Breaking the Link Between Two Dow Leaders

On this day in economic and business history...

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) has been home to several pairs of companies with the same corporate parent, occasionally at the same time. However, there has only been one example in Dow history of one component owning another, and this Dow duo persisted for decades.

It began in 1925, when General Motors (NYSE: GM  ) joined the Dow for the second time. The automaker joined DuPont (NYSE: DD  ) , which had been buying its shares for 11 years and which had used its ownership clout to force GM founder William Durant out of the company four years earlier. DuPont had joined the Dow a year and a half earlier.

This close relationship between two industrial giants bothered federal prosecutors, who filed antitrust charges against DuPont in 1949. Eight years later, on June 3, 1957, the U.S. Supreme Court handed down a 4-2 verdict (one justice had not yet been installed when the case was argued, another recused himself due to his earlier legal role defending DuPont, and a third had conflicts of interest relating to his role as Attorney General during the initial prosecution) against DuPont's ownership. The majority decided the case based on the discovery that DuPont's 23% stake -- worth an estimated $2.7 billion -- gave it preferential treatment in the market for paint and fabric sales to the automaker. The case hinged on an interpretation of the Clayton Act, which made illegal any stock acquisitions that would "tend to create a monopoly in any line of commerce." It was the first time that the Clayton Act had been interpreted along such lines.

The Court thus overruled the Chicago District Court and sent the case back to the District Court's judge for the final determination of "equitable relief." The market showed minimal reaction, with neither stock moving more than a percentage point in either direction. DuPont took four years to fully divest itself of its stake in General Motors, which had been a strong acquisition since being finalized in 1919. DuPont's $50 million purchase brought it annualized returns of 11% for 38 years -- not counting the dividends GM paid to DuPont, which became a substantial part of the latter company's annual profits.

A pop within the drop
The Dow experienced one of the largest gains in its history on June 3, 1931, when the index rose 7.1% nearly two years into the worst bear market in its history. The 3.3 million shares traded produced "the strongest rally in almost a year," according to The Los Angeles Times. The New York Times, which calculated market gains using a different index, pegged it as the "widest advance in 18 months" -- a more accurate assessment, as the index gained 9.4% in mid-November of 1929.

The rally was built on the government's abandonment of antitrust efforts against the merger of two post-breakup companies of the former Standard Oil Trust, as well as the reduction of broker margin requirements to only 20%. Because excessive leverage became widely seen as a primary cause of the crash, it's questionable why such a move should be so widely cheered -- but traders have always enjoyed playing with other people's money, and the availability of greater amounts of it for their own collateral was undoubtedly appealing.

Few investors were optimistic at this point, but a positive mood took hold as the day progressed, leading some traders to speculate that the crash was running its course. This speculation proved disastrously wrong. Despite its impressive gains, the Dow still closed out the day exactly two-thirds below its 1929 peak. Difficult as it is to imagine, the index went on to lose slightly more than two-thirds more of its June 3, 1931 value before bottoming out the following summer.

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