The last 100 years have brought recurring business cycles of consolidation and contraction, internal growth and diversification, market booms and busts, and government efforts to break up monopolies and spur competition. These powerful forces have prodded executives to strike innovative deals with allies, rivals, and government entities. And the resultant mergers, acquisitions, take- overs, spin-offs, divestitures, joint ventures, and new alliances have transformed the business landscape.
What were the top deals of the past century? There is surely room for debate, but assembled below are the ones we believe helped alter the course of U.S. history.
Size Does Matter
The biggest deal of the twentieth century may have been one of its first. Between 1897 and 1904, the nation was in the midst of a merger craze; 4,277 firms melded into 257. And the financial force behind many of these deals was none other than imperious banker J.P. Morgan, creator of such behemoths as General Electric and AT&T.
In 1900, however, Morgan hadn’t been able to crack the nation’s largest industry–steel– nor its unchallenged leader–Carnegie Steel. Instead, he was content to back such consolidating upstarts as Federal Steel and National Tube. But when Scottish-born founder Andrew Carnegie threatened to further integrate Carnegie into finished steel products, Morgan grew concerned. His answer: a merger.
Carnegie’s terms –$480 million, or 12 times earnings–were unprecedented for the time. But Morgan was unfazed, and responded with a typically terse, “I accept this price.” On March 3, 1901, Morgan announced the merger of Carnegie Steel with Federal Steel and National Tube. The new company, U.S. Steel, was the largest corporation in the world, capitalized with $1.4 billion, or about 7 percent of the nation’s gross national product (more than $400 billion in today’s dollars). As Henry Adams put it, “Pierpont Morgan is apparently trying to swallow the sun.”
Everything about the deal, in fact, was huge. The billion-dollar combined company ran steel mills, coke ovens, railroads, and steamships. It made up half the nation’s steelmaking capacity. The deal made Carnegie, who owned 50 percent of the company, the richest man in the world–for a few years anyway, until he was surpassed by John D. Rockefeller.
More important, the deal set the stage for the American management revolution. Morgan’s cadre of professional managers were among the first to prove that a sprawling, billion-dollar company could be run efficiently and profitably. The agglomeration of U.S. Steel was emblematic of the way American industrial companies would gain unprecedented size and scope in the coming decades, and of the way they would tap into more-sophisticated domestic capital markets. No longer would managers’ visions be limited by the structures previously imposed by size.
Debut Of The Lbo
One of the greatest consumers of steel was Henry Ford and his nifty little invention, the Model T. Introduced in 1908, the mass-produced Model T revolutionized the automobile industry- -and the nation. The key to its success, however, was the assembly line, which required substantial investment.
Ford’s plan to finance a mammoth new plant along River Rouge in Detroit, was unorthodox. In 1916, he slashed annual dividends to $1.2 million, from $60 million the year before, causing an uproar among shareholders. Minority shareholders John and Horace Dodge, who had set up a rival firm in 1913 with Ford dividend proceeds, sued. The courts ultimately let Ford go ahead with his plan, but ordered him to pay a $19 million dividend to minority shareholders.
Ford was now determined to get rid of the shareholders, whom he dubbed “parasites.” In late 1918 and early 1919, he threatened to start a new company to make a cheaper version of the Model T. Meanwhile, Ford’s agents approached jittery minority stockholders and offered to buy their stock. On July 11, 1919, Ford struck a deal to buy out the other shareholders for $105.8 million, borrowing $75 million from a financial syndicate led by Chase Securities to fund the transaction. Ford was thrilled, dancing a jig around the room after the papers were signed.
Having pulled off a leveraged buyout more than 60 years before the term was invented, Ford was free to invest, and invest he did. Between 1918 and 1920, the eccentric inventor spent $60.5 million on River Rouge, which, when it opened, stood as a paragon of industrial civilization: 90 buildings, 42,000 employees, 93 miles of rail track. More important, the plant could turn a lump of iron and steel into a Model T in just over a day, thus providing a potent stimulus to mass production. For generations, companies would face Ford’s dilemma: protect near-term profits or pursue R&D for potentially greater rewards.
