For God, Country, and Coca-Cola

by Mark Pendergrast

  A TIME OF TRANSITION

  Howard Candler had officially taken over as president of The Coca-Cola Company at the January 21, 1916, board meeting, but his father still owned most of the stock. Although busy with his new political office, Asa Candler still wasn’t quite ready to relinquish his power over Coca-Cola—at least not yet.

  For years, going back as far as 1908, the Coca-Cola millionaire had toyed with the idea of selling out. Following the 1911 trial, he had begun to purchase the few shares held outside the family, and he had tentatively agreed to sell the Company for $8 million, but investors were too skittish. Now, in 1916, a Chicago lawyer named Max Pam, who specialized in corporate mergers, put together a deal for $25 million. His would-be buyers, a consortium of Cincinnati whiskey brewers, wanted to diversify as the prohibition movement gained momentum. On December 21, 1916, at a special meeting of Coca-Cola Company stockholders, the sale was scuttled by a single stockholder who owned five shares—probably Candler’s obstreperous son, Asa Candler Jr., known as Buddie. Four days later, on Christmas Day, the elder Candler gave all but seven shares of his Coca-Cola stock to his family. Asa Candler had finally relinquished control of the Company to his children.*

  Only two weeks later, a similar purchase offer was made by two New York lawyers, Bainbridge Colby and Ed Brown,† representing another syndicate that proposed to purchase Coca-Cola for $25 million. Besides netting a huge profit, the sale would have major tax benefits: the accumulated earnings tax on $25 million in invested capital would be minor compared to the huge amount then being paid, and the firm would no longer have to pay such extraordinary dividends. The details of the proposed deal were outlined in a January 15, 1917, letter. Colby and Brown would receive $1 million as their brokerage fee.

  A tumultuous Coca-Cola board meeting took place three days later. By the time the minutes were demanded in court in 1920, they had conveniently disappeared, along with the Colby/Brown letter. The surviving annual report contains only the cryptic statement, “Asa G. Candler made a verbal report.” The New York Times later reported that “the deal fell through when one of the chief stockholders, a member of the Candler family, declined to sell.” Again, Buddie was probably the culprit.

  Although the planned recapitalization hung fire for the rest of the year, a real reorganization of the Company never took place. According to the minutes of a June 4, 1918, meeting, “it is now deemed better policy not to abandon the old corporation.” Instead, “beneficial ownership certificates” for $25 million were issued in return for the stock. The move was an effort to capitalize the goodwill and trademark of the Company via an agreement among themselves, in anticipation of a future sale. Max Pam, along with Colby & Brown, threatened to sue for breach of contract. They split $1 million dollars’ worth of beneficial ownership certificates as a settlement.

  SUGAR AT WAR

  By the summer of 1918, other major changes had been thrust upon the Company. The United States’ entrance into World War I resulted in sugar rationing. Coca-Cola took out ads proclaiming that “sugar enlists for war,” asking the public’s patience with reduced supplies. Another patriotic spread showed a hand holding a glass of Coca-Cola with a shadow of the Statue of Liberty grasping the flame behind it. For the first time, the Company found itself actually begging its bottlers not to seek new markets, since it couldn’t provide enough syrup.

  Sugar was by far the most costly ingredient of Coca-Cola. For many years, its wholesale price had hovered around five cents a pound. By May of 1917, the price had gone to eight cents, which required a five-cent-per-gallon price hike. Sam Dobbs wanted to order the parent bottlers to pay more. Harold Hirsch disagreed, pointing out that the bottling contract called for a flat price. He advised diplomacy rather than strong-arm tactics. Consequently, Dobbs traveled to Chattanooga to discuss it with George Hunter, who had taken over the Thomas Company when his Uncle Ben died in 1914. Hunter agreed to a temporary price hike only as long as he deemed necessary because of “the abnormal conditions” of the war.

  By the following January, Howard Candler decided to abandon the rebate program, partly to discourage volume and partly to dodge the FTC litigation that he knew was coming.* The same month, he issued a statement that plants would begin to shut down until the new crop of sugar came in. At government request, soft drink manufacturers had halved their output. “But we can’t get the sugar just now for even half our supply,” he concluded.

  The effect on Coca-Cola’s business wasn’t as dramatic as might be expected. In 1916, sales didn’t quite reach ten million gallons of syrup. In 1917, this figure jumped to over twelve million and then fell back to ten million gallons the following year. The total demand for cola drinks was rising substantially, however, and Coca-Cola clearly lost business because it couldn’t obtain enough sugar. Soda fountains displayed signs such as: “COCA-COLA being unobtainable we are serving AFRI-KOLA The Next Best.” Many other fountains and bottlers weren’t so honest; substitution was rampant.

  The war also meant more taxes. John Candler testified before the U.S. Senate Committee on Finance, arguing against a special 10 percent tax on soft drinks. “My clients,” he said, “are willing to pay a tax, they expect to pay a tax, they have no desire to dodge a tax.” But slim profit margins wouldn’t absorb the proposed levy. “All that we ask is that we be not destroyed,” Candler begged the politicians, explaining that the Company couldn’t pass the tax