What If These Planned Mergers Had Happened?
Mergers and acquisitions have been common throughout business history. Three major waves were particularly important: the building of the trusts, trying to dominate each industry, in the 1890s; another round of industry consolidations in the roaring 1920s; and the rise of the conglomerates in the 1960s, as financial wheeler-dealers acquired companies in totally unrelated industries.
Yet, for every acquisition or merger that takes place, many more are considered, planned, or announced. These “deals” fall through for many reasons, from the failure to finance an offer to another suitor coming along with a higher offer. These “failed deals” are soon forgotten. But it is fun to think about how the business world might have turned out differently had they proceeded. Here we review of few of the “almost” ones that we find most intriguing.
General Motors buys Ford Motor
It is October 1909. Billy Durant’s General Motors, built around his highly successful Buick operation in Flint, is just over one year old, as is Henry Ford’s model named “T.” Durant, a sales and financial wizard, wants to build the biggest auto company. Henry Ford, having failed multiple times, is suffering from a bad back, “lumbago.” He lays on the floor of his hotel bathroom.
Durant’s company is already larger. For the year 1909, the Ford Motor Company will make a net profit of $3.2 million on sales of $10.6 million, compared with General Motors’ $6.9 million profit on sales of $20 million.
Billy Durant approaches James Couzens, Ford’s right-hand man and administrative chief: “I want to buy the Ford Motor Company.”
Henry is open to the idea. He is 46 years old, his back is killing him, he has finally found success after repeated failures, but he is also in a patent suit that could cost him a fortune. Why not cash out? Couzens was also burned out, working for the tireless and difficult Ford.
Durant bought just about every good car maker he could get his hands on, including Olds and Cadillac, but always with GM stock, rarely with cash. He was ready to pay the $8 million that Henry wanted.
Couzens takes the offer back to Henry, telling him that he favors the deal. "All right, but gold on the table." Couzens asks him what he means. "I mean cash," Ford answers. "And tell him I'll throw in my lumbago."
Couzens and Durant ultimately figure out a deal: $2 million in stock in Durant's General Motors and $6 million in cash, $4 million to be paid over three years at 5 percent interest, and $2 million paid up front.
Billy Durant is on the verge of the greatest auto merger in history (at least in hindsight). But Durant’s bank, National City Bank of New York, refuses to loan him the $2 million he needs to seal the deal. (The bank is a predecessor of Citicorp, but at this time associated with JP Morgan, a later rival.) The auto business was considered too risky, too speculative.
Durant and Ford part ways, going on to one of the great competitive battles in business history.
Within fourteen months, Ford wins his patent battle, removing that cloud from over his head. His Model T takes off. Buying out his fellow shareholders, Henry Ford drops the price of the Model T. His production numbers go into the millions, lowering the cost to make each car.
In 1916, just 7 years later, Ford makes a profit of $60 million on sales of $207 million, well ahead of GM’s $29 million profit on $157 million in sales. Nine years after that, in 1925, Ford (now wholly owned by Henry, his wife, and his son) makes $115 million on $966 million sales, versus GM’s $130 million profit on sales of $735 million. Two years later, the Model T has run its course, and GM’s Chevrolet takes the lead.
While the two companies continue to be fierce competitors, General Motors handily beats Ford for the next four or five decades. Ford does not allow outsiders (the public) to own stock in the company until 1956, after Henry’s death. Both companies rise to new challenges as Toyota, Honda, and many others have flooded the American market in the last fifty years. GM goes bankrupt; Ford nearly so but avoids it. Both have, at least for now, survived all the turmoil.
Sears, Roebuck Buys JC Penney
December 3, 1929: The New York Times headline reads, “Penney Chain to go to Sears-Roebuck.” The subheads state, “Julius Rosenwald States That Negotiations for Merger Are On. $300,000,000 is involved. Greatest Mail-Order House and Popular-Priced Chain to Combine.”
