Welcome to The Business Buying Academy with Sieva Kozinsky.

🔑 How to Beat a Monopoly (or at least try)

AT&T had one of the most dominant monopolies ever.

For decades, it controlled over 80% of the telecom market and became the largest company in the world.

No company came close to competing.

But one tried, and built a $20 billion a year business in the process.

Today we're going to look at the story of General Telephone's and how it eventually did surpass AT&T- but only after the government broke up the monopoly.

U.S. telephone service in the 1950s was a two-tier system.

AT&T’s Bell System was the dominant giant.

It monopolized the industry with more than 85% market share,

Hundreds of independent telecom companies filled in the gaps to cover smaller cities, suburbs, and rural areas

But one of those independents stood out:

General Telephone Company.

Starting in 1918 in Wisconsin, the company went through several name changes, combinations, reorganizations, and even a bankruptcy during the Great Depression.

It emerged as the General Telephone Company and began buying up other small telephone companies.

Then GTC expanded aggressively under President Donald Power starting in 1950.

Here are a few of the key deals:

• 1950: GTC acquired Leich Electric Company, GTC's first manufacturing subsidiary that supplied GTC with switching mechanisms.
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• 1955: Acquired Theodore Gary & Company. This put GTC on the map as the leading independent telephone company. Gary was the second-largest independent, with about 600,000 telephones in 17 states. General already had about 1.9 million phones; the combined company served about 2.5 million customers in 30 states and put assets at $700 million.
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• 1957: Bought Peninsular Telephone Company (Florida), which ownedabout 300,000 lines. After the purchase, Peninsular’s instrument buying shifted from Stromberg-Carlson toward GTC's Automatic Electric - exactly the vertical integration GTC wanted, but this was later attacked in antitrust cases.

Fast forward to the end of the decade.

By 1959, General Telephone operated more than 3.5 million telephones across dozens of states.

It was big by independent standards, but still a distant second to AT&T.

The strategic problem was technological as much as financial.

Power and others expected the next generation of telephone service to rely less on copper pairs and electromechanical switches and more on microwave radio, electronics, and eventually computers.

Bell was already one the leading edge of developing its own electronics cheaply and at scale.

No independent phone company had the resources to do that.

A phone company that only operated lines would remain dependent on outside suppliers. In the mid to late 1950s, that meant everyone besides AT&T Bell.

General Telephone's solution to AT&T's dominance:

Become a phone company that also makes equipment and electronics. Then they could, in theory, become a miniature version of the Bell System.

Enter Sylvania Electric Products.

Sylvania's roots were in light bulbs: The company started with businessman Frank Poor’s early-1900s business refilling burned-out lamps in small town Massachusetts.

By the 1940s, the company had expanded and made incandescent and fluorescent lamps, radio tubes, and wartime electronics.

During World War II it mass-produced miniature vacuum tubes for proximity fuzes (devices used in explosives).

After the war it moved into television sets and picture tubes, cameras, chemicals and metallurgy, and defense work.

In 1958 Sylvania had roughly $334 million in sales; about a quarter of that was military electronics, with a reported $60 million defense backlog in missile components and electronic systems.

The company needed more capital to expand its manufacturing capabilities.

Power joined Sylvania’s board in April 1957, a common “getting to know you” step before a stock merger.

The Deal

The merger became effective in March 1959.

The company became General Telephone & Electronics Corporation (GT&E, later GTE).

Sylvania continued as a wholly owned subsidiary with substantial operating autonomy, which matched General Telephone’s habit of leaving acquired phone companies relatively intact.

A few details of the deal:

• The exchange was a share-for-share stock merger. No large cash outlay was required.
• Companies had combined assets of $1.5 billion at announcement (and $1.85 billion once the deal closed the next year).
• 76,000 total employees.
• The largest merger of the 1950s in terms of combined assets and employee count.

Power became chairman and chief executive of the combined company. Sylvania’s Don G. Mitchell became president and remained chairman of the Sylvania subsidiary.

Sylvania got a larger balance sheet and a parent with regulated cash flow.

General Telephone got what AT&T Bell had: laboratories, lighting and materials science, consumer-electronics manufacturing, and a defense-electronics business that looked useful for microwave, switching, and military communications.

The New York Times said the new company would sell “almost a thousand products,” from telephones and relays to photoflash bulbs and digital computers.

So why would a telecom company also want to operate such a complicated electronic manufacturing business?

Couldn't they have just purchased a manufacturing business that just made telecom components?

One reason was regulation.

The Celler-Kefauver Act of 1950 had made it harder to buy direct competitors in the same product market.

A telephone company buying another large telephone company could draw scrutiny.

But a telephone company buying a lighting and electronics manufacturer was simply "diversification", drawing little scrutiny from regulators.

How the Deal Turned Out

In the short run the merger played out well.

GTE remained the largest independent telephone company.

Sylvania kept making lamps, tubes, TVs, and defense electronics.

The telephone side kept expanding thanks to organic growth and more acquisitions.

Over a longer horizon the manufacturing business struggled, while the telecom business remained the durable core.

Japanese and other foreign manufacturers took the radio and television market in the 1970s.

GTE sold Sylvania in 1992 for $1.1 billion.

From 1959 to 1992, Sylvania's revenue grew from $330 million to $2.2 billion (about 5.9% annual growth).

But Sylvania was a much smaller piece of GTE's business by the early 1990s.

While the two were about equal at the time of the merger in 1959, Sylvania only accounted for about 11% of GTE's revenue and 12% of its net profit.

So did the plan ultimately work?

Well, kind of.

But not in the way the General Telephone Company envisioned back in the 1950s.

AT&T was broken up in 1984 into several smaller telecom companies (called the "Baby Bells")

GTE remained a notable player.

In 2000, GTE was acquired by Bell Atlantic and the new company was renamed Verizon.

Bell Atlantic was one of the seven “Baby Bells”, the Regional Bell Operating Companies created in 1984 when the U.S. government broke up AT&T’s Bell System monopoly.

Bell Atlantic provided local telephone service in the Mid-Atlantic: Pennsylvania, New Jersey, Delaware, Maryland, Virginia, West Virginia, and Washington, D.C.

Today, Verizon is larger than AT&T in terms of revenue - but surpassing AT&T was only possible because of the government intervening to break up the monopoly.

Sieva

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Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.

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