November 2020 | Lessons from the past Trust Buster (1901-1909) In 1901, US President Theodore Roosevelt began the Muckraking process of dismantling the country’s sprawling A significant wave of M&A activity in the 1890s reduced monopolies, gaining the name ‘Trust Buster’. The history competition as the trusts swallowed up smaller of this episode provides an interesting lesson about competitors.4 As a result, they came under increasing investing in companies with dominant market positions. public criticism. For example, The History of the Standard Oil Company written in 1904 by investigative journalist Ida Robber Barons Tarbell, one of the original ‘muckrakers’, was a vitriolic The late 19th century was a period of rapid growth of the exposé of the dubious practices of the company. US economy which saw the rise of powerful corporations, Accusations against the companies included market such as Standard Oil and US Steel. The men who ran these manipulation, stifling competition, poor product quality giant companies, such as Andrew Carnegie, J. P. Morgan and employee exploitation, going as far as violence and and John D. Rockefeller, were given the name ‘robber intimidation. The companies were clearly not operating in barons’ by critics because of their extreme wealth and the interests of all stakeholders. power. Trust Buster Monopolies Theodore ‘Teddy’ Roosevelt became US President after Many of these corporations, which were called ‘trusts’ the assassination of William McKinley in 1901, and was because of their legal structure at the time, came to returned to the White House by a landslide victory in the dominate their particular industries. For example, the 1904 presidential election. Roosevelt was committed to American Sugar Refining Company controlled 98% of the taking on the monopoly power of the trusts, arguing he US sugar market and Standard Oil 91% of the US refining was not anti-business, nor even anti-trust, but rather anti market.1 bad-business. When US Steel was created in 1901, it became the world’s largest company and Andrew Carnegie, who was bought- Bonfire of the Trusts out as part of the deal, became one of the world’s richest Roosevelt used the Sherman Act to break up the trusts. men.2 When the company took over the Tennessee Coal, His first target was Northern Securities Company, a Iron and Railroad Company it would produce more than conglomerate controlling railways across the US, which half of the steel in the US.3 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 Roosevelt was committed to targets included the American Tobacco Company (1911), taking on the monopoly power of the Chicago Meat Packers (1905), Otis Elevator (1906) and Du Pont (1907). the trusts, arguing he was not An important and symbolic example was Standard Oil. The anti-business, nor even anti-trust, US federal court ruled in favour of the government in 1909, but the company appealed against its court-ordered but rather anti bad-business. dissolution. However, it was finally broken into 34 separate companies after an appeal was rejected by the Supreme Court in 1911.6 Legislation aiming to restrict the monopoly power of these During Roosevelt’s presidency more than 40 antitrust companies resulted in the Sherman Anti-Trust Act of 1890. suits were filed against corporations and the policy However, the political will to use the law to take on vested continued under his successor President Taft from 1909. In interests did not exist in the 1890s. total, the Department of Justice filed 127 antitrust cases between 1904 and 1914, resulting in a significant diminution of US corporate power.7 At Stewart Investors we favour management and owners who provide careful stewardship. This includes paying Impact on shareholders reasonable rates of tax, charging customers a fair price Antitrust investigations were negative for shareholders of and treating the workforce well which is not always the targeted companies as share prices declined substantially case with monopolistic companies such as the ones during these years. The investigations had a dampening broken up by Roosevelt. 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. 1 Source: http://origins.osu.edu/milestones/january-2019- us-sugar-monopoly-E.C.Knight-Sherman-Act-Spreckels- 21st century monopolies court, https://en.wikipedia.org/wiki/Standard_Oil Today, US companies such as Alphabet, Amazon, Apple, Facebook and Microsoft have dominant positions in their 2 Source: https://www.history.com/topics/19th-century/ markets. They have been criticised for swallowing up andrew-carnegie smaller rivals, minimising tax payments and poor 3 Source: https://en.wikipedia.org/wiki/U.S._Steel treatment of workers, all of which could threaten their social licence to operate.9 It seems that they are emerging 4 Gerard Helferich, An Unlikely Trust (2018), 39. from the coronavirus pandemic in even stronger positions. 5 George Bittlingmayer, The stock market and early The EU has shown willingness to challenge some of these antitrust enforcement, Journal of Law & Economics, companies. A competition probe ruled that Alphabet’s xxxvi, (1993), 6. Google had spent 10 years blocking rival online 6 Source: https://en.wikipedia.org/wiki/Standard_Oil advertisers.10 As a result the EU imposed fines on Google totalling €8.2bn.11 7 Bittlingmayer, 10, 13. We believe these companies may face more intensive 8 Bittlingmayer, 29. regulation in the future and could ultimately be broken up 9 ‘Big Tech has moved from offering utopia to selling or severely curtailed, like the early 20th century dystopia’ https://www.ft.com/content/78d78b7c-fbfc- monopolies, with negative implications for shareholders. 11e9-a354-36acbbb0d9b6 However, it may take a radical US President like Teddy Roosevelt to begin the process in the US. 10 Source:https://www.ft.com/content/e26b4ae0-4b00- 11e9-8b7f-d49067e0f50d The trust busting of the early 20th century highlights the risk of owning large, monopolistic companies when their 11 Source: https://www.ft.com/content/e26b4ae0-4b00- licence to operate is challenged. This is one of the reasons 11e9-8b7f-d49067e0f50d we do not hold positions in these kind of companies in our portfolios. Important information 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). Australia 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. United Kingdom 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.