In 1924, the brilliant Robert Wood either gets fired from or quits (depending on who you believe) his executive job at mail-order pioneer Montgomery, Ward. At the same time, aging Julius Rosenwald, the visionary controlling stockholder of mail-order competitor Sears, Roebuck wants to step back and focus on his extensive philanthropies, including building thousands of schools for poor black children across the American South.
Rosenwald approaches Wood, but Wood is only interested in joining Sears if Rosenwald agrees to build stores, departing from their highly successful (and profitable) mail-order roots. (Wood had unsuccessfully tried to get Ward’s to open stores.) Rosenwald is not crazy about the idea, but Wood is insistent. Ever a student of data, Wood knows that the American people were moving from the farm (where Sears rules) to the cities (where downtown department stores lead the way). He knows that more and more people have cars and want parking lots, which the department stores lack, having successfully depended on foot and streetcar traffic. Rosenwald wants Wood badly enough that he relents, agreeing to test the operation of stores.
Wood joins Sears and the first test store opens in February of 1925. By 1928, Robert Wood is the President of Sears and the company is operating 192 stores, generating 31% of company revenues (vs. 69% from mail-order).
But there are problems aplenty. Wood wants to keep growing the chain, but it is not as easy as he thought it would be. The merchandise buyers at Sears’ Homan Avenue “largest merchandising facility on earth” headquarters give preference to the catalog. Understanding the preferences of millions of customers in over one hundred cities is more complex. The company has no experience in how to design stores, pick fixtures, or display merchandise. Wood has also determined that the stores should serve the whole family, as opposed to the male-focused catalog. He expands the company’s interest in clothing.
Most importantly, Sears’ chain of stores has grown overnight, without an adequate system to train future store managers, let alone district managers. And all those people are spread out across the country, not a short walk from Wood’s office on Homan Avenue.
Wood knows he needs help if he is to achieve his goals. Outside of the department stores, stuck downtown with no parking and higher prices, there are only a few great retail chains that know “general merchandise” (not groceries). The largest is the tightly controlled dime store giant FW Woolworth, which does about three times the sales of the Sears’ stores and makes more profit than all of Sears put together. Next in line is JC Penney, doing about twice the sales of the Sears’ stores. Highly regarded in the retail industry, Rosenwald and Wood set their sights on Penney’s.
James Cash Penney opened his first retail store in Kemmerer, Wyoming, in 1902. By 1928, his company is operating 1,023 stores across the nation. All are focused on “soft goods” – clothing, linens, sheets, towels, underwear, and all that; fields that Wood has his eye on. And Penney’s is renowned for its well-trained managers and precise system of opening and running stores. Each manager receives a large share of his store’s profit (there were few if any women managers at that time). Penney’s has everything that Robert Wood needs in order to build his national chain of stores.
JC Penney, Julius Rosenwald, and Robert Wood were all what we could today call “class acts.” Honest and fair dealing. So JC Penney opens his books up to Rosenwald and Wood, holding nothing back. The three men like each other and respect each other. They all express enthusiasm for the merger, resulting in those New York Times headlines.
Yet, in the final analysis, JC Penney becomes concerned that his managers would not have the profit-sharing system he had invented to keep them motivated. Though Sears under Rosenwald is one of the leaders in giving stock to every employee, it does not have the extreme managers’ “partnership” system that Penney’s relies on. James Cash Penney decides, “No deal; we are better off staying independent.”
By 1931, Sears’ stores are generating more sales than the catalog. Through continuous trial and error, Robert Wood overcomes his many challenges and builds the largest retail store organization on earth – in sales, profits, profit rates, and every other measure one can imagine. JC Penney also goes on to record sales and profits, even entering the catalog business, and (for a period) offering hard goods like appliances and auto parts in addition to soft goods. The two companies compete on many fronts for the next eighty years after the failed merger.
Like General Motors and Ford, the competitive environment for Sears and Penney’s has changed dramatically over the last 20 years. While Ford and GM (barely) survived, Sears is today a “goner” for all practical purposes, and JC Penney struggles for its breath.
