In 1901, US President Theodore Roosevelt began the process of dismantling the country’s sprawling monopolies, gaining the name ‘Trust Buster’. The history of this episode provides an interesting lesson about investing in companies with dominant market positions.
The late 19th century was a period of rapid growth of the US economy which saw the rise of powerful corporations, such as Standard Oil and US Steel. The men who ran these giant companies, such as Andrew Carnegie, J. P. Morgan and John D. Rockefeller, were given the name ‘robber barons’ by critics because of their extreme wealth and power.
Many of these corporations, which were called ‘trusts’ because of their legal structure at the time, came to dominate their particular industries. For example, the American Sugar Refining Company controlled 98% of the US sugar market and Standard Oil 91% of the US refining market.1
When US Steel was created in 1901, it became the world’s largest company and Andrew Carnegie, who was bought-out as part of the deal, became one of the world’s richest men.2 When the company took over the Tennessee Coal, Iron and Railroad Company it would produce more than half of the steel in the US.3
Roosevelt was committed to taking on the monopoly power of the trusts, arguing he was not anti-business, nor even anti-trust, but rather anti bad-business.
Legislation aiming to restrict the monopoly power of these companies resulted in the Sherman Anti-Trust Act of 1890. However, the political will to use the law to take on vested interests did not exist in the 1890s.
A significant wave of M&A activity in the 1890s reduced competition as the trusts swallowed up smaller competitors.4 As a result, they came under increasing public criticism. For example, The History of the Standard Oil Company written in 1904 by investigative journalist Ida Tarbell, one of the original ‘muckrakers’, was a vitriolic exposé of the dubious practices of the company.
Accusations against the companies included market manipulation, stifling competition, poor product quality and employee exploitation, going as far as violence and intimidation. The companies were clearly not operating in the interests of all stakeholders.
Theodore ‘Teddy’ Roosevelt became US President after the assassination of William McKinley in 1901, and was returned to the White House by a landslide victory in the 1904 presidential election. Roosevelt was committed to taking on the monopoly power of the trusts, arguing he was not anti-business, nor even anti-trust, but rather anti bad-business.
Bonfire of the Trusts
Roosevelt used the Sherman Act to break up the trusts. His first target was Northern Securities Company, a conglomerate controlling railways across the US, which was taken to court in 1902 and dissolved by the Supreme Court in 1904.
Next came the Beef-Trust case which was precipitated by a public storm after beef price rises in 1902.5 Other targets included the American Tobacco Company (1911), the Chicago Meat Packers (1905), Otis Elevator (1906) and Du Pont (1907).
An important and symbolic example was Standard Oil. The US federal court ruled in favour of the government in 1909, but the company appealed against its court-ordered dissolution. However, it was finally broken into 34 separate companies after an appeal was rejected by the Supreme Court in 1911.6
During Roosevelt’s presidency more than 40 antitrust suits were filed against corporations and the policy continued under his successor President Taft from 1909. In total, the Department of Justice filed 127 antitrust cases between 1904 and 1914, resulting in a significant diminution of US corporate power.7
Impact on shareholders
Antitrust investigations were negative for shareholders of targeted companies as share prices declined substantially during these years. The investigations had a dampening impact on the stock market as a whole.8 The antitrust campaign highlights how owning shares in companies with monopolistic powers at certain times can be a bad investment.
21st century monopolies
Today, US companies such as Alphabet, Amazon, Apple, Facebook and Microsoft have dominant positions in their markets. They have been criticised for swallowing up smaller rivals, minimising tax payments and poor treatment of workers, all of which could threaten their social licence to operate.9 It seems that they are emerging from the coronavirus pandemic in even stronger positions.
The EU has shown willingness to challenge some of these companies. A competition probe ruled that Alphabet’s Google had spent 10 years blocking rival online advertisers.10 As a result the EU imposed fines on Google totalling €8.2bn.11
We believe these companies may face more intensive regulation in the future and could ultimately be broken up or severely curtailed, like the early 20th century monopolies, with negative implications for shareholders. However, it may take a radical US President like Teddy Roosevelt to begin the process in the US.
The trust busting of the early 20th century highlights the risk of owning large, monopolistic companies when their licence to operate is challenged. This is one of the reasons we do not hold positions in these kind of companies in our portfolios.
At Stewart Investors we favour management and owners who provide careful stewardship. This includes paying reasonable rates of tax, charging customers a fair price and treating the workforce well which is not always the case with monopolistic companies such as the ones broken up by Roosevelt.
This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.
This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document.
References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.
Hong Kong and Singapore
In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Stewart Investors is a business name of First Sentier Investors (Hong Kong) Limited. Stewart Investors (registration number 53310114W) is a business division of First Sentier Investors (Singapore).
In Australia, this document is issued by First Sentier Investors (Australia) IM Limited AFSL 289017 ABN 89 114 194 311 (FSI AIM). Stewart Investors is a trading name of FSI AIM.
This document is not a financial promotion. In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.
European Economic Area (“EEA”)
In the EEA, this document is issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland, number 629188.
In certain jurisdictions the distribution of this material may be restricted. The recipient is required to inform themselves about any such restrictions and observe them. By having requested this document and by not deleting this email and attachment, you warrant and represent that you qualify under any applicable financial promotion rules that may be applicable to you to receive and consider this document, failing which you should return and delete this e-mail and all attachments pertaining thereto. In the Middle East, this material is communicated by First Sentier Investors (Singapore).
If in doubt, you are recommended to consult a party licensed by the Capital Markets Authority (“CMA”) pursuant to Law No. 7/2010 and the Executive Regulations to give you the appropriate advice. Neither this document nor any of the information contained herein is intended to and shall not lead to the conclusion of any contract whatsoever within Kuwait.
UAE - Dubai International Financial Centre (DIFC)
Within the DIFC this material is directed solely at Professional Clients as defined by the DFSA’s COB Rulebook.
By having requested this document and / or by not deleting this email and attachment, you warrant and represent that you qualify under the exemptions contained in Article 2 of the Emirates Securities and Commodities Authority Board Resolution No 37 of 2012, as amended by decision No 13 of 2012 (the “Mutual Fund Regulations”). By receiving this material you acknowledge and confirm that you fall within one or more of the exemptions contained in Article 2 of the Mutual Fund Regulations.
United States of America
In the United States, this document is issued by First Sentier Investors International IM Limited, as SEC registered investment adviser. Stewart Investors is the trading name of First Sentier Investors International IM Limited. This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 (hereafter the “1940 Act”), as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933 (“1933 Act), and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors.
In other jurisdictions where this document may lawfully be issued, this document is issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.