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.
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