Kraft, Hershey, and Colgate Combine to Form Largest Consumer Products Company
October 16, 1929 (a very busy year!): the New York Times shouts, “Kraft-Phenix, Hershey, and Colgate Are Said to Be Planning to Combine.”
The 1920’s has already witnessed the creation of two giant food and consumer product “combines.”
After her father CW Post commits suicide in 1914, his daughter Marjorie Merriweather Post (as in her Florida estate, Mar-A-Lago) takes over his cereal company, the Postum Company. Soon she and her husband, stockbroker EF Hutton, begin buying up other food companies, including Cheek-Neal, the maker of the best-selling Maxwell House Coffee. They also buy Jell-O and frozen food pioneer Clarence Birdseye’s company. In June of 1929, they rename the company General Foods.
In Cincinnati, the yeast kings, the Fleischmann family, merge their extremely profitable company with the nationally known Royal Baking Powder Company, naming the merged company Standard Brands, also confirmed in the Times on the same day in June of 1929. Standard Brands soon acquires Chase & Sanborn, another major coffee brand.
General Foods and Standard Brands are hell-bent on becoming huge, often competing with each other. Their formation shakes the industry. But others are busy dreaming up their own schemes.
Colgate, founded in 1806, has recently merged with both the hot new Palmolive Soap maker and the Peet Bothers soap outfit from Kansas City. The result is the delightfully named Colgate-Palmolive-Peet Company. Kraft, the world’s largest cheese producer (200 million pounds a year) has just purchased its archrival, the #2 Phenix Cheese Company, giving rise to the Kraft-Phenix Cheese Company. Hershey is merrily pumping out its popular chocolate bars.
RS Reynolds, an heir to the Camel-pumping RJ Reynolds tobacco fortune (also the source of Reynolds Aluminum and Eskimo Pies), has joined forces with (surprise) the National City Bank of New York (again!). They want to form yet a third major diversified food industry company. Reynolds already owns enough stock in Kraft-Phenix to control that company (according to Fortune magazine, this was unbeknownst to Kraft founder and CEO James Kraft).
Reynolds eyes Hershey and Colgate. In 1929, the combination of the three companies would create a company with revenues of $229 million and profits of $20 million. General Foods in the same year earns profits of $19 million on sales of $128 million. Giant Procter & Gamble, Colgate’s archrival, founded in 1837, makes $19 million on $202 million in sales. Standard Brands does not report their sales (not legally required back then) but is smaller than General Foods and earns a profit of $18 million. Thus, Reynolds’ new company will be more profitable and bigger than any of the others, their equal in every regard.
(You may be wondering why Campbell Soup, HJ Heinz, and Kellogg’s – all very successful and profitable at the time – are not in the mix. All three are solidly in the hands of their founders or their heirs. Campbell and Heinz do not go public until after World War II.)
But Reynolds’ dream was not to come true. We do not know all the reasons, but dairy trust National Dairy Products swoops in and buys Kraft-Phenix, probably with James Kraft’s support. National Dairy operated local dairies all across the nation and had been put together in the 1920s. By 1929, the company is doing $300 million a year in sales and making a profit of $21.6 million, topping all the others mentioned in the preceding paragraphs. Only the giant meatpackers like Swift and Armour are bigger in the food business, and they did not make big profits relative to their huge commodity sales numbers.
The succeeding history of these companies is too convoluted to describe at length here. National Dairy Products (no longer milking cows), General Foods, and Standard Brands became mixed up in mergers with RJ Reynolds, Nabisco, and Philip Morris over the last forty years. Much of their remains are now part of a new company, Kraft Heinz, controlled by Warren Buffett’s Berkshire Hathaway and Brazil’s 3G group (who also control the world’s largest brewer, Anheuser-Busch InBev). Hershey, Kellogg's, Heinz, Campbell, and Colgate remain fiercely independent. Colgate-Palmolive has become one of the strongest companies in the world, still battling the great Procter & Gamble, especially over toothpaste.
