Standard Oil Monopolies
by Tom Gardner
ALEXANDRIA, VA (Sept. 4, 1998) --Today marks the continuation of yesterday's column on building monopolies in the public markets. History and logic tell us that any company with monopolist position in a growing industry likely makes for an outstanding buy-and-hold investment. But what are the consequences of that dominance? Some say anti-trust activity could step in and ruin shareholder value.
But in the largest anti-trust case in the U.S. this century, federal intervention did not destroy value for shareholders, it enhanced it. The company is Standard Oil, John D. Rockefeller's petroleum cartel. By the 1880s, Standard Oil controlled 90-95% of all oil production in the United States. Over the next two decades, its hold on the industry had grown tighter. And by 1906, the U.S. government was filing an anti-trust suit against Standard Oil. Using Ida Tarbell's encyclopedic collection of unfair competitive practices (The History of the Standard Oil Company), the trust-busters succeeded in breaking out Rockefeller's monopoly into thirty-three pieces by 1911.
Instinct tells us that Rockefeller failed. Investors might assume that, once detached, his web of oil corporations sloughed in the breeze, then vanished. Nope. Rockefeller's thirty-three companies included what would become Amoco, Arco, Mobil, Exxon, and Chevron. And within ten years of its break-up, the offspring of Standard Oil would, in aggregate, be valued three times richer. Since then.. much the same. Long-term shareholders have been rewarded over and again this century.
I don't mean to suggest that plowing through an industry as we think monopolies would is an excellent way to increase shareholder value. No. When the leaders of a public company act as if they own an absolute monopoly, sell. Why? Because there is no such thing as a perfect, absolute monopoly. They don't exist. The organization that acts like a monopoly -- that stops reaching and reinventing, that stops rewarding its competitors in the short-term, and that casually resorts to mass-market price gouging -- is in for a little rough and tumble before fading into the mists of irrelevance.
Fools, 1) pursuing a monopoly and 2) behaving like a monopoly are separate things.
Consider Great Britain before the American Revolution. Saddled with debt after its dominance of the French and Indian War, the British decided to lob over a slew of tariffs at its thirteen American colonies in the 1760s. The Sugar Act, the Currency Act, and the Stamp Act increased England's rights to regulate the flow of products and capital into, through, and out of the colonies -- all without inviting American representation in the British Parliament.
By forcing short-term pain on the colonies, without barter and without concern, the English were engaging in consummate monopolist thinking. That arrogance led to arrogance. The Throne then contracted the Declaratory Act in 1766, which empowered the British with inalienable rights to legislate the American colonies "in all cases whatsoever." Was there ever more controlling language than this? By creating no value for anyone but themselves, the British Parliament was assuming the classic stance and strut of a monopoly.
And that was just the time to sell their shares and buy American. Because when arrogance results in a model that first and last creates value for the giant, the people and their institutions rally together in mobs. The free-market equivalent is a band of disappointed customers looking for an alternative. And in those times, all it takes is a pamphlet simply titled Letters from a Farmer in Pennsylvania (by John Dickinson) to spur the crowds to revolt.
Just as in classic Greek mythology, hubris is the sin to which the excellent are most susceptible; impatient over-ambition is the goat-song of the monopoly. And the self-rewarding monopolist, without the ability to serve naught but himself, is escorted to the periphery like a proud and drunken man toward the exits.
These are not the companies we aim to invest in.
Instead, the Cash-King model searches for organizations that aspire to greatness and dominance, while recognizing that they can never quite achieve it. They're the Cal Ripkens of the commercial world, increasing the demands of their off-season workouts to improve their performance on the ballfield. They treat their own age and their veteran experience as potential obstacles to their success. They understand that the dynamics of their industry which zag today can zig in two years. And, as businesses, they commit themselves today to a more rigorous numerical review of their performance than ever before. Finally, they know how to create short-term value for their competitors.
To close tonight, I'm playing around with a few different metrics for measuring the magical combination of monopolistic performance with the attitude of an underdog. That's our dream company -- the one which performs like a predator, but acts like prey.
Right now, I'm fiddling around with these:
1. Gross margins 3% above their lead competitor.
2. Net margins 4% above their lead competitor.
3. A Flow Ratio below 0.75.
4. The clearly leading namebrand in their group.
5. A host of very small competitors who have successes to celebrate that are minor compared to the monopoly, but major relative to the rest of the world.
I'd hoped to have something to apply to Microsoft's business tonight, but there's much more tinkering to be done. I hope you'll help me out in the Cash-King Strategies (Web) folder. How might we together measure growing monopolies that, at worst, will be cut apart into so many priceless diamonds -- those that do not risk being unhappily ignored by their existing customers?
Tom Gardner, Fool
Stock Change Bid AXP -3 5/8 73.63 CHV +2 3/16 77.88 CSCO -1 3/8 89.25 KO + 1/8 62.13 GPS + 1/2 53.50 EK -1 81.00 XON +2 1/8 66.06 GM -1 56.31 INTC +1 1/2 78.25 MSFT -2 5/8 96.63 PFE -4 1/2 95.38 SGP -2 1/2 91.25 TROW -1 11/16 28.25
Day Month Year History C-K (1.60%) 1.84% 0.36% 0.36% S&P 500 (0.85%) 1.71% (3.19%) (3.19%) Nasdaq (0.34%) 4.49% (5.99%) (5.99%) Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 96.63 23.45% 2/3/98 22 Pfizer 82.30 95.38 15.89% 5/1/98 37 Gap Inc. 51.09 53.50 4.72% 6/23/98 23 Cisco Syst 86.35 89.25 3.36% 8/21/98 22 Schering P 95.99 91.25 -4.93% 2/13/98 22 Intel 84.67 78.25 -7.59% 2/27/98 27 Coca-Cola 69.11 62.13 -10.10% 2/6/98 56 T. Rowe Pr 33.67 28.25 -16.11% 5/26/98 18 AmExpress 104.07 73.63 -29.25% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 81.00 28.27% 3/12/98 20 Exxon 64.34 66.06 2.69% 3/12/98 15 Chevron 83.34 77.88 -6.56% 3/12/98 17 General Mo 72.41 56.31 -22.23% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 2319.00 $440.55 2/3/98 22 Pfizer 1810.58 2098.25 $287.67 5/1/98 37 Gap Inc. 1890.33 1979.50 $89.17 6/23/98 23 Cisco Syst 1985.95 2052.75 $66.80 8/21/98 22 Schering P 2111.7 2007.50 -$104.20 2/13/98 22 Intel 1862.83 1721.50 -$141.33 2/27/98 27 Coca-Cola 1865.89 1677.38 -$188.52 2/6/98 56 T. Rowe Pr 1885.70 1582.00 -$303.70 5/26/98 18 AmExpress 1873.20 1325.25 -$547.95 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1620.00 $357.05 3/12/98 20 Exxon 1286.70 1321.25 $34.55 3/12/98 15 Chevron 1250.14 1168.13 -$82.02 3/12/98 17 General Mo 1230.89 957.31 -$273.58 CASH $48.07 TOTAL $21877.88 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio for future investment. This will be reflected
in the numbers as soon as possible.
*The year for the S&P and Nasdaq will be as of 02/03/98