The Great Pyramids
Not everyone had as many financing options as Ford. Consequently, in the 1910s and 1920s, several executives developed new techniques, such as pyramid holding companies, to fund necessary expansion. One such executive was Samuel Insull, a onetime assistant to Thomas Edison, who sought to profitably offer electricity to rural areas at low prices. To fund his idea, he set up holding companies, organized in a pyramid structure. The company at the bottom, Company A, was capitalized with 50 percent bonds, 20 percent nonvoting preferred stock, and 30 percent common voting stock. All the voting common was held by Company B, which in turn was similarly capitalized, with the common voting stock held by Company C. And so on.
By controlling the voting stock at the top of the pyramid, Insull could control the entire network of companies below. The revenues collected by the operating utility went to pay interest on the bonds and the preferred stock, with the rest upstreamed as dividends to the holding company, all the way to the top. With just $66.68 of capital invested, for example, Insull was able to control West Florida Power Co., capitalized at $100,000.
In the 1920s, some 500,000 public investors, many of whom were Insull customers, bought bonds issued by his holding companies. By 1930, he controlled more than 200 companies and took in 11.5 cents of every dollar spent on electricity. The pyramid was precarious; a default on the bonds at the lowest level would topple the whole structure. And that’s exactly what happened after the 1929 crash. Insull was forced to turn over the company to creditors. He died, penniless, in 1938.
As is true of so many industries in their infancy–think the Internet–Insull found it was difficult to expand service to millions while remaining profitable.
Dealmaking in the 1930s and 1940s was a lot less colorful, thanks to the Depression, New Dealera antitrust activity, and World War II. But the greater involvement of the government in the nation’s economy during these years gave rise to some interesting transactions. Case in point: Alcoa, the aluminum concern long run by Andrew Mellon.
In 1945, Alcoa, which had monopolized the market for production of bauxite and aluminum, finally lost a long-running antitrust case. And the government, which had spent $672 million on new aluminum plants to support the war effort, single-handedly brought competition to the industry.
The War Surplus Property Board, for example, sold a huge refinery at Hurricane Creek, Arkansas, and five other facilities worth $170 million to Reynolds Metals for $57.6 million. Next, Henry Kaiser, the entrepreneur behind Permanente Metals, bought five government facilities for $43.5 million. Their original cost: $120 million. In addition, the government forced Alcoa to give Reynolds and other companies access to its proprietary techniques for processing and manufacturing aluminum.
Within a matter of years, Kaiser Aluminum (as Permanente Metals was later named) and Reynolds both became fully integrated aluminum makers. Between 1946 and 1958, aluminum production boomed, and the upstarts shared in the prosperity. By 1960, Alcoa’s sales nearly tripled from the 1946 level. But its new competitors, Reynolds and Kaiser, had 28 percent and 25 percent of the aluminum market, respectively. Another strike for creative destruction. From Standard Oil to Alcoa to AT&T, companies that long resisted antitrust enforcement wound up benefiting from the creative energies released by government- mandated competition.
Power To The Shareholders
In the years following World War II, rapid growth, American global dominance, and a burgeoning middle class allowed companies to grow organically. Few deals of consequence were struck. But an intriguing quasi-deal at Montgomery Ward foreshadowed such important shareholder battles as IBM versus Lotus and Hilton’s run at ITT.
In the grip of 81-year-old Sewell Avery, Montgomery Ward was showing its age. A survivor of the Depression, Avery sat on a $327 million cash hoard. Meanwhile, the company had begun closing stores, dropping from 628 units in 1940 to 508 in 1954.
Forty-three-year-old Louis Wolfson believed Ward could make better use of its capital. In 1954, he amassed 500,000 of Ward’s 6.5 million shares and promised to take over the “poorly managed” company and “return it to the stockholders.” Rebuffed, Wolfson tried to use the proxy process–the annual election of directors by shareholders–to get his way. He filed a lawsuit to force all nine Ward board members, instead of three, to stand for election. Then he took his case to thousands of Ward’s 68,000 shareholders.
The battle quickly turned acrimonious. At the raucous shareholders meeting on April 22, 1955, Wolfson and his associates won three seats on the board, and Avery stepped down as chairman a few weeks later. “The Avery tea party is over,” Wolfson said. Avery’s replacement quickly set Ward on a new shareholder-friendly course.
Wolfson’s use of the proxy process was an early attempt to give life to the notion that a public company is a democracy and should be run for the benefit of its shareholders. In 1952, just 11 proxy contests had taken place. Today, investor groups file hundreds of proxy resolutions annually on issues ranging from corporate control to hiring practices.
Rise Of The Conglomerate
Shareholders today might scoff at the idea of aggressively acquiring companies in distantly related fields. But in the 1960s, executives believed such moves would shield them from downturns in their core businesses. Harold Geneen sought to prove this with a vengeance.
An accountant by training, British-born Geneen was tapped to head International Telephone & Telegraph (ITT) in 1958. The firm operated telephone systems and had revenues of $800 million. Geneen set out to buy underperforming companies with ITT stock, concentrating at first in industrial technology fields. In 1961, for example, he bought Jennings Radio Manufacturing Corp. and cable-maker Surprenant Manufacturing for a combined $27 million. He followed it up with the purchase of pump-maker Bell & Gossett and General Controls in 1963, and Comsat in 1964.
In 1965, Geneen decreed that ITT should become one of the 10 largest firms in the nation (it was number 30 on the Fortune 500 at the time). To achieve that status, he paid $51 million for fast-growing Avis Inc., and in quick succession snapped up homebuilder Levitt & Sons, hotel chain Sheraton, and Continental Baking. In 1968 alone, Geneen bought 20 companies for more than $1 billion, mostly in friendly mergers that used ITT’s stock as currency. By 1973, with the acquisition of Hartford Fire Insurance, sales soared to $10.2 billion.
In the late 1960s and early 1970s, companies ranging from Xerox to Sears engaged in similar attempts at diversification, creating unlikely corporate marriages. In the 1970s, ITT was hampered by a global recession and political scandals. By the time Geneen stepped down in 1978, with more than 100 acquisitions under his belt, he had built ITT’s revenues to $22 billion. By proving that massive companies could be built quickly with a lot of stock and a lot of nerve, Geneen set an example for more- focused conglomerate builders that would follow: Henry Silverman of Cendant Corp., Dennis Kozlowski of Tyco.
Terms Of Endearment
In the 1970s, more and more firms came to regard diversification as a matter of life and death. And this belief begat a tactic that would recur throughout the rest of the century: the hostile takeover.
In 1974, International Nickel Co. of Canada (Inco), the $1.5 billion nickel giant, was seeking to diversify. It settled on ESB, a $372 million Philadelphia-based battery manufacturer. But instead of ironing out a deal, on July 18 Inco chairman L. Edward Grubb simply gave ESB three hours’ notice before announcing a $157 million, $28-per-share tender offer–44 percent above the stock’s prior close. ESB’s chief executive officer, F.J. Port, complained publicly that a “hostile tender offer is being made by a foreign company,” and urged holders to reject it. Angered, Inco asked a federal court to impose injunctions against ESB for its public statements about Inco.
On July 23, United Aircraft Corp. entered the bidding with ESB’s support, offering a cash bid of $34 a share. Inco responded by raising its bid to $36, then $38, prices United Aircraft quickly met. Finally, on July 25, after Inco raised its offer to $41 a share, ESB gave in. An event the Wall Street Journal dubbed a “dizzying race” ended, and ESB’s shareholders received a 110 percent premium above the pretakeover price. The term “hostile takeover” had entered the vernacular.
Barbarians Among Us
In the 1980s, some 60 years after Henry Ford introduced the tactic, leveraged buyouts would alter American industry. In 1988 alone, 388 LBOs, with an average value of $458 million, were completed. And none was more infamous than the LBO of RJR Nabisco.
