Eccles #1 - Sego Milk

My in depth research into the life and works of Marriner Eccles begins! Today I start with an incredible story of his first real business venture. Introducing - Marriner Eccles, The Entrepreneur.

Introduction

I am Alexander Bagehot and you’re listening to The Bankster Podcast, the only show dedicated to the fascinating and ever more consequential world of central banking.

For those of you that have been listened to the last couple of episodes you know that I’m well into the beginnings of my research of the life and works of Marriner Eccles. My long term, possibly decades long, goal of writing a biography of Eccles has officially begun. And I’m very excited to bring you along in the journey of figuring out who Eccles was and how his legacy carries on today.

All good biographies begin with a captivating story that encompasses the character of the subject. I’m less than 100 pages into Eccles autobiography and I may have already found it. But before I tell that story I wanted to share a few areas of the life of Marriner Eccles that I’m going to be looking into: The Man of Faith, The Family Man, The Entrepreneur, The Banker, The Government Advisor, The Fed Chairman.

Each Eccles episode this season will focus on one aspect of Eccles life. Today’s story comes from The Entrepreneur and involves one of Eccles first business major business moves. So let’s jump right in - today’s episode is called, “Sego Milk”

Sego Milk

Let’s set the scene. When Eccles was 22 years old his father unexpectedly died. He was reportedly the richest man in Utah when he died in 1912. The will outlined how the family businesses would be distributed - 5/7th’s to the first wife and her 12 children and 2/7th’s to the second wife and her 9 children. Marriner Eccles was the first born of the second wife and found himself the owner or part owner of a handful of companies overnight. Speaking of these businesses, Eccles says (in his 1951 autobiography, “Beckoning Frontiers”) the following:

And in all these large concerns, while I served as a director in some of them, I still had little say on how things were run. But in 1919 there began a gradual turn-about in the existing state of affairs. The chain that did this had its links formed of dissension within the ranks of the David Eccles Company [my half brother’s company]; of dissension among the other large shareholders in various enterprises; and also of a considerable success the Eccles Investment Company had in a venture of its own that was to help place it in a position of some independent strength.

In 1919 I heard of a pending deal involving the stock of the Sego Milk Products Company, which had a plant in Utah and another one in California. It had been organized by... [an interest in Maine]...twenty years before and was shared in by local farmers, many of whom supplied milk to the Utah plant, and who also served as its officers and directors. The president of the company, a farmer representing the other farmer interests, came to me at this time and asked whether I—along with the other stockholders—would be interested in selling to some Chicago people the ten-per-cent interest in the concern held by the Eccles Investment Company. I knew nothing at all about the milk business but I told him that if the purchase of the Sego Milk Company was good enough for a Chicago concern, it might also be good enough for a Utah interest to buy. The response from the directors was that they would just as soon sell their stock to me as to anyone else.

Did you catch that? So Eccles , recently having inherited a small portion of this milk co-op type business of which he has no expertise, decides that if the business is wanted by a group in Chicago it must be valuable. But Eccles couldn’t buy it the business outright. In his own words, Eccles continues.

[In Utah] The president [of the Sego Milk Product Company] then disclosed that there was a block of stock held by a Mr. Radcliffe, in Los Angeles. Since it represented thirty-three per cent of the total, no one could gain control of the company until he also controlled these shares. This news sent me to Los Angeles the next day, in the hope of getting an option on the purchase of this stock before the Chicago interest got in contact with the owner.

Take out your mental notepads here and follow along with me. In order to control this milk product company and prevent it from being sold to the Chicagoans Eccles will need at least 51%. He already owns 10% from the inheritance. He now learns that a man in LA has another 33%. If he could convince the LA man to sell his shares he’d be at 43%, but still short of the 51% needed. Eccles has a strategy for this.

At the same time I had another option agreement drawn up, and this one was placed in the hands of my friend and associate Roy Bullen. He was to try to get an option on all the stock held in Utah.

