John D. Rockefeller still ranks as one of the richest men in modern times. Rockefeller is one of the great figures of Wall Street - reviled as a villain, applauded as an innovator and universally recognized as one of the most powerful men in history. Read on for a look at his life and achievements.
Son of a Peddler
Rockefeller was born on July 8, 1839. His father led a nomadic life selling goods across the country while his mother raised the children. Rockefeller received an unusually good education for his time and found work as a commission house clerk at age 16. He left the commission house to form a partnership at age 24.
The first thing that distinguished Rockefeller from others was his understanding of risk. He knew that speculators in oil had the potential for huge profits if they hit a deposit, but they were also losing money when they didn't. Instead of getting into the speculation business, Rockefeller chose the refining business, where the profits were smaller but more stable.
Putting all of his money into his first refining business, Rockefeller transformed it by emphasizing what we now call research and development (R&D). He hated that all by-products were discarded during the refining process. In seeking to make the process more efficient, his company created various lubricants, common grease and the forerunners to Vaseline, paint and many other useful products.
The Road to Monopoly
Rockefeller saw the cutthroat competition in the oil industry as a ruinous influence and began to methodically stamp it out. Under his firm hand, and due to his seemingly super-human abilities to choose excellent managers, by 1890 Rockefeller's company, Standard Oil of Ohio, was well ahead of the industry and enjoying a high profit margin. He used these profits to buy out competitors. If a competitor did not want to be bought out, Rockefeller had his means of persuasion.
- Sometimes the technique was as simple as buying up all the oil barrels and causing a shortage that crippled smaller companies.
- Another technique was to orchestrate price wars between wholly owned subsidiaries, thus forcing holdouts to sell at a loss to compete.
- A more complex technique involved limiting the number of trains available for shipment by using his close relationship with the railroad companies.
- Yet another option was purchasing all the equipment and equipment suppliers and refusing to sell replacement parts to holdouts.
More often than not, however, Rockefeller simply had to make an offer and the competitors took the deal rather than try to fight against the tide. Standard Oil of Ohio became simply Standard Oil and continued to grow.
Bothered by the inconsistent support of competing rail companies, Rockefeller backed the creation of the South Improvement Company to fix the transport costs for his company. He also agreed to help this company buy up all the railroads in return for bulk rebates. Competitors in both rail and oil lobbied the government to stop this move.
Today, rebates for consistent bulk shippers are a common business practice, and oil producers do indeed get shipping rebates, but Standard Oil also wanted rebates on other shipping as a thank-you for its financing efforts. Essentially, the company was asking for rebates while also planning to take a cut from the rail companies' profits when it shipped competitors' products. This was asking too much, and the deal fell apart.
The Standard Oil Trust
After his failure to reorganize the rail industry, Rockefeller decided to get his sprawling empire in order. He and his partners created a trust, the first of its kind, where they swapped their individual holdings for shares in the trust. Rockefeller now had centralized control and a veto on all the corporate boards within his conglomerate. The immediate benefits included even lower costs, lower kerosene prices and standardization across the industry. Rockefeller's company now had the size to build pipelines and other infrastructure on a scale previously unthinkable.
Standard Oil also employed chemists to develop ways to increase the types and quality of combustible fuels and to convert waste into usable substances. The petroleum coming out of the ground was being refined into various products: diesel, paint, hair gel, varnish and so on. The new products and kerosene were cheap and becoming cheaper as the company created an economy of scale across the globe. Rockefeller wasn't directly involved in the day-to-day operations of Standard Oil at this time, but he was still seen as the figurehead.
The government disliked the near-total monopoly in the oil industry and broke up the trust in 1892. Standard Oil's legal team quickly converted the trust into a holding company, a clever arrangement that functioned like a trust but was outside of the legal definition. The government adjusted its legislative attack accordingly and broke up the holding company in 1911.
Standard Oil was carved up into smaller, but still sizable, chunks under the government's supervision. Although their names have changed over the years, Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM) and ConocoPhillips (NYSE:COP), among others, all share a Standard Oil pedigree. These companies had the advantage of Standard Oil's R&D and infrastructure, so they easily made the transition to gasoline producers when kerosene sales dropped as a result of Edison's electric light bulb invention.
Rockefeller the Philanthropist
Rockefeller retired in 1896 and devoted the rest of his life to philanthropy. He put the same drive for improvement and efficiency that built Standard Oil toward charitable works. The laudable way in which he dispersed his fortune caused a crisis of conscience in a nation that had grown up hating him for the way he had built it. He gave away hundreds of millions of dollars during his declining years and, with his son's help, set up the Rockefeller Foundation to carry on his work after he died.
The Bottom Line
Rockefeller is a rare figure in history, not because of his wealth, but because we're finding more good than bad things to say about him as time passes. For much of his life, Rockefeller was despised and feared. In contrast, when Henry Ford did to the auto industry what Rockefeller did for oil, Ford was applauded.
Rockefeller knew of the general sentiment toward him, but it didn't halt his philanthropy. He threw himself behind business and charity with the same vigor. Moreover, his path of building a fortune and then giving it away has become a template for equally driven people, such as Bill Gates. Through Rockefeller's foundation, more wealth has been dispersed than Rockefeller personally earned during his lifetime. He inspired others like him to give even more. Some people might fault him for how he built his fortune, but his business practices and his philanthropy were ultimately for the benefit of all.
Fundamental AnalysisAfter World War II, Germany was in ruins. Learn about the country's quick rise to the third strongest economy in the world.
Investing BasicsCarl Icahn's investment strategy, explained to regular investors.
Investing BasicsLearn about the man who mentored Warren Buffett, who eventually became the investing "Oracle of Omaha".
Active TradingWe look at the Sage of Omaha's methodology for evaluating value stocks.
Forex EducationGeorge Soros spent decades as one of the world's elite investors, and even he didn't always come out on top. But when he did, it was spectacular.
EntrepreneurshipThough not as well-remembered as some of his contemporaries, Andrew Carnegie's legacy is strong and moralistic.
ProfessionalsObtain information, both general and comparative, about the best available financial modeling courses for individuals pursuing a career in investment banking.
ProfessionalsLearn what credit risk analysts do every day and how much money they make on average, and identify the skills and education needed for this career.
ProfessionalsLearn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
Financial AdvisorsLearn techniques for emphasizing your CFA Level I status in the Skills and Certifications or Professional Development section of your resume.
The first American corporations were developed in the 1790s, almost instantly becoming key institutions in the economy. Though ... Read Full Answer >>
Several qualities are needed to be a member of the c-suite of a publicly traded company. The c-suite is business jargon term ... Read Full Answer >>
Michael Jordan is perhaps one of the most well-known and richest athletes in the world. However, two notable athletic giants ... Read Full Answer >>
Rupert Murdoch owns a controlling share of News Corporation and over 750 different businesses. Some of the major brands he ... Read Full Answer >>
Suppose one sporting goods manufacturer merges with or acquires another sporting goods manufacturer. Before the merger and ... Read Full Answer >>
Bernard Baruch obtained his fortune by investing in profitable stocks on Wall Street. Baruch is known as a legendary stock ... Read Full Answer >>