The Rise and Fall of the Largest Company of All Time

On this day in economic and financial history...

O'er the glad waters of the dark blue sea,
Our thoughts as boundless, and our souls as free,
Far as the breeze can bear, the billows foam,
Survey our empire and behold our home!
These are our realms, no limits to their sway --
Our flag the sceptre all who meet obey.
Ours the wild life in tumult still to range
From toil to rest, and joy in every change.
--Lord Byron, The Corsair

In centuries past, those who mastered the sea were often the ones who ruled the world. This was never truer than during the Age of Sail that followed the expeditions of Columbus. For nearly a hundred years, Spain and Portugal fought wars of trade and conquest in the New World and throughout the Orient. Their glory would not last. At the dawn of the 16th century, one company -- the first publicly traded company in the history of the world -- rose to prominence in Amsterdam. It would eventually become the largest company the world has ever seen.

March 20, 1602 is typically recognized as the founding date of the Dutch East India Company. The company's origins date to 1595, when the first four merchant ships sailed from Holland (the present-day Netherlands) on a journey of trade and adventure to the East. One vessel was lost, and two-thirds of the crew perished on that fateful trip before their return nearly two and a half years later, but the spirit of commerce had taken root in the remaining traders. It was Johan van Oldenbarnevelt who established the VOC -- the Verenigde Oostindische Compagnie, or United East India Company -- and acquired a monopoly on trade routes beyond the Cape of Good Hope.

The VOC held the first "public offering" of shares in history shortly after its founding, for much the same reason that companies offer their shares in IPOs today. Within six months, the Amsterdam bourse (stock exchange) was founded to handle trading in the company's shares. This initial offering raised 6.5 million guilders for the VOC. In 1602, this was an astronomical sum -- the equivalent to more than 32,000 years of wages for an unskilled laborer, corresponding to roughly $912 billion today. According to Clem Chambers:

The company's IPO saw a pop of 15% to its issue price, the first opportunity for investors to snag an IPO in history. It is intriguing to imagine that somewhere in the record there may well be the name of the first stock flipper in history, though it is unlikely that many of the initial shareholders "stagged" the issue, as the actual concept of stock market trading wasn't yet invented; buying and selling was a manual and laborious affair.

Long-term holders were on to a good investment, too, and 20 years later the share price had risen 300%. This might not seem like a particularly stellar return, but during the period the average dividend from the company was a fat 18%. Clearly investors at the time were not so interested in capital appreciation and looked to income for their returns. Life was short in the 17th century, so investors looked for the sort of returns that today could never be delivered. While P/E ratios weren't yet invented, the P/E of the Dutch East India Co. was very low and, though the actual accounts of the company were not transparent, the P/E of the company must have been nearly one when, four years after its foundation, the company paid a record dividend of 75%.

However, the executive board of the company seemed to have been under just as much pressure to make its numbers as any modern group of execs, and the company resorted in later years to all kinds of financial engineering to keep up its notional shareholder returns. Cash dividends were increasingly replaced by bonds, and even spices like pepper were used as payment. Soon shareholders were known as "pepper sacks," undoubtedly for their ownership of hard-to-dispose-of aromatic payments in lieu of cash.

Then, of course, along came tulip mania -- the first of many speculative market bubbles to come. This period, which witnessed tulip bulbs explode in value under the influence of what amounted to options trading, saw the company's stock rise to 1,200% of its original issue price.

Tulip mania helped push the VOC's valuation up to about 78 million guilders (equal to $7.4 trillion), which is more than enough to rank it as the largest market cap in history. To put that in perspective, the 30 components of the Dow Jones Industrial Average combined for a total market cap of $3.3 trillion four centuries after the VOC's founding. The S&P 500 surpassed the VOC by $2.8 trillion in total market cap at that time, but that's not much of a fair fight: The S&P contains all manner of niche industries, while the VOC served as the heart of European multinational commerce for nearly two centuries.

The VOC enjoyed nearly two centuries of dominance thanks to incredible scale that gave it an almost imperial range of powers. These powers were used to coin money, negotiate treaties, wage war, and even execute criminals. Between the time of its founding and the time of its collapse shortly after the American Revolution, the VOC employed nearly a million Europeans on almost 5,000 ships, which brought 2.5 million tons of valuable goods back to the continent. By comparison, there were roughly 2.5 million colonists -- including a substantial slave population -- in what became the United States during the time of the Revolutionary War.

From the time following its post-tulip-mania bubble deflation to the turn of the 18th century, the VOC expended roughly 370 million guilders, or about $37 trillion in contemporary terms -- roughly $615 billion in capital expenditures per year, for six decades. From 1700 until its collapse in 1796, the VOC spent a staggering 1.6 billion guilders, which would be roughly $168 trillion today, or nearly $1.8 trillion in spending per year.

Toward the end, the VOC simply couldn't support its massive spending requirements, especially after the British refocused on continental affairs in the twilight of the American Revolution. The total gross profit on the sale of goods for the entire second century of the company's existence was only about 25 million guilders, which averages out to a rather paltry $28 million in gross profit per year. The Dutch crown's capitulation in the Fourth Anglo-Dutch War in 1784 tightened the noose, but by this point the VOC was already suffocating under the weight of unwieldy management, horrendously slow corporate communications, pervasive corruption, and a shift in Asian trade patterns that simply left the lumbering giant behind.

The world's largest company fell into ruin in 1798, leaving behind debts of 219 million guilders (about $23 trillion in modern terms) for the Dutch government to clean up. The financial-crisis bailouts can't hold a candle to the VOC bailout, which hung around Dutch necks for decades after the company's dissolution.

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