It is likely Mr. Reynolds found other uses for his smokin’ hot money.
Fox Studios to Acquire M-G-M
Since we told the full, tragic story of William Fox in a prior article, here we just quote a paragraph from that posting:
In March 1929, William Fox announced that he had an agreement to acquire control of M-G-M from Marcus Loew’s widow and other stockholders, creating the largest entertainment company on earth. But in July 1929, before the deal closed, Fox’s speeding Rolls Royce collided with a housewife in her Chrysler. Fox’s chauffeur died and William Fox almost expired, requiring transfusions of rare blood and spending three months in the hospital. By the time he got out of the hospital, the stock market had crashed and the deal fell through.
Giant Drug Combine
For our last story, a deal that happened, then got undone!
Just after the turn of the century (1900), Boston patent medicine salesman Louis K. Liggett comes up with the idea of manufacturing drugs and selling them as private label products to independent pharmacies around the nation. He names the company United Drug and brands the products “Rexall.”
Over the next twenty years, Liggett signs up over 7,000 Rexall “agencies” and even gets control of Britain’s famed Boots Pure Drug pharmacy chain. Louis Liggett also begins to open his own drug store chain under the Liggett name, growing it to over 700 stores, the largest drug store chain in the world. In addition, Liggett enters the cigar store business, a big industry at the time. (Drug and cigar store competitor Whelan also merges with giant United Cigar Stores, with a more than 3,000 locations.)
Apparently, Liggett’s appetite just keeps growing. While Liggett has his own factories, his stores and Rexall agencies also sell nationally branded products from other drug companies. At the same time, some of those drug companies also catch the 1920s merger bug that is evident throughout this article. So, in 1928, Drug, Inc., is formed, with Louis Liggett as Chairman.
Drug, Inc. – a totally appropriate name – not only controls the Liggett drug store chain and the Rexall brand, but it includes Sterling Products (makers of Bayer Aspirin and Phillips Milk of Magnesia), and through Sterling, many other well-known companies and brands. The list of brands includes Vick’s VapoRub, Fletcher’s Castoria, Midol, Danderine, and Mum. The best parts of Drug, Inc., are likely Bristol-Myers, makers of Sal Hepatica laxative and Ipana toothpaste, and the ever-popular Life Savers, which company was already selling 68 million rolls a year by 1920!
Such a giant combination of retailers and their suppliers is almost unimaginable today.
And it was unimaginable then. In June 1933, the five-year-old company is broken up into its original components, “to best operate these businesses and benefit shareholders.” Shareholders receive shares in five new companies: Sterling Products (Bayer), United Drug (the stores), Bristol-Myers, Vick Chemical, and Life Savers.
Each of those companies then developed its own history. After years of effort, in 1994 the original German Bayer company re-acquired the American rights to Bayer Aspirin, which had been taken away from them by the US government during World War I (they also got Phillips Milk of Magnesia in the deal). Bristol-Myers, which went on to make Bufferin a big success and later merged with pharmaceutical leader Squibb, has become one of the world’s largest pharmaceutical companies. Procter & Gamble, always on the lookout for appropriate acquisitions in consumer healthcare, picked up Vick’s and expanded their product line (in separate deals, P&G also acquired Pepto-Bismol and Metamucil). And Life Savers is now owned by Wrigley, which is in turn owned by candy and dog food giant Mars, one of the most private companies in the world.
One can only wonder how different the world would be if all the drug stores and many familiar brands were still incorporated into Drug, Inc., if GM owned Ford, if Sears had bought Penney’s, if cheese chocolate and soap had been joined at the hip, and if M-G-M’s awesome film library had been included when the Walt Disney Company recently bought Fox films.
Please pass this along to anyone you think would find it interesting! We invite your comments here.
Gary Hoover
Executive Director