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Mergers, External Growth, and Finance in the Development of Large-Scale Enterprise in Germany, 1880–1913

Published online by Cambridge University Press:  03 March 2009

Richard Tilly
Richard Tilly
Affiliation:
Professor of Economic and Social History at the University of Münster, Federal Republic of Germany.
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Abstract

The external growth of a sample of large German enterprises for the 1880–1913 period is here investigated. External growth, defined as acquisition of existing firms and measured by the reported value of their assets, is found to have accounted for no more than one-fifth of average overall enterprise growth in the period. An examination of individual examples, however, reveals that external growth was frequently decisive for the growth of survivor enterprises and, in some sectors, a significant contributor to concentration. Some quantitative tests suggest that financial factors, and particularly stock prices, significantly influenced external growth. The paper concludes by comparing German with British and American findings.

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Articles
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The Journal of Economic History , Volume 42 , Issue 3 , September 1982 , pp. 629 - 658
Copyright
Copyright © The Economic History Association 1982

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References

1 Davis, L., “The Capital Markets and Industrial Concentration; the US and the UK, a Comparative Study,” Economic History Review, 19 (1966), 255–72;CrossRefGoogle ScholarNelson, R., Merger Movements in American Industry, 1895–1956 (Princeton, 1959);Google ScholarHannah, L., “Mergers in British Manufacturing Industry, 1880–1918,” Oxford Economic Papers, 26 (1974), 1–20;CrossRefGoogle ScholarChandler, A., The Visible Hand (Cambridge, 1977) esp. chap. 10.Google Scholar

2 For a recent survey see the contributions in Mestmäcker, E.-J. and Richter, Rudolf, eds., “Competition Policy: German and American Experience. A Symposium,” Zeitschrift für die gesamte Staatswissenschaft, 136 (09. 1980).Google Scholar

3 See, e.g., Boehme, H., “Bankenkonzentration und Schwerindustrie,” in Sozialgeschichte Heute (Göttingen, 1974).Google ScholarFeldenkirchen, W., “Kapitalbeschaffung in der Eisen- und Stahlindustrie des Ruhrgebiets 1879–1914,” Zeirschrift für Unternehmensgeschichte, 24 (1979);Google ScholarKocka, J., “Entrepreneurs and Managers in German Industrialization,” in Cambridge Economic History of Europe, ed. Mathias, P. and Postan, M. (Cambridge, 1978), vol. 7, esp. pp. 565–70.Google ScholarLandes, D., The Unbound Prometheus (Cambridge, Massachusetts, 1969), e.g., 263–64, 300, 350.Google ScholarKocka, J. and Sigrist, H., “Die hundert grössten Industrieunternehmen im späten 19. Jahrhundert, Expansion, Diversifikation und Integration im internationalen Vergleich,”Google Scholar and Horn, N., “Aktienrechtliche Unternehmensorganisation in der Hochindustrialisierung (1860–1920). Deutschland, England, Frankreich und die U.S.A. im internationalen Vergleich,” in Recht und Entwicklung der Grossunternehmen im 19. und frühen 20. Jahrhundert, eds. Kocka, J. and Horn, N. (Göttingen, 1979).Google ScholarNussbaum, H., Unternehmen gegen Monopole (Berlin, 1966). The important older studies include:Google ScholarJeidels, O., Das Verhältnis der Grossbanken zur Industrie, 2nd ed. (Leipzig, 1913);Google ScholarRiesser, J., Die deutschen Grossbanken und ihre Konzentrarion (Berlin, 1910);Google ScholarHilferding, R., Das Finanzkapital (Berlin, 1909);Google ScholarVoelcker, H., “Vereinigungsformen und Interessenbeteiligungen in der deutschen Grossindustrie,” Schmollers Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich, 33 (Leipzig, 1909), 1–42.Google Scholar

4 The classic references are Hilferding, Jeidels and Riesser, cited in the previous footnote and. more recently, Gerschenkron, A., Title essay in Economic Backwardness in Historical Perspective (Cambridge, Massachusetts, 1962), 15–16.Google Scholar

