Deals of the Century

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.

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