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Aspire | Action | Acquire

Teaming Up

Prior to the introduction of the Sherman Anti Trust Act in 1890, it was not uncommon for businesses to collaborate for the purpose of locking out existing or potential competitors. It was the lockout of the New York & Harlem Railroad and later the rival Hudson River Railroad, in which Cornelius Vanderbilt had controlling stakes, that motivated his ultimate takeover of the New York Central trunk line. A physical consideration that prevented inter-operability was different width railway gauges between the trunk and local lines.

The attraction of collaborating with other businesses, including the competition, during the nineteenth century can also be attributed to the prohibition on corporations owning shares in other corporations. Investors typically purchased holding in their own names and, often in cooperation with other stockholders, forced collaborations or mergers. Cornelius Vanderbilt was presented such an option to merge the Hudson into the New York Central, when an agreement broke down between the roads and freight was being re-consigned from the Central to steamboats.

Initially, the opportunity to merge the Hudson and Central in 1866 was declined to do so due to rising public disquiet over the size of the railroads, and notably the Pennsylvania Railroad. This can be contrasted with the disquiet of takeovers amongst today’s technology behemoths. What emerged in the railroads, the high technology equivalent of that era, was a cartel agreement between the four trunklines (Baltimore & Ohio, the Pennsylvania, the Erie, and the New York Central) with the purpose of not undercutting each other’s prices.

The railroad cartel model can be contrasted to that which existed between mill owners in the steel industry. In 1877, when Carnegie was invited to “pool” with local competitors and restrict his output, he walked out. His more efficient Edgar Thomson mill, named after the Pennsylvania Railroad president, had undercut the prices of cartel members. Carnegie, who returned to negotiate, threatened to undercut them further if they did not award him a greater share of an agreed production output. They did and market demand drove prices down. The want of the early iron and steel industry proprietors to collaborate was very rational.

The experience of the railroads, the mills’ major customers, was an oversupply of duplicated roads that resulted in crippling price wars and financial losses. The very same rationale led to J D Rockefeller acquiring rival refiners in the oil industry as opposed to cartelizing. Rockefeller’s Standard Oil Trust, devised by his attorney, involved rivals surrendering operational control for a stake in a much larger organization. Many proprietors who succumbed to Standard Oil, only to see their less efficient refineries shut down, joined the “team” of its upper management.

Despite exporting the majority of the kerosene it produced overseas, and making home lighting affordable, Standard Oil fell victim to the  Sherman Anti-Trust Act in 1911.  It was not alone. The E I Du Pont Nemours Powder Company exited an industry cartel, the Gunpowder Trade Association, in 1904 upon acquiring its transnational competitors. Former owners who swapped their businesses for equity joined Du Pont’s upper management only to fall foul of an antitrust suit in 1907, resulting in the 1912 dissolution of the Powder Company. Unlike Standard Oil, du Pont did not vertically integrate companies supplying raw materials.

The dissolution of the Powder Company would seed diversification and a controlling investment in General Motors, which antitrust laws would force it to relinquish in 1949. This was a consequence of Du Pont having a perceived advantage over competitors in the supply of automotive paints to General Motors. The relevance of Du Pont, which almost certainly saved General Motors from demise in the 1920s, is that it became the model of corporate governance that separated management from ownership for much of the twentieth century.

In what might seem a paradox, modern competition laws [United States v. Microsoft Corporation, 253 F.3d 34 (D.C. Cir. 2001) being a case in point] necessitates inter-firm collaboration. Michael Porter, too, in a jointly written 2011 Harvard Business Review article, has conceded that his adversarial 5-forces model of competition needs to take greater account of the benefits of businesses collaborating: teaming up!