5 Wehler, H.-U., Das deutsche Kaiserreich, 1st ed. (Göttingen, 1975), esp. pp. 49–59;Google Scholaridem, “Der Aufstieg des organisierten Kapitalismus und Interventionsstaates in Deutschland,” in Organisierter Kapitalismus. Voraussetzungen und Anfänge, ed. Winkler, H. A. (Göttingen, 1974).Google Scholar

6 Webb, Stephen argues the former position for steel: “Tariffs, Cartels, Technology and Growth in the German Steel Industry, 1879 to 1914,” this JOURNAL, 40 (06 1980), 309–29, esp. 319–23.Google Scholar The latter position forms part of the interpretation offered by Neuburger, H. and Stokes, H., “German Banks and German Growth, 1883–1913: An Empirical View,” this JOURNAL, 34 (09. 1974), 710–31.Google Scholar

7 Nelson, Merger Movements.Google Scholar

8 Weston, J. F., The Role of Mergers in the Growth of Large Firms (Berkeley, 1953).Google Scholar

9 For a description of this survivor sample and some possible interpretations of the enterprise behavior recorded, see Rettig, R., Das Investitions-und Finanzierungsverhalten deutscher Grossunternehmen, 1880–1911 (Münster, 1978).Google Scholar

10 Huerkamp, C., “Fusionen der 100 grössten Unternehmen von 1907 zwischen 1887 und 1907,” appendix to article by J. Kocka and H. Sigrist, “Die hundert grössten deutschen lndustrieunternehmen im späten 19. und frühen 20. Jahrhundert. Expansion, Diversifikation und Integration im internationalen Vergleich,” in Recht und Entwicklung der Grossunternehmen, eds. Horn and Kocka, pp. 13–17;Google ScholarPierenkemper, T., Die westfäischen Schwerindustriellen. Eine Modelluntersuchung (Göttingen, 1979).Google Scholar

11 In addition to Rettig, Das Investitions- und FinanzierungsverhaltensGoogle Scholar see also Tilly, R., “Das Wachstum industrieller Grossunternehmen in Deutschland, 1880–1911,” in Wirtschaftswachstum, Energie und Verkehr vom Mittelalter bis ins 19. Jahrhundert, ed. Kellenbenz, H. (Stuttgart, 1978). Not all of the companies existed throughout the entire period—the A.E.G., for example, began (as the Deutsche Edison Gesellschaft) in 1883—so that the description in the text is essentially but not exactly correct.Google Scholar

12 Extremely useful surveys which treat parts of the concentration process before 1914 are: Fischer, W. and Czada, P., “Wandlungen in der deutschen lndustriestruktur im 20. Jahrhundert. Ein statistischer-deskriptiver Ansatz,” in Entstehung und Wandel der modernen Gesellschaft, ed. Ritter, G. A. (Cologne, 1970);Google Scholar and Kocka, J., “Entrepreneurs and Managers.”Google Scholar See also Maschke, E., Grundzūge der deutschen Kartellgeschichte bis 1914, Lecture series of the Society for Westphalian Economic History (Dortmund, 1964).Google Scholar Finally, many of the essays in Horn and Kocka, eds., Recht und Entwicklung, contribute new information on special aspects of concentration (e.g., by Blaich, Herrmann, or Reich).Google Scholar

13 Yet the published accounts may tend to underestimate the value of such transactions—for example that involving the shares of the Swiss “Elektrobank” in 1897 which went into the A.E.G.'s security holdings at no more than half of their market value. The “Elektrobank,” however, never became a full subsidiary of the A.E.G.; compare Liefmann, R., Beteiligungs-und Finanzierungsgesellschaften, 5th ed. (Jena, 1931), esp. pp. 435–41Google Scholar. See also Lowe, J., “Die elektrotechnische Industrie,” in Die Störungen im deutschen Wirtschaftsleben während der Jahre 1900 ff., Schriften des Vereins für Sozialpolitik, vol. 107 (Leipzig, 1903) pp. 77–155;Google ScholarSothen, H. V., “Die Wirtschaftspolitik der Allgemeinen Elektrizitäts-Gesellschaft” (Diss., Freiburg/Br., 1915);Google ScholarWagon, E., Die finanzielle Entwicklung deutscher Aktiengesellschaften von 1870–1900 und die Gesellschaft mit beschränkter Haftung im Jahre 1900 (Jena, 1903), p. 89;Google ScholarHasse, H., “Die Allgemeine Elektnzitäts Gesellschaft und ihre wirtschaftliche Bedeutung (Diss., Heidelberg, 1902);Google ScholarFasolt, F., Die sieben grössren deutschen Elektrizitätsgesellschaften (Lepizig, 1904);Google Scholar and Strobel, A., “Die Gründung des Zūhcher Elektrotrusts. Ein Beitrag zum Unternehmergeschäft der deutschen Elektroindustrie 1895–1900,” in Geschichte, Wirtschaft, Gesellschaft, ed. Hassinger, E., Mülter, J. H. and Ott, H. (Berlin, 1975).Google Scholar

14 One reason for the expression “at least” is in the discrepancy between columns 3 and 4 of Table 1. The names of the companies involved make it probable that only a small discrepancy is at stake. Another reason for that expression is the frequent use of nominal share issue values to indicate acquisitions costs, although in some cases the issue of new shares brought a considerable premium (“Agio”). I should add here that acquisitions of properties such as mining land have not been counted as external growth unless they involved acquisition of a company as well.Google Scholar

15 Thus participations or direct investment appear to play no significant quantitative role here. Moreover, the addition of the growth of the securities portfolio over the 1880–1911 period raises the share of external growth in total growth to no more than 29 percent (to roughly 423 out of the total of 1,472 millions of marks).Google Scholar

16 If we include growth in the A.E.G.'s entire securities portfolio as external growth, the share rises well above the average—to 38 percent of total growth, 1883–1911.Google Scholar

17 One is tempted to connect this relatively slow growth and horizontal combination with the growing cartelization of heavy industry since the 1890s, but available cost data do not support such an argument.Google Scholar See Webb, “Tariffs, Cartels, Technology and Growth,” esp. pp. 319–23.Google Scholar Analysis of coal production alone, however, might tell another story. It should be added that the survival criterion for membership in the sample of firms investigated here could mean a bias toward slowgrowing enterprise. On this see Tilly, “Das Wachstum,” p. 156–57.Google Scholar

18 See, e.g., Kocka, “Entrepreneurs,” esp. p. 560.Google Scholar

19 Huerkamp, “Fusionen.”Google Scholar

20 Ibid., p. 117. So far as the motive was not largely the lure of capital gains.

21 Kocka and Sigrist, “Die hundert grössten deutschen Industrieunternehmen,” p. 84.Google Scholar

22 Author's calculations (based on data in Salings Börsenjahrbuch, 1890/1891),Google Scholar and Däbritz, W., Bochumer Verein für Bergbau und Gussstahlfabrikation in Bochum. Neun Jahrzehnte seiner Geschichte im Rahmen der Wirtschaft des Ruhrbezirks (Düsseldorf, 1934), pp. 207, 222.Google Scholar

23 Author's calculations (based on data in Salings Börsenjahrbuch, 1890/1891 and 1891/1892).Google Scholar and Heinrichsbauer, A., Harpener Bergbau AG., 1856–1936. Achtzig Jahre Ruhrkohlen-Bergbau (Essen, 1936), pp. 89–92.Google Scholar

24 In the American merger wave, 1895–1904, many mergers (or “consolidations”) involved dozens of disappearing firms and were in effect an alternative form of cartel for controlling price and output competition which was rendered “necessary” by the Sherman Act of 1890 and its interpretation by the courts. On this see Chandler, A., The Visible Hand, esp. pp. 331–39; see also Nelson, Merger Movements, chap, 3;Google Scholar and Bunting, D., Statistical View of the Trusts (Westport, Connecticut, and London, 1974), for data on the large enterprises created.Google Scholar And for the long-term implications, Weston, J. F., The Role of Mergers.Google Scholar

25 On this point see Voelcker, H., “Vereinigungsformen und Interessenbeteiligung”; the articles by Blaich, Cornish, and Hannah in Recht and Entwicklung, eds. Horn and Kocka.Google Scholar

26 In addition to the literature cited in note 13, see also Kocka, J., Unternehmensverwaltung und Angestelltenschaft am Beispiel Siemens 1847–1914 (Stuttgart, 1969) pp. 319–35;Google ScholarPinner, F., Emil Rathenau and das elektronische Zeitalter (Leipzig, 1918);Google Scholar and Czada, P., Die Berliner Elektroindustrie in der Weimares Zeit (Berlin, 1969).Google Scholar

27 According to data reprinted in Kocka, Unternehmensverwaltung, pp. 567, 571, Siemens grew by about 210 million marks between 1889 and 1912–1913, its “participations” by about 75 million marks. A.E.G.'s growth between 1883 and 1911–1912 amounted to about 326 million marks, of which 126 million (including the securities portfolio) represented external growth.Google Scholar These are based on the author's calculations of figures taken from Salings Börsenjahrbuch and the sources cited in note 13.Google Scholar

28 The 75 percent estimate is no more than an order of magnitude. All estimates of capacity or market shares in this industry for this period necessarily suffer from the paucity of data on the size of individual firm's capacity and output and from the difficulty of defining the “electro-technical” industry itself. The other estimates in the text refer to reported total equity capital plus long-term debt of the largest firms as of 1900. To the extent that growth was more rapid at the lower end of the market, these figures overstate concentration.Google Scholar This is a possibility, as Fischer, Wolfram has suggested (in “Bergbau, Industrie und Handwerk, 1850–1914,” in Handbuch der deutschen Wirtschafts- und Sozialgeschichte, ed. Zorn, W. (Stuttgart, 1976), vol. 2, p. 550). If the industry is broadly defined to include the electricity works on the grounds that they were founded mainly by the heavy equipment companies, we observe a continuous decline in the share of the three biggest companies from 75 to 54 percent between 1896 and 1907, even if we subtract the total participations of the three largest companies from the industry's reported total.Google Scholar The latter are given in Hoffmann, W. et al. , Das Wachstum der deutschen Wirtschaft seit der Mitte des 19. Jahrhunderts (Berlin, Heidelberg, New York, 1965), Table 220. Employment figures are no less ambiguous. If Czada's data are correct, then the share of the three largest companies in total German-wide employment rose between 1895 and 1907 from 64 to 78 percent. Kocka's figure for the industry as a whole in 1907, however, is much larger than Czada's and suggests a decline in the share of the “Big Three” to around 56 percent.CrossRefGoogle ScholarCzada, Berliner Elektroindustrie, p. 55;Google ScholarKocka, Unternehmensverwaltung, p. 315. On the other hand, the reported capitalization data could understate effective control exercised by the largest enterprises over smaller ones.Google Scholar On this see Sothen, Die Wirtschaftspolitik der Allgemeinen-Elektrizitäts-Gesellschaft, p. 80.Google Scholar See also Pohl, H., “Die Konzentration in der deutschen Wirtschaft vom ausgehenden 19. Jahrhundert bis 1945,” in Zeitschrift für Unternehmensgeschichte, supplementary issue, II (Wiesbaden, 1978).Google Scholar

29 Heinrichsbauer, Harpener Bergbau AG, pp. 89–92;Google ScholarDäbritz, W., “Entstehung und Aufbau des Rheinisch-Westfälischen Industriebezwirks,” in Beiträge zur Geschichte der Technik und Industrie, vol. 15 (Berlin, 1925), esp. p. 106;Google ScholarFischer, “Bergbau, Industrie und Handwerk,” p. 546.Google Scholar

30 Data in Der Werdegang der Rheinischen Stahiwerke (Essen, 1936) esp. pp. 14–18,Google Scholar and Salings Börsenjahrbuch, 1899–1903.Google Scholar

