Breaking up big business into smaller, more competitive companies is viewed as good for consumers by “trustbusters,” and many old-fashioned free enterprisers. Much more surprising is the historical evidence that splitting up giant corporations, under our anti-monopoly laws, has been very good for shareholders as well.
One year after the breakup in 1911 of the enormous Standard Oil trust into 33 separate companies, shareholders’ value rose 47 percent while the Dow-Jones industrial average rose only 7.6 percent. After the industry-wide divestiture in 1935 under the Public Utility Holding Company Act, share values soared well above market averages over the next decade and a half. In some remarkable and little noticed Senate testimony two years ago on Sen. Philip Hart’s Industrial Reorganization Act, Donald E. Weeden, chairman of the Wall Street securities firm of Weeden & Co., said:
“From my own knowledge of prior deconcentration cases, they generally have demonstrated that the sum of the parts equals and often exceeds the price of the concentrated whole.”
Weeden then went on to observe how the break-up of the Big Three auto companies, General Motors(GM), Ford and Chrysler, into more companies would produce more innovation in transporation vehicles, attract more capital and very probably help shareholders. He accused GM of downplaying its mass transportation divisions because producing automobiles is more profitable.
“So long as one bus,” Weeden testified, can do the job Of 35 Cadillacs, one subway car, 50 Olds-mobiles — and one train, 1,000 Chevrolets — the pressure on the most public-spirited, well-meaning corporate managers at General Motors will he overwhelming to push private cars rather than mass transit.
“Reorganize GM’s present bus and locomotive divisions into separate independent companies and the amount of private capital willing to invest in mass transit solutions might increase beyond the equity underwriter’s fondest dream.”
Splitting up the Big Three would allow for more precise investment and spring loose managerial entrepreneurs who are now stifled by endless committee meetings, concluded this outspoken Wall Streeter.
The justice department is suing IBM with the objective of divesting some of its operations. Business Week quotes one securityanalyst as saying, “IBM’s European operations alone are worth more than the entire market value of IBM’s stock.”
If shareholders of concentrated industries realized that they would likely grow wealthier if their large company were divested into several firms, support for anti-monopoly enforcements could grow by leaps and bounds.
Presently, the Federal Trade Commission (FTC) is trying to break up the breakfast cereal and oil industry giants. FTC specialists claim consumers are being overcharged many millions of dollars annually by these corporate goliaths.
Within and without the government, there are legal and economic experts urging deconcentration of several other industries. But because the effect of higher prices from concentrated industries on consumers is so diffuse and hidden, there has never been a roaring constituency for enforcing the antimonopoly laws.
Suppose shareholders were to anticipate higher values for their shares in the companies newly formed after divestiture of the large corporations. Imagine the dilemma of the corporate managers when confronted with their owners saying, “Break us up, Washington, so we can make more money.”