1900.24 In the early 1900s, transportation costs increased very little despite a rising demand for transportation services. It is interesting to note that the ability of U.S. railroads to continue to cost-effectively ship goods in a global economy impressed Warren Buffett so much that in 2009 he bid $26.3 billion in cash and stock for the remainder of the Burlington Northern railroad that he did not already own. Burlington Northern is actually a product of 390 different railroad M&As over the period 1850–2000.
Several other structural changes helped firms service national markets. For example, the invention of the Bonsack continuous process cigarette machine enabled the American Tobacco Company to supply the nation's cigarette market with a relatively small number of machines.25 As firms expanded, they exploited economies of scale in production and distribution. For example, the Standard Oil Trust controlled 40 % of the world's oil production by using only three refineries. It eliminated unnecessary plants and thereby achieved greater efficiency.26 A similar process of expansion in the pursuit of scale economies took place in many manufacturing industries in the U.S. economy during this time. Companies and their managers began to study the production process in an effort to enhance their ability to engage in ever-expanding mass production.27 The expansion of the scale of business also required greater managerial skills and led to further specialization of management.
As mentioned, the first merger wave did not start until 1897, but the first great takeover battle began much earlier – in 1868. Although the term takeover battle is commonly used today to describe the sometimes acerbic conflicts among firms in takeovers, it can be more literally applied to the conflicts that occurred in early corporate mergers. One such takeover contest involved an attempt to take control of the Erie Railroad in 1868. The takeover attempt pitted Cornelius Vanderbilt against Daniel Drew, Jim Fisk, and Jay Gould. As one of their major takeover defenses, the defenders of the Erie Railroad issued themselves large quantities of stock, in what is known as a stock watering campaign, even though they lacked the authorization to do so.28 At that time, because bribery of judges and elected officials was common, legal remedies for violating corporate laws were particularly weak. The battle for control of the railroad took a violent turn when the target corporation hired guards, equipped with firearms and cannons, to protect its headquarters. The takeover attempt ended when Vanderbilt abandoned his assault on the Erie Railroad and turned his attention to weaker targets.
In the late nineteenth century, as a result of such takeover contests, the public became increasingly concerned about unethical business practices. Corporate laws were not particularly effective during the 1890s. In response to many anti-railroad protests, Congress established the Interstate Commerce Commission in 1897. The Harrison, Cleveland, and McKinley administrations (1889–1901) were all very pro-business and filled the commission with supporters of the very railroads they were elected to regulate. Not until the passage of antitrust legislation in the late 1800s and early 1900s, and tougher securities laws after the Great Depression, did the legal system attain the necessary power to discourage unethical takeover tactics.
Lacking adequate legal restraints, the banking and business community adopted its own voluntary code of ethical behavior. This code was enforced by an unwritten agreement among investment bankers, who agreed to do business only with firms that adhered to their higher ethical standards. Today Great Britain relies on such a voluntary code. Although these informal standards did not preclude all improper activities in the pursuit of takeovers, they did set the stage for reasonable behavior during the first takeover wave.
Financial factors rather than legal restrictions forced the end of the first merger wave. First, the shipbuilding trust collapse in the early 1900s brought to the fore the dangers of fraudulent financing. Second, and most important, the stock market crash of 1904, followed by the banking Panic of 1907, closed many of the nation's banks and ultimately paved the way for the formation of the Federal Reserve System. As a result of a declining stock market and a weak banking system, the basic financial ingredients for fueling takeovers were absent. Without these, the first great takeover period came to a halt. Some economic historians have interpreted the many horizontal combinations that took place in the first wave as an attempt to achieve economies of scale. Through M&As, the expanding companies sought to increase their efficiency by lower per-unit costs. The fact that the majority of these mergers failed implies that these companies were not successful in their pursuit of enhanced efficiency. Under President Theodore Roosevelt, whose tenure in the executive office lasted from 1901 to 1909, the antitrust environment steadily became more stringent. Although he did not play a significant role in bringing an end to the first wave, Roosevelt, who came to be known as the trustbuster, continued to try to exert pressure on anticompetitive activities.
The government was initially unsuccessful in its antitrust lawsuits, but toward the end of Roosevelt's term in office it began to realize more success in the courtrooms. The landmark Supreme Court decision in the 1904 Northern Securities case is an example of the government's greater success in bringing antitrust actions. Although President Roosevelt holds the reputation of being the trustbuster, it was his successor, William Howard Taft, who succeeded in breaking up some of the major trusts. It is ironic that many of the companies formed in the breakup of the large trusts became very large businesses. For example, Standard Oil was broken up into companies such as Standard Oil of New Jersey, which later became Exxon; Standard Oil of New York, which became Mobil and merged with Exxon in 1998; Standard Oil of California, which rebranded under the name Chevron, and acquired Gulf Oil in 1985, Texaco in 2001, and Unocal in 2005; and Standard Oil of Indiana, which became Amoco, and was acquired by BP in 1998. The mergers between some of the components of the old Standard Oil reflect the partial undoing of this breakup as the petroleum market has been global, and these descendants of J. D. Rockefeller's old company now face much international competition.
Second Wave, 1916–1929
George Stigler, the late Nobel prize–winning economist and former professor at the University of Chicago, contrasted the first and second merger waves as “merging for monopoly” versus “merging for oligopoly.” During the second merger wave, several industries were consolidated. Rather than monopolies, the result was often an oligopolistic industry structure. The consolidation pattern established in the first merger period continued into the second period. During this second period, the U.S. economy continued to evolve and develop, primarily because of the post–World War I economic boom, which provided much investment capital for eagerly waiting securities markets. The availability of capital, which was fueled by favorable economic conditions and lax margin requirements, set the stage for the stock market crash of 1929.
The antitrust environment of the 1920s was stricter than the environment that had prevailed before the first merger wave. By 1910, Congress had become concerned about the abuses of the market and the power wielded by monopolies. It also had become clear that the Sherman Act was not an effective deterrent to monopoly. As a result, Congress passed the Clayton Act in 1914, a law that reinforced the antimonopoly provisions of the Sherman Act. (For a discussion of the Sherman and Clayton Acts, see Chapter 3.) As the economy and the banking system rebounded in the late 1900s, this antitrust law became a somewhat more important deterrent to monopoly. With a more stringent antitrust environment, the second merger wave produced fewer monopolies but more oligopolies and many vertical mergers. In addition, many companies in unrelated industries merged. This was the first large-scale formation of conglomerates. However, although these business combinations involved firms that did not directly produce the same products, they often had similar product lines.
Armed with the Clayton and Sherman Acts, the U.S. government was in a better position to engage in more effective antitrust enforcement than had occurred during the first merger wave. Nonetheless, its primary focus remained on cracking down on unfair business practices and preventing cartels or pools, as opposed to stopping anticompetitive mergers. At this time
Ibid.
Alfred D. Chandler,
Alfred D. Chandler, “The Coming of Oligopoly and Its Meaning for Antitrust,” in
Robert C. Puth,
T. J. Stiles,