31 An interesting study of the heavy industrial cartels based on archival materials has been prepared by Peters, Lon, “Co-operative Competition in German Coal and Steel, 1893–1914” (Ph.D. diss., Yale University, 1981).Google Scholar

32 Pierenkemper, T., Die wesrfälischen Schwerindusrriellen, esp. pp. 227–32.Google Scholar

33 This number represents the annual production of acquired coal mines as of 1883(for the 1872–1892 period) and 1900 (for the 1893–1913 period). The total for the Ruhr district is from Däbritz, “Entstehung,” p. 106.Google Scholar

34 The market shares are calculated from data in Meifert, W., “Die organisatorische Entwicklung der rheinisch-westfälischen Kohlenwirtschaft (Diss., University of Münster, 1923). It is significant that between 1893 and 1913 concentration among members of the coal syndicate did not increase as rapidly as before. But the cartel itself was of course an important check on competitive behavior—with substantial costs to the economy as a whole. Lon Peter's dissertation, “Co-operative Competition,” has interesting things to say on this cartel.Google Scholar

35 This obviously eased acquisition of other firms. It is certain that the costs of raising funds on the main capital markets in Germany varied inversely with the age and size of industrial corporations. By the 1880s new companies (one-quarter of whose capital had to be paid up before operations could begin) had to wait one year between founding and issue of shares on the stock exchange, and the minimum issue was one million marks in the chief market, Berlin. Only a small minority of German industrial corporations ever issued securities on the exchange, many of them disappearing before the conditions were ripe, quite a few of them merging into larger corporations having access to the exchange. See on this Loeb, E., “Die Berliner Grossbanken in den Jahren 1895–1902 und die Krisis der Jahre 1900 und 1901,” Schriften des Vereins für Sozialpolitik, vol. 110, p. 111.Google Scholar See also Moral, F., Aktienkapital und Akrien-Emissionskurs bei industriellen Unternehmungen (Munich and Leipzig, 1914).Google Scholar For estimates showing an inverse relationship between size of industrial corporations and costs of capital in the 1880–1911 period (as measured by realized rates of return corrected for risk), see Tilly, R., “Banken und Industrialisierung in Deutschland: Quantifizierungsversuche,” in Eniwicklung und Aufgaben von Versicherungen and Banken in der Industrialisierung, ed. Henning, F.-W. (Berlin, 1980).Google Scholar

36 Nominal share capital growth probably reflects enterprise behavior better than total equity capital since total equity capital reflects the accumulation of reserves originating mainly in the premium earned on new share issues on the stock exchange. Our investigation has focused mainly on the industrial stock price index, because the long-term rate of interest was unimportant for external growth and dividends apparently followed stock prices (rather than influenced them). We calculated a correlation of r = 0.68 for the variables stock prices at t- 1 and dividend rate at t. Stock prices and dividend rates derive from Salings Bōrsenjahrbuch, 1880–1913. For contemporary views see, e.g., Der Deutsche Ökonomist, 17 November 1888, no. 309, and 12 November 1898, no. 830.Google Scholar Also Donner, O., “Die Kursbildung am Aktienmarkt,” Vierteljahresheft zur Konjunkrurforschung, special issue, 36 (Berlin, 1934), esp. pp. 19, 20.Google Scholar

37 See note 36 and also N. Reich, “Auswirkungen der deutschen Aktienrechtsform von 1884 auf die Konzentration der deutschen Wirtschaft,” and F. Falke, “Anlegerschutz und Unternehmenspub lizität. Die Zulassung von Aktien zum Börsenhandel bis zur New Deal-Gesetzgebung in vergleichender Sicht,” in Recht und Entwicklung, ed. Horn and Kocka.Google Scholar

38 Preliminary correlation analysis of these connections produced the following coefficients (all for the 1883–1913 period): net investment in manufacturing (t0) and new issues of industrial shares (t−1) = 0.75; new issues of industrial shares (t0) and industrial stock prices (t0) = 0.62; net investment in manufacturing (t0) and rate of growth of industrial production (t0) = 0.63; partial correlation coefficients between investment in manufacturing and new issues and industrial growth (as above) were 0.67 and 0.48. The multiple R2 = 0.67. The connections deserve closer attention.Google Scholar

