The Deal That Rocked the Dow to New Highs

On this day in economic and business history ...

The Dow Jones Industrial Average closed over 9,000 points for the first time in its history on April 6, 1998. The 9,033.23 close was reached largely on news of a merger between Citicorp -- now Citigroup -- and Dow component Travelers , the largest corporate tie-up in history to that time, defying the weakness in other, broader indexes. Travelers soared 21% on news of the deal, and non-component Citi rose 16%. The divergence between the Dow and other indexes prompted Charles Pradilla of Cowen to tell The New York Times that "this market is probably a little ahead of itself."

It was a big year for big deals in 1998. At that point in the year, more than 2,500 deals worth more than $316 billion had already been announced, a 50% increase over 1997's total for the comparable period. Stock-based transactions in an environment of ballooning stock prices surely helped to drive the year-over-year growth in deal value. The path to 9,000 also saw divergence in the Dow's components -- nine components, primarily heavy-industry and commodity stocks, were lower when the index reached 9,000 than they had been at Dow 8,000. This was offset by big gains of at least 30% in eight other Dow stocks, during that period. This group included all of the Dow's financially focused components, including Travelers, American Express, and JPMorgan Chase .

The Citi deal, however, was far and away the largest of the year's deals to date. Announced at a value of $70 billion, the stock-based merger swelled to $84 million during the day as investors bid up shares of the two companies, anticipating a clear path through regulatory hurdles that at that point would have made such a deal technically illegal. The Gramm-Leach-Bliley act had yet to be proposed, and a similar Glass-Steagall-destroying effort had died in the House of Representatives not a week before the deal was proposed. To become Citigroup, with an estimated $50 billion in revenue, $700 billion in assets, and $140 billion in market cap, the two companies would have to work hard to undo decades of regulatory precedent. Victory would have gained the new company top ranking among the world's largest financial-services companies. Ultimately, they succeeded, ushering in a new era of financial consolidation -- but talk of records would fade as the dot-com bubble produced ever more outlandish merger valuations, culminating in the disastrous AOL and Time Warner tie-up that wound up destroying the vast majority of its shareholders' wealth after the bubble popped.

One man's junk ...
Drexel Burnham Lambert created the junk bond in 1977, and it found great success when offered for the first time on April 6, 1977. Drexel's rise and fall would become the stuff of Wall Street legend (you can read more on its collapse by clicking here), and it all began on that April day. Harlan D. Platt recounts the path of that first junk bond in a book titled, appropriately enough, The First Junk Bond:

Having exhausted its regular sources of finance (bank loans and private placements), [Texas International] relied on Drexel Burnham Lambert, then an inconsequential investment banking house, to raise new cash. Drexel and its guiding spirit, Michael Milken, were to pioneer the notion that the capital market could accommodate more than just the largest 500 companies. ...

Drexel offered investors a $30 million Texas International bond issue in April 1977. To attract buyers for the unknown company's debt, the bond paid interest at 11.5%, nearly 150% of the prevailing prime interest rate. Following a warm investor response, an additional $20 million tranche of the note was sold in July 1978. Texas International's 11.5% subordinated debenture was the first junk bond. Its sale began a beautiful relationship between the company and Drexel that endured for more than a decade and encompassed every aspect of the investment banking function, as Drexel grew into a financial powerhouse and Texas International emerged on the international oil scene.

Junk bonds became one of the defining characteristics of the leveraged-buyout mania of the 1980s, and Drexel prospered as its creation became a preferred source of deal financing. However, all good things must come to an end. Drexel collapsed, Milken went to prison, and junk bonds lost a bit of luster. However, high-yield debt continues to be a frequent source of financing throughout the corporate world -- in 2011, junk bonds comprised about $1.4 trillion of $32 trillion U.S. bond market.

Pictures for the people
George Eastman sold the very first Kodak camera on April 6, 1888. It wasn't the first camera ever made -- not by a long shot -- but it was the first time anyone had tried to bring photography to the people. Lauren Hewes of the American Antiquarian Society writes:

[It was] a camera designed for the people, not for professional photographers. Perhaps this doesn't sound like such a big deal today, when I can snap a photograph with my cell phone and email it halfway around the world in a second or two. But until 1888 the populace could only consume photographs produced by professional photographers. You had to haul yourself and your family to the photographer's studio to get a family portrait. Or you hired the professional photographer in town to come out and take a picture of your home or your prize cow, or your factory or business.

Eastman's invention revolutionized photography. ... The camera allowed almost anyone who could afford the price [of $25] to create a visual record of their lives, outside of the professional photographer's studio. The exposures were a distinctive round shape and can be identified both by this shape and by their mounts, which are usually marked with the Kodak insignia. The camera had severe limitations (it could only take 100 shots, had to be returned to Kodak for processing, and had a finicky shutter that was set with a string), but it was successful enough that the company quickly came out with a smaller, more affordable version ... [the] Brownie camera.

Early adopters must always suffer through a commercialized development process, it seems. Photography spread gradually among the populace, but the explosive phase of its growth wouldn't occur for some time -- $25 in 1888 would be nearly $650 in modern terms, and later upgrades to this first camera tended to increase the price. Before Eastman's camera, only a few million photographs had ever been taken, although the technology had been around since the 1820s.

The Brownie camera spurred wider adoption, and by the time of the Great Depression, the world was taking about 1 billion pictures every year. By the 1970s, that number had grown tenfold. This was just practice for the smartphone-driven photography explosion that has now taken the world by storm: today, nearly 400 billion photos are taken around the world each year, a rate equaling the total photographic output of the entire 1800s every two minutes.

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