A Close Look at Two Industries That Changed the World
Mar 5th 2013 11:30AM
Updated Mar 5th 2013 11:32AM
On this day in economic and financial history...
Spanish physician Francisco Fernandes became the first known European to introduce tobacco to the Old World on March 5, 1558. Christopher Columbus had known of the plant, and a member of his crew had returned with a small personal supply. However, Fernandes was the first to return with live plants and seeds after a journey to Mexico. Tobacco soon made its way around the continent. A year later, French ambassador Jean Nicot sent a supply of seeds to the French queen, who rewarded him by naming the plant after him: nicotiana, which you should recognize as the linguistic progenitor of nicotine. By the 17th century, tobacco smoking was a fashionable pastime, and demand for its cultivation soon led to the rise of plantation culture in the early American South, particularly in Virginian colonies. Today, American tobacco farming is centered in Kentucky and North Carolina, which together account for 71% of the tobacco grown in the United States.
Today, tobacco is both a hugely successful global industry and a deadly global health problem. The Tobacco Atlas, a joint publication of the American Cancer Society and the World Lung Foundation (no friends of the industry), notes that the industry earned $35 billion in profit and caused nearly 6 million related deaths in 2010, with 1.2 million of those deaths occurring in China. Philip Morris International was the leading manufacturer by volume and the most profitable publicly traded tobacco company in the world that year, but the state-owned China National Tobacco earned more than twice Philip Morris' profit on just 35% more revenue. Controlling the monopoly on addiction in a country with more than a billion people can easily create incredibly profit.
Tobacco companies have been under siege in the U.S. for decades as waves of litigation, regulation, and antismoking campaigns have given the industry a black eye. Yet Philip Morris International focuses on overseas markets, where business prospects generally look brighter. Investors have been happy with its stock's performance, but is Philip Morris still a buy? Find out in The Motley Fool's premium research report on the company, which includes in-depth analysis of its opportunities and challenges ahead. To claim your report, along with a year's worth of analyst updates covering key developments, just click here now.
Traveling the path to profit
Travelers is the result of the merger of two old insurance companies: St. Paul Fire and Marine Insurance and Travelers itself. St. Paul, the elder of the two companies, was founded on March 5, 1853, in the city that gave it its name. There was little competition in the Minnesota Territory (it did not become a state until 1858) when territorial secretary Alexander Wilkin brought 16 other businessmen together to found the company, and in fact there was relatively little risk in the business -- it would be two years before St. Paul Fire and Marine paid out its first claim.
St. Paul Fire and Marine survived the Panic of 1857 and continued to grow after Minnesota attained statehood, reaching national scope by the 20th century. Travelers and St. Paul Fire and Marine would not merge until 2004, two years after Travelers was spun off at the end of a short-lived landmark merger with Citicorp that formed Citigroup and led to the dismantling of Glass-Steagall. Originally branded St. Paul Travelers, the combined company reverted to Travelers in 2007 after reacquiring its umbrella logo from Citigroup. Travelers gained some measure of satisfaction over the failed Citi merger when it replaced its former parent on the Dow Jones Industrial Average in 2009.
Rebuilding Ma Bell (part 2)
AT&T came as close as it ever will to reconstructing the old monopolistic Bell System on March 5, 2006, when it announced a $67 billion purchase of regional Baby Bell BellSouth. The deal, announced only a year after AT&T was reconstituted in a merger with SBC Communications, would allow AT&T to take full control of the joint Cingular Wireless venture split between it and BellSouth. Cingular served 54 million wireless subscribers at the time of the announcement, and the two telecoms combined for roughly $130 billion in revenue through service to 70 million landline subscribers. The all-stock deal would later swell to a value of $86 billion by the time the FCC approved it at the end of 2006.
The deal wound up being a fairly solid one for shareholders, though not the world-beater many hoped for. In the five years that followed the announcement, AT&T shares returned a total of 34% including dividends, compared to just 11% for the Dow. The outperformance was even more notable in AT&T's first year after the announcement, as it bested the Dow 41% to 11% on its way to a gain of nearly 70% before the housing-driven crash of 2008 sent returns back to zero.
From Socal to Chevron
Standard Oil of California, a.k.a. Socal, made a $13.2 billion buyout offer to Gulf Oil on March 5, 1984. At the time, it was the biggest merger in corporate history, and it would create an oil supermajor with $57.3 billion in annual revenue. The new company became the third-largest oil company in the U.S., behind only Exxon and Mobil -- both of which, along with Socal, had originally been part of the Standard Oil Trust.
The merger momentum had begun several months earlier when legendary oilman T. Boone Pickens led an investment group into Gulf Oil stock until he held more than 13% of the company. Pickens had every intention of increasing his stake when Socal's buyout offer arrived, but he could hardly complain: The buyout offered $80 per share against the Pickens group's average cost basis of $45 per share. As a result of the acquisition, Socal changed its name to Chevron , the Dow component you're now familiar with. Today, it's the ninth-largest oil company in the world (as well as the fourth-largest non-state oil company in the world and the second-largest oil company in the U.S.). From the day before the acquisition's announcement to its 25th anniversary, Chevron's shares produced a total annualized return of 12.1% -- and its 25th anniversary just happened to coincide with the bottom of the worst recession in modern times. The Dow, in comparison, grew at an annualized rate of 7.2% over the same time frame.
Homebrewing a computing revolution
The Homebrew Computer Club held its first meeting on March 5, 1975. It was one of the earliest computer hobbyist groups to arise after the launch of MIPS' legendary Altair 8800, which was to be the genesis of the PC revolution. Thirty-two interested people came together in Gordon French's garage in Menlo Park, Calif., for that first meeting to tinker with a newly acquired Altair, engage in debates that would cross the eyes of the nontechnical, and contemplate the possibility of pooling resources for better deals on parts and completed machines. Among the Homebrew Computer Club's member roster were several legendary figures of the early PC era: John Draper, one of the most famous "phone phreakers"; Jerry Lawson, who created the Fairchild Channel F (the first cartridge-based video gaming console); and Adam Osborne, who developed the world's first commercially successful portable computer.
The club's first newsletter, released 10 days later by Fred Moore, boldly stated, "I expect home computers will be used in unconventional ways -- most of which no one has thought of yet." Moore was more right than he could have imagined. Two of the Homebrew Computer Club's earliest members, Steve Wozniak and Steve Jobs, would build the Apple I as a way to show off Wozniak's technical aptitude to the group. The Apple I caught the eye of a local computing store, and less than two years later Apple was incorporated in another garage in Silicon Valley to handle a rising tide of interest in Wozniak's machines. The rest, as they say, is history.
There's no doubt that Apple is at the center of technology's largest revolution ever and that longtime shareholders have been handsomely rewarded. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons both to buy and to sell Apple, as well as what opportunities remain for the company (and your portfolio) going forward. To get instant access to his latest thoughts on Apple, simply click here now.
The article A Close Look at Two Industries That Changed the World originally appeared on Fool.com.Fool contributor Alex Planes owns shares of Philip Morris International. The Motley Fool recommends Apple and Chevron. The Motley Fool owns shares of Apple and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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