The Deal Of The Century
The unexpected consequences of J.P.Morgan's deal to create U.S. Steel, which controlled 60% of the US market, have vibrated through every decade
July/August 1998 | Volume 49, Issue 4
Morgan’s frosty relations with Carnegie were repeated with Rockefeller, again reflecting the residual tension between Wall Street and heavy industry. Through his Lake Superior Consolidated Iron Mines, Rockefeller owned most of the iron ore on the Mesabi Range in Minnesota, along with fifty-six ore-carrying vessels. Morgan couldn’t afford to exclude such rich holdings from his trust. Yet his visceral dislike of Rockefeller prevented him from approaching him about a purchase. When Judge Elbert Gary, president of Federal Steel, asked why he didn’t proceed with Rockefeller, Morgan snapped, “I don’t like him.” Gary was utterly perplexed. “Mr. Morgan, when a business proposition of so great importance to the Steel Corporation is involved, would you let a personal prejudice interfere with its success?” “I don’t know,” Morgan admitted. Rockefeller derided Morgan as a haughty aristocrat, pumped up with false pride. “For my part, I have never been able to see why any man should have such a high’and mighty feeling about himself,” he said.
Overcoming his dislike, the temperamental Morgan finally deigned to see Rockefeller. When he visited his home on West Fifty-fourth Street, Rockefeller, a skillful negotiator, insisted that he was retired and that their chat should be purely social; he said that his son, twenty-seven-year-old John D., Jr., would later take up the matter with him. Morgan doubtless grimaced at the snub. When Rockefeller, Jr., duly visited J. P. Morgan & Company, the boss repaid the compliment and didn’t look up from his desk for a long time. Finally he lifted his eyes and growled, “Well, what’s your price?” Since the Rockefellers were among the holdouts in forming U.S. Steel, they could stall to their advantage. In the end Rockefeller received $88.5 million for his ore and steamship properties, or $5 million more than Morgan had originally offered.
Disposing of the avalanche of U.S. Steel shares was no small matter at a time when daily volume on the New York Stock Exchange had never exceeded two million shares. The stock was capitalized at $1.4 billion—inconceivably large at a time when all American manufacturing concerns were capitalized at just $9 billion. (We should point out that both hope and hype were packaged into that offering price; the underlying assets were worth only $880 million.) The $1.4 billion price tag surpassed the accumulated national debt and was nearly triple the size of that year’s federal spending. Morgan fielded a giant syndicate of three hundred underwriters to market the securities. In the process he showed that Wall Street commanded the capital to effect a tremendous new wave of mergers, introducing giant economies of scale to industry. Taking a big block of U.S. Steel stock, the Morgan bank placed four of its representatives on U.S. Steel’s board, making it a captive client. No longer the servant of industrial America, Wall Street had emerged irrevocably as its master. Or so it seemed.
The kaleidoscope of history forever shifts before our eyes, and the lessons of U.S. Steel have changed with time. From the vantage point of 1998, we can spy some hitherto unseen ironies in the deal’s long-term impact. By shaking loose steel companies from their original owners and binding them to his trust, Morgan hastened the end of an era when many large industrial concerns were still run by founding entrepreneurs. Thenceforth, under the tutelage of investment bankers, most corporations would be run by professional, salaried managers, beholden to their Wall Street sponsors. Yet the bankers’ reign wouldn’t survive the twentieth century. By offering shares to the public, the financiers had paved the way, inadvertently, for a long-term demotion in their power. In time the shares of U.S. Steel and other companies would be widely dispersed among individual and institutional investors who would supersede the power of Wall Street investment houses.
As we approach the millennium, the ethos of American business has experienced a radical transfermation. The corporate ideal is now transparency, not opacity. Companies publish glossy annual reports, issue reams of information, and deluge stock analysts with reports on company developments. Chief executives monitor the share prices of their companies as prophecies of their future tenure and ignore the stock market at their peril. This state of affairs was unwittingly set in motion by J. P. Morgan, who never imagined when he formed U.S. Steel in 1901 that he and his fellow bankers would someday cede control of their foremost clients to tens of millions of small, obscure investors.