling had retained would be temporarily worth far more than it had been worth a few days or weeks before. A Wall Street man called Project Redeployment “getting something for nothing.”

But it worked. In 1965, Ling-Temco-Vought ranked number 204 on the
Fortune
directory of the largest U.S. industrial companies; in 1967, 38; finally in 1969, 14. Net income per share—before allowing for dilution by all those convertible shares—nearly tripled in 1966 and then went up some 75 percent more in 1967. As a result, market price of the company's stock, from
the beginning of 1965 to the peak in 1967, multiplied more than ten times. Could there be any wonder that the huge new investing public loved it?

Ling at his peak was a mogul in the nineteenth-century manner, as lordly as a Vanderbilt or a Yerkes. (In that respect, he represented a striking and perhaps rather engaging contrast to his fellow-Texan multimillionares of his own time, the secretive, often penny-pinching oil men.) Ling claimed the German Field Marshal Rommel as “one of my teachers,” and he talked grandly to anyone who would listen in metaphors drawn from sports and physical combat—“let's three-putt it,” “a karate chop to the neck.” He was short, however, with those who doubted. Once when a leading Wall Street stock analyst presumed to question his free use of debt securities to make acquisitions, Ling summoned the analyst into his presence; finding him to be a man of dignified middle age, Ling dismissed him with a contemptuous “What could I expect from someone over forty?” At a reputed cost of over $3 million, he built himself an imperial mansion in Dallas, with a façade of Roman columns, a portico lined with classic statuary, bathrooms with gold faucets (an Italian marble bathtub worth $14,000 in one of them), and its own golf course. (His address, as listed in
Who's Who
—10,300 Gaywood Road—astonishingly conveyed the democratic suggestion that his pleasure dome was merely one of many.) Inside the mansion was a collection of seventeenth-century books that their owner genuinely cherished without, in many cases, having the vaguest notion what was inside them. He was not above deceiving his guests. Once he met Oskar Morgenstern, the famous Princeton econometrician, and invited him to “a small dinner—five or six people.” The dinner was for thirty, and after coffee Morgenstern, unwarned, found himself asked by his host to “say a few words.” One did not refuse Ling in his house—nor did one quibble about the terms under which one was inside it. Morgenstern complied.