We had agreed that we would pay [both the owner in LA and the shareholders in Utah] the same price the Chicago interest was willing to pay for the stock; that everyone would have a chance to sell what he owned; that everyone would be in on the ground floor; and that there would be no commissions. The whole transaction involved some $900,000, which was a sizable sum in that day for a small local company whose total output was less than half a million cases of milk a year.”

“On arriving in Los Angeles, I checked in at the Alexandria Hotel, got in contact with Radcliffe, and asked whether he could call on me. When he came to my room, I found him old enough to be my grandfather; but, more important, it was evident that he had not been approached by the Chicago interest. We discussed the milk business in general, which was something of a strain since all I knew about it was what I had read in the financial statement of the milk company. Finally I asked him if at $30 a share, which amounted to $300,000 for his holdings, he would consider giving me an option on his stock for at least fifteen days so that I could determine whether I could gain control of the company.

For those of you not as familiar with the finance world, that last sentence there from Eccles was describing what an option is. If Mr Radcliffe agreed, he would be promising to let Eccles buy all of his shares anytime in the following 15 days. Eccles wouldn’t be required to buy them. That’s why it’s called an option - Eccles would have the option to buy the shares. He couldn’t buy them outright remember because even with all of Radcliffe’s shares he’d still only have 43%. Ok, so back to Eccles’s hotel room in Los Angeles. He’s just proposed the option.

[Radcliffe] said he would like to think the matter over and would see me the next morning. I insisted that the deal would have to be closed that night; that he knew the price being offered him was more than the stock was worth; that it was not for trading purposes; and that, moreover, I expected to leave town the next day. He said he would need a lawyer to draw up the contract, whereupon, as an impetuous young man who presumed to talk about the milk business on the basis of a balance sheet, I told him that a lawyer was not necessary.

Here we see Eccles’s bold yet risky business intuition.  

What we wanted to do was very simple, and we could certainly state it in clear English. Radcliffe must have had some painful dealings with lawyers in the earlier years of his life, because he assented to this. I took a sheet of hotel stationery and wrote our one-page contract in duplicate. We signed it, and I left for Utah the next morning. The contract was perfectly good in every respect.

A day’s travel from his home state, on hotel scratch paper, this option would mark the first successful business venture that Eccles directed. Here’s what happened next.

The transaction completed in Los Angeles was paralleled by Bullen’s success in Utah. In three days we had an option to buy control of the milk company. Those who sold us the stock gained a handsome profit. To conserve as much of it as possible under the existing tax law, they agreed to take their payments and profits over a period of five years. This, in turn, was fortunate for the Eccles Investment Company since it avoided the need to pay out lump sums of money. Instead, we made the stock payments largely out of the dividends we received from the milk company.

“During the five years we owned the concern, our accumulated earnings after taxes and depreciation were approximately one million dollars. At the end of this period we were to benefit from another development. To justify its national advertising, the Pet Milk Company of St. Louis for some time sought a national distribution of its products. It had not pierced the territory west of the Rocky Mountains, this being the area where the Sego Milk Products Company centered its operations. Hence the Pet Milk Company approached us with a purchase offer. Negotiations lasting a number of months came to a head when the Pet Milk Company bought all the stock of the Sego Company at a price that gave our stockholders a substantial profit, the purchase taking place after the Sego Company distributed in dividends all its earnings for the previous five years.

The result left the Eccles Investment Company with a substantial amount of idle cash.”

This bold and decisive move would help catapult him into the active role of businessman. Thus was born Marriner Eccles The Entrepreneur.

Conclusion

Today’s episode was written, edited, and produced by me, Alexander Bagehot. Reach out with your feedback, comments, and questions on twitter or via my website www.thebanksterpodcast.com. Leave a rating and share the podcast with your coworkers, friends, and family. Thanks to all of you for listening. I’ll see you next time on The Bankster Podcast!