That year, Ross Johnson, the flamboyant CEO of cigarette and consumer-products firm RJR Nabisco, got Shearson Lehman Hutton to back him in a $75-per-share, $17 billion buyout of his own firm. A week later, Kohlberg Kravis Roberts & Co. entered with a $90-per-share bid. Five rounds of intense bidding brought in the likes of Bruce Wasserstein and the Forstmann brothers. Ultimately, KKR, backed by Merrill Lynch, Morgan Stanley, and Michael Milken’s junk-bond juggernaut, carried the day with a complicated $109-per-share bid. Of the $31.5 billion purchase price, $30 billion was in the form of debt.
Months after the deal was consummated in February 1989, RJR was hit by a series of crises. After Congress considered changing the tax status of debt raised for LBOs and Moody’s downgraded RJR’s debt, KKR in July 1990 had to inject another $1.7 billion in equity. In 1991, RJR Nabisco went public, selling shares for $11.25 apiece, doubling KKR’s original investment. Anti-tobacco litigation and price wars prevented RJR from participating fully in the 1990s bull market. But the deal, which spawned the best-selling book Barbarians at the Gate, had a lasting impact on popular culture, and on business culture. In addition, the high-stakes gamble prompted a reevaluation of the use of debt. As Kravis would later say, “Debt is out, equity is in.”
In the wake of the RJR Nabisco near-debacle, attention turned to the converging industries of entertainment, telecommunications, and broadcasting. With the expansion of cable and computer bandwidth in the early 1990s, it became crucial for companies to control content–books, music, and movies. Chairman Sumner Redstone, a crusty septuagenarian whose Viacom owned MTV, Nickelodeon, and cable systems, was one of the content kings. He coveted Paramount Communications, whose crown jewels included Simon & Schuster and Paramount movie studios.
On September 12, 1993, Viacom and Paramount announced a friendly, $8.2 billion merger, valuing Paramount at about $69 a share. Five days later, media mogul Barry Diller entered the fray, using home-shopping channel QVC as an acquisition vehicle. Backed by cable companies Comcast and TCI, he made an $80-per- share, $9.5 billion hostile bid. Throughout the fall, the two parties bid like art collectors at Sotheby’s. Each passing month brought in new players. Viacom, for example, lined up $1.2 billion from Baby Bell Nynex, and engineered a merger with cash-flow-rich video-chain Blockbuster. And Diller banked $3.5 billion in financing from unlikely bedfellows like BellSouth, Advance Publications, and cable firm Cox Enterprises.
Viacom ultimately took the prize with a $107- per-share, $9.9 billion bid in February 1994. And Diller’s summation–”They won. We lost. Next.” — signaled it was time to move on.
Rivaling the action in the New Economy were the deals being consummated in financial services throughout the 1990s. In banking, Chase merged with Chemical. Investment bank Morgan Stanley got together with brokerage Dean Witter, and Deutschebank bought Bankers Trust.
For much of the decade, Sanford Weill used Travelers Insurance Co. as a vehicle to expand from underwriting life insurance policies to underwriting stocks and bonds. He bought big targets like Smith Barney and Salomon Brothers. Having digested them, he turned to the biggest target possible: Citicorp.
In February 1998, Weill sounded out Citicorp CEO John Reed about a merger. And the massive, $83 billion deal, announced on April 6, 1998, did more than help the Dow to its first 9,000 close. It united Citicorp, Travelers, Smith Barney, and Salomon under one big umbrella. That effort to form a financial supermarket– an endeavor at which both Sears and American Express had failed in earlier decades–was a leap of faith. Depression-era regulations forbade the marriage of insurance companies and banking firms, and Congress had just shelved legislation that would have rolled those regulations back.
But the merged company, with its 100 million customers in 100 countries, created a fact on the ground that was difficult for Congress to ignore. And as financial services firms continued to branch out, Congress would ultimately approve changes to the 1933 Glass- Steagall Act. (The new legislation will doubtless set the stage for a round of new deals.) As a final triumph–and yet another example of how government officials were following their lead–Reed and Weill convinced former Treasury Secretary Robert Rubin to join Citigroup in late 1999.
The century in deals ended much as it had begun: with a blockbuster deal engineered by respected and powerful Wall Street bankers. The more deals change, the more they remain the same.