JP Morgan preferred low-competition.
He was a financier and one of the richest persons in the world.
Morgan loved stability. He invested in companies aiming for good margins and consistency.
JP Morgan had a reputation for being a consolidator. He would often finance and merge two competing companies.
This would result in much less competition and better margins.
Too much competition destroys value was his mantra.
Andrew Carnegie was on the opposite side of this belief system.
Andrew Carnegie was also one of the richest people in the world. But his wealth did not come from finance or investing.
It came from steel.
Carnegie Steel owned the steel-making chain end-to-end. Iron ore mining, transporting, blast furnaces, steel mills, etc. His company owned them all.
It allowed the entire system to work closely and in an integrated manner. Its efficiency and cost savings were the kind others could not achieve.
Around 1900, Carnegie Steel was considered the world’s biggest steel producer.
Carnegie vs Morgan
Carnegie was not in the business of making steel end-products to a great extent. It was mainly a producer of steel.
Some of the companies Morgan had invested in were end-product makers. And they depended on steel bought from Carnegie.
Things were good until Andrew Carnegie’s gaze fell on end-products. These were steel items like rods, pipes, wires, buckets, nails, etc.
He thought about how much cheaper and more efficiently he could make end-products since he already owned the entire steel-making chain.
The news got out. The word reached JP Morgan.
He was obviously not pleased.
JP Morgan realised that if Carnegie started making end-products along with owning the entire steel-making process, his own companies would not be able to compete.
The solution?
JP Morgan’s companies would also have to set up their own steel-making system and expand existing ones.
Everything that Carnegie already had, they would have to get for themselves. That was how he would be able to put up a fight.
In short, both Andrew and Morgan would become owners of end-to-end steel and steel products making companies.
This would require massive investments from both companies.
More so from JP Morgan’s companies since the cost of setting up blast furnaces, iron mines, etc is much higher.
Charles Schwab
Today we talk about semiconductor technology and crude oil being crucial industries.
Steel was considered a crucial industry in the early 1900s.
America was rapidly industrializing, and steel was required in massive quantities.
This also coincided with a massive expansion in railroad networks in America.
A young man named Charles Schwab joined Carnegie Steel in 1880 as a stake driver. He was working on the factory floor.
He performed exceptionally well. Within a year, he was promoted to chief engineer and assistant manager.
And within 17 years of joining the company, Charles became the president of the Carnegie Steel Company.
Perceived as being very charismatic, Charles was well-regarded.
He was a great salesman. He would successfully sell not only products but also goals, and vision to the factory workers.
Charles would visit the factories often, talk to individual workers, remember their names, praise them publicly, and encourage a healthy sense of competition among them.
Charles Meets Morgan
In 1900, Charles Schwab attended a dinner at a club in New York.
This dinner was also attended by JP Morgan.
It was here that Charles Schwab floated an idea.
He informed JP Morgan about how his goal of reducing competition and protecting margins could be met if he invested in Carnegie Steel.
He did not propose an offer. He did not suggest a move. He just wondered aloud about the idea in front of JP Morgan.
JP Morgan was interested.
After the dinner, they met privately and talked further. Morgan asked more about the potential deal Charles Schwab was proposing.
JP Morgan felt threatened by Carnegie’s desire to make end-products. JP Morgan had thought about setting up his own steelmaking factories.
But the proposition of acquiring an existing steel-making business seemed like an even better deal. It would allow him to make steel, and at the same time his end-product-making companies would not have to worry about supply.
Charles Schwab had taken a big risk here.
He was merely suggesting the idea to JP Morgan. He had not spoken to Andrew Carnegie about this at all.
But he had a deep understanding of steel-making, much like Andrew Carnegie had.
He had a good understanding of capital management of steel companies — the kind of the topic that JP Morgan dealt with.
And he was aware of some of Andrew Carnegie’s recent thoughts.
Armed with the knowledge that JP Morgan might agree to buy Carnegie Steel, he approached his boss, Andrew.
Charles Meets Andrew
Carnegie Steel was an extremely successful company that had essentially become a money-printing machine.
On the surface, there was little reason for Andrew to sell his company.
But Charles knew a few things about Andrew and felt he could push the topic.
Andrew Carnegie was at the peak of his successful career. He had built a behemoth company.
He could restart building a brand new vertical in his company — that of making steel end-products. That would be a fresh start requiring years-long effort.
But at the age of 65, Andrew was getting more interested in philanthropy. He wanted to build schools and libraries.
Charles knew that, and pitched the proposal accordingly.
Carnegie Steel was a private company. By selling, he could make his wealth more liquid. With money like this, Andrew could pursue his philanthropic endeavors like nobody else before.
Charles also highlighted that given this was not a distress sale, Andrew could demand a price he deemed fit for the company.
After some thought, he pitched a price. $480 million.
Charles took the number to JP Morgan.
According to reports, JP Morgan agreed to the price almost immediately.
United States Steel Corporation
JP Morgan didn’t just acquire Carnegie Steel, he consolidated a bunch of other steel companies.
He used a mix of bonds and equity shares sold to investors to raise the massive amount of money needed for this acquisition.
It became a system of steel industry companies composed of entities that did everything from mining, smelting, steel-making, end-product making, and so on.
The parent company came to be called United States Steel Corporation.
Combined together, United States Steel Corp was the world’s first unicorn company ($1.4 billion, to be precise).
And Charles Schwab was its president.
Quick Takes
+ India’s Infrastructure output rose to a five month high of 5% year-on- year in June. (vs 3.2% in May). The Index of Core Industries for June is the first data released with a revised base year of 2022-23.
+ The government clarified that there is no proposal to remove long-term capital gains tax on equities for domestic investors in the parliament. The clarification was followed by the decision to exempt FPIs from LTCG tax on investments in government securities last month.
+The government will sign an Implementation Agreement with Germany on 22 July to strengthen institutional capacity, facilitate knowledge sharing and foster technical cooperation. The agreement will be signed during the release of ‘AAROH-Annual Report on Mine Closure’.
+Sebi directed depositories to issue operational guidelines for freezing promoter holdings at the ISIN level during buybacks by 1 August.
+US President Donald Trump said that all imported generic drugs will have 100% tariff in 2028 and 200% a year after that. There will be no tariff for 2 years starting 1 August. This is done to reshore generic pharmaceutical production into America.
+The government approved two Electronics Manufacturing Clusters (EMCs) worth Rs 1,012 crore in Manallur and Pillapaikkam, Tamil Nadu.
+The government approved construction of a 14.52 km line between Nimpura and Midnapur, West Bengal for Rs 440 crore. The project is expected to support additional 3.52 MTPA traffic on the freight corridor to transport coal, iron ore, steel, etc.
+India’s forex reserves rose by $1.08 billion to $676.24 billion in the week that ended on 17 July.
+The government approved two additional railway lines in Karnataka and Andhra Pradesh (46 km network) with a total cost of Rs 1,264 crore.
+India’s services exports rose 8.72% to $421.3 billion in FY25-26, compared to last year. Telecommunications, computer & information services, and business services contributed the most to the growth.
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest