American Tobacco and the Legacy of the Antitrust Laws

An original member of the 12 stocks that made up the original Dow Jones Industrial Average in 1896 ceased to exist last month, though few people noticed. General Electric Co. is the only one of the original 12 members that remains in the DJIA. The National Lead Co. (now NL Industries Inc.) and Laclede Gas Co. (now Laclede Group Holding Co.) were removed in 1916 and 1899 respectively. Other companies among the original 12, such as the United States Leather Co., American Spirits Manufacturing Co. and United States Cordage Co. disappeared long ago. Beam, Inc. was acquired by Suntory Holdings on April 30, 2014. Although you may not immediately recognize Beam, Inc., originally known as the American Tobacco Co., as an original member of the DJIA, the company played a significant role in American corporate history.  

Automated Cut and Roll

The American Tobacco Co. originally incorporated in New Jersey by James Buchanan Duke on January 21, 1890 as a merger of five tobacco companies: W. Duke & Sons (begun in 1879), Allen & Gintner, W.S. Kimball & Co., Kinney Tobacco and Goodwin & Co. Duke gained a competitive advantage by using machines manufactured by the Bonsack Machine Co. to roll and cut cigarettes. Until then, cigarettes had been rolled and cut manually. A skilled worker could roll 200 cigarettes in an hour. Bonsack’s machines could roll 200 cigarettes in a minute. Duke got a secret contract with the Bonsack Machine Co. and used this competitive advantage to cut his prices and slowly take over the American tobacco industry. The five companies that formed the American Tobacco Co. in 1890 produced 90% of the cigarettes in America. Duke increased his control over the tobacco industry on October 9, 1904 when he reincorporated the American Tobacco Co. after acquiring both the Consolidated Tobacco Co. and the Continental Tobacco Co. As the chart below shows, the stock for the original American Tobacco Co. rose from 100 to 250 between 1890 and 1904, rewarding shareholders handsomely.

In 1890, the American Tobacco Co. had a capitalization of only $25 million. After that, the company dominated the tobacco industry, absorbing another 250 companies in all areas relating to tobacco over the next two decades. The American Tobacco Co. produced 80% of the cigarettes, plug tobacco, smoking tobacco, and snuff products produced in the United States. Having taken over the American market, the company expanded into Great Britain, China, Japan and other countries. In 1907, the American Tobacco Co. was indicted for violation of the Sherman Anti-Trust Act of 1890. Though the American Tobacco Co. neither grew tobacco itself, nor sold cigarettes at the retail level, its vertical integration gave it complete control of every other aspect of the tobacco industry. The equity of the American Tobacco Co. grew to over $300 million by 1911, making the American Tobacco Co. half the size of the Standard Oil Co. and U.S. Steel.  

The Monopoly Becomes an Oligopoly

On May 29, 1911, the Supreme Court ordered both the Standard Oil Co. and the American Tobacco Co. to dissolve because of their violation of anti-trust laws. The problem with dissolving the American Tobacco Co. was that Duke had integrated production in such a way that it was difficult to break up the American Tobacco Co. cleanly. The solution that was reached was to break the American Tobacco Co. into several competing firms. The government would allow shareholders to buy shares at par in two new companies, Liggett & Myers and Lorillard, while distributing shares directly to shareholders in 14 subsidiaries including:
  • American Snuff Co.
  • George W. Helme Co.
  • Weyman-Bruton Co.
  • McAndrews & Forbes Co.
  • R.J. Reynolds & Co.
  • United Cigar Stores
  • British-American Tobacco Co.
Shareholders received odd fractions in each subsidiary, for example, 75,908/401,824 of a share of American Snuff Co. common. The monopoly became an oligopoly. The two most famous brands of the American Tobacco Co. were Lucky Strikes and Pall Mall which were sold to British American Tobacco in 1994. As the chart below shows, though American Tobacco Co. stock did well between World War I and 1929, rising eight-fold in price, after the 1920s, the stock stagnated. At the market bottom in 1974, the stock still traded where it had been in 1929, 45 years before.  

Tobacco Sells Off

Since the Surgeon General declared cigarettes to be dangerous to consumers’ health in the 1960s, the American Tobacco Co. decided to diversify away from cigarettes. Symbolically, on July 1, 1969, the company removed the word Tobacco from its name when it changed its name to American Brands, Inc. The company diversified into office supplies through its ACCO subsidiary, golf through its Acushnet division, home and hardware through names such as Moen and Master Lock, and alcohol through spirits such as Jim Beam. In 1994, the company sold off its tobacco division to Brown & Williamson. The American Tobacco Co. was no more.

On May 30, 1997, American Brands, Inc. changed its name to Fortune Brands, Inc. and on October 3, 2011, the company spun off its Fortune Brands Home & Security Division, and changed its name to Beam, Inc., keeping its spirits business (after acquiring 25 additional spirits from Allied Domecq and selling its wines to Constellation Brands). The tobacco company was now named after a brand of alcohol. On January 13, 2014, Suntory Holdings of Osaka, Japan entered into a deal to acquire Beam, Inc. for about $13.6 billion and on April 30, 2014, the deal was completed. Allowing for splits and stock distributions, the company’s strategy of diversification worked. By the time the company was bought out, its stock had risen over 40-fold from around $2 a share in 1974 to the acquisition price of $83.50 in 2014.  

The Legacy of the Antitrust Laws

It was a simple innovation, the application of machinery to rolling and cutting cigarettes, which allowed the American Tobacco Co. to dominate the tobacco industry. By the time the company was finally acquired last month, it was a shadow of its former self. While the Standard Oil Co. (now ExxonMobil) grew from $600 million in 1911 to over $400 billion today, Beam, Inc. had a capitalization of only $13 billion when it was taken over last month. A century has passed since the American Tobacco Co. was broken up by the Supreme Court. Standard Oil, broken up in 1911 and AT&T, broken up in 1982 have gradually reformed themselves through mergers and acquisitions until they are now two of the largest companies on the NYSE. The American Tobacco Co. was never able to reorganize itself and dominate its industry after its breakup in the way Standard Oil still does. The Antitrust laws had a lasting impact on the tobacco industry.

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