39 Cited in note 10. The experiment performed with Pierenkemper's source materials could be executed for other samples of enterprises and transactions. In many cases, banks pushed for mergers and did much of the related organizational work.Google Scholar See, e.g., Feldenkirchen, W., “The Banks and the Steel Industry in the Ruhr,” in German Yearbook on Business History (1981), pp. 27–51.Google Scholar

40 Nelson, Merger Movements; Hannah, “Mergers in British Manufacturing Industry.”Google Scholar

41 It would also seem to contradict the argument pushed by Chandler or Cornish, i.e., that changes in the legal climate in the 1890s explain the merger movement in the United States. See on this Chandler, Visible Hand, esp. chap. 10; Cornish, in Recht und Entwicklung, ed. Horn and Kocka; Hannah, “Mergers,” pp. 7–8.Google Scholar See also Smiley, Gene, “The Expansion of the New York Securities Market at the Turn of the Century,” Business History Review, 45 (1981), 75–85, for a supporting argument.CrossRefGoogle Scholar

42 The sheer economic size differences of the countries might explain part of the gaps. As of 1900 population in the United States, Great Britain, and Germany was about 77,41, and 56 million; total income (in current dollars and at the exchange rates of £1 = $5, and $1 = 4 marks) about $16, $8, and $7 billions; and per capita income (in current dollars) something like $210, $195, and $125. There were also differences in the estimated annual rates of growth. For the 1870–1913 period, they were roughly as follows: United States, 6; Great Britain, 2; and Germany, 4 percent. Thus, even if it were logically possible to relate the number of firm disappearances by merger to such aggregate measures, their correspondence is poor.Google Scholar

43 The number of companies acquired per firm in our German sample for the 1880–1913 period was equal toY = 0.98 + 0.10 (the average capital, in millions of marks), or = 2.5. Extrapolating this to all other listed companies as of 1906—a year with complete data and roughly the midpoint between 1895 and 1913—gives a total of about 650 additional disappearances. That would bring the German total to about half of the British level; but given the unusual longevity of our sample the extrapolation is surely an overestimate. Less than one-third of all listed companies as of 1906 were survivors from the 1870s.

44 See note 24.Google Scholar

45 This is because shares in G.m.b.H. were not easily marketed. A study of this form of enterprise (which expanded rapidly in the 1892–1913 period) is overdue.Google Scholar

46 Some of these points have been raised by L. Davis (in his article, “The Capital Market”) to explain Anglo-American differences.Google Scholar

47 Nelson, Merger Movements, esp. p. 64.Google Scholar

48 On this see Davis, L. and Gailman, R., “Capital Formation in the United States during the Nineteenth Century,” in The Cambridge Economic History of Europe, eds.Google Scholar Mathias and Postan, vol. 7, part 2, p. 38, where they cite the work of Evans, G. H., Business Incorporations in the United States, 1800–1943 (New York, 1948)—a work I was unable to consult.Google Scholar

49 For Great Britain see Clapham, J. H., An Economic History of Modern Britain, vol. 3, Machines and National Rivalries (Cambridge, 1938, reprint ed., 1963), pp. 201–91 and esp. p. 222.Google Scholar For Germany see Moll, E., “Aktiengesellschaften, Statistik,” in Handwōrterbuch der Staatswissenschaften, 4th ed. (Jena, 1923);Google Scholar and Vierteljahresheft zur Statistik des Deutschen Reiches zu 1913, supplementary issue (Berlin, 1913).Google Scholar

50 Nelson, Merger Movements, pp. 51–52. The estimate of capitalization by industry for 1904 that Nelson uses, however, is itself heavily influenced by previous merger activity.Google Scholar

51 Ibid.; Hannah, “Mergers,” p. 20; Huerkamp, “Fusionen,” p. 114.

52 In the United States the number of firm disappearances per merger was about four times as high as the British or German rates.Google Scholar

53 Chandler, Visible Hand, and Cornish, “Legal Control” (as cited in note 25) are relevant here.Google Scholar