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Welcome to The Business Buying Academy with Sieva Kozinsky. π From Edison's Secretary to Billions in Assets Let's talk about one of the wildest rises and falls in American business history. He started as Thomas Edison's secretary. Then he built his own utility empire - and quickly destroyed it. Meet Samuel Insull, the guy who lit up the Midwest (and a bunch of other places), built one of the largest utility companies in the world, and then watched it all come crashing down in the Great Depression. Insull was born in London in 1859 and came to the U.S. in 1881 as Thomas Edison's personal secretary. He worked for Edison until the early 1890s, when he left to run his own utility companies. He lived the American Dream. Samuel climbed the ranks fast and eventually landed in Chicago, where he took over some local power companies. In 1881, at the age of 21, Insull immigrated to the US, complete with side whiskers to make him appear older than his years. In the decade that followed, Insull took on increasing responsibilities in Edison's business endeavors, building electrical power stations throughout the US. With several other Edison Pioneers, he participated in the January 1889 founding of Edison General Electric, which later became General Electric. He was all-in on alternating current (AC) (winning the "War of the Currents" against Edison's DC preference) because it made long-distance power transmission practical. By 1907, he'd rolled a bunch of Chicago electric outfits into Commonwealth Edison (ComEd). The guy loved scale: bigger plants, better transmission, lower prices, more customers. He pushed hard to get electricity into homes and businesses, like marketing appliances and extending lines to suburbs. By the 1920s, ComEd was serving hundreds of thousands of customers with revenue around $40 million a year (about $800 million adjusted for inflation). The Holding Company Insull didn't stop with just Chicago. He started gobbling up utilities, gas companies, and even electric railroads across the Midwest and beyond. Here are a few of his notable deals:
To keep control and raise cash, he built this massive layered holding company setup. By the late 1920s/early 1930s, the Insull group had:
He controlled huge amounts of assets. But had little equity in each one. Some estimates put the equity positions in various utility companies Samuel owned at just 1%. Their creative deal structures became ticking time bombs. Here's how they were the Middle West Utilities was structured:
Key advantages to this structure (from Samuel Insull's perspective):
One highly-leveraged company became the collateral for another highly-leveraged deal, repeated over dozens of deals. With this story headed towards the late 1920s, you can probably guess what happened next. Hundreds of thousands of regular folks bought in. 600,000 shareholders and another 500,000 bondholders. Utilities felt safe and reliable, right? 1929 hits, the market crashes, and the Depression drags on. Revenues drop and debt becomes impossible to service. The whole interconnected pyramid started collapsing in 1931 and '32.
As the Depression worsened, and stretched longer than most expected, the shares began to fall. In one week alone in September of 1931, the value of the companies dropped by $150 million. And as the shares fell, the bankers demanded more and more collateral from Insull, gradually acquiring voting control of his empire. β - Arch Bridge Institute. Stocks tanked, investors got wiped out. It was brutal for everyday people who trusted the "safe" utility stocks. Insull stepped down, took a ton of heat (FDR even called out Insull during campaign speeches).
"The Insull failure has done more to open the eyes of the American public to the truth than anything that has happened. It shows us that the development of these financial monstrosities was such as to compel inevitable and ultimate ruin."β β - President Franklin D. Roosevelt in a 1932 campaign speech Insull bounced to Europe. But the government extradited him back, and he faced fraud and antitrust charges. The trial was a circus. It was seven weeks long, but the jury took just two hours to acquit him on everything. He wasn't found guilty of criminal wrongdoing; it was more bad timing and heavy leverage meeting an economic collapse. Sieva P.S. - Are you hiring? Get started with top global talent from Somewhere (I'm a customer and investor) What did you think of today's newsletter? Rate this newsletter using the poll below: Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning. |
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