In early 1872, a refining business that had taken Rockefeller years to build suddenly became much bigger. In a matter of weeks, Standard Oil bought most of its competitors in Cleveland, then the center of American oil refining. Historians call this the “Cleveland Massacre.” It is one of the first large consolidations in American business, and a useful case study in how to buy competitors, and in what it costs to do so.
The situation: too many refiners
Cleveland had about 26 refineries in 1872, and they produced more kerosene than the market needed. Prices were low, margins were thin, and many owners were losing money. Standard was the largest refiner in the city and, as we saw in Part 2, one of the cheapest to run. It also had cash on hand, and in January 1872 it raised its capital from $1 million to $2.5 million. In other words, Rockefeller prepared his financing before he made his first offer.
Step 1: buy the strongest rival first
The first target was Clark, Payne & Company, Standard’s biggest competitor in Cleveland. Rockefeller offered about $400,000 for its business, and its partner Oliver Payne took the payment in Standard stock. Payne later became a Standard executive and one of its largest shareholders. A rival who owns shares in your company has a reason to help you win.
Step 2: a simple offer
To other refiners the offer was straightforward. Hand over the refinery to Standard’s appraisers, and receive either Standard stock or cash for the value they set. Ida Tarbell’s account says Rockefeller advised taking the stock. Rockefeller later wrote that he preferred sellers to take stock but offered a choice anyway, and that most chose cash. Giving a choice made it easier to say yes.
Step 3: the shadow of the South Improvement Company
Timing was not an accident. In early 1872, a secret alliance called the South Improvement Company was announced, bringing together several railroads and a select group of large refiners, Standard among them. Railroad rates for outsiders were set to rise sharply, and independent refiners were told they could not compete with the Standard. Many concluded their businesses were about to lose their value, and sold. One scholarly explanation holds that this threat, more than anything else, explains why so many sold in such a short time. Rockefeller later said Standard did not create the South Improvement Company.
The plan collapsed in public. Oil producers and independent refiners reacted with outrage, boycotts, and protests, and in April 1872 Pennsylvania repealed the company’s charter before it had completed a single transaction. By then, though, most of the Cleveland sales were done.
How many, and how fast?
The headline figure is 22 of 26 Cleveland refineries. Most popular accounts say this happened in about six weeks, from February to March 1872, and others say within four months. Not every source agrees: one legal history counts 21 of 26, including six sold in a single 48-hour stretch, and a Japanese academic study counts 16 firms by April and the rest over the remainder of 1872. The safe summary is that Standard absorbed the great majority of Cleveland’s refiners within months, and by the end of 1872 it controlled a capacity of about 10,000 barrels of refined oil a day.
What happened to the purchased refineries
Standard did not keep everything it bought. It shut down plants it considered inefficient and kept the better ones. Many former owners stayed on as shareholders and executives. In later years Standard also used companies that looked independent to hide how much it controlled, a practice that drew intense criticism once it came to light.
A fair caveat
This was legal consolidation, but it was not gentle. Some sellers felt they had no choice, and John’s own brother Frank Rockefeller later gave evidence that refiners sold because they believed they could not compete with the South Improvement Company. Critics, with Tarbell the best known, saw it as the use of secret railroad advantages to push competitors out. Defenders point out that Cleveland’s refining industry was overbuilt and that Standard offered fair appraisals, with a choice of cash or stock. Both things can be partly true. Two claims from popular summaries could not be confirmed: that Rockefeller opened Standard’s books to prove his costs were three times lower, and that a financial crisis caused the price collapse. The sources point to overproduction in Cleveland, while the national Panic came a year later in 1873.
Five lessons to take away
- Prepare the money before the opportunity. Standard raised capital in January and bought in February.
- Start with the strongest rival. Winning him over changes the picture for everyone else.
- Pay in equity when you can. Stock aligns the seller with your success and saves cash.
- Offer a choice. Cash or stock made the deal easier to accept.
- Be careful what the deal relies on. Pressure and secrecy worked in the short term and became a long-term liability.
For a family office
Families run into the same questions when they buy, sell, or merge businesses. How is the business valued, and by whom? Is payment in cash or in shares of the buyer? If an offer arrives with a tight deadline, what is creating the pressure? An independent valuation and independent legal advice are the usual protections on the seller’s side. These are questions to bring to your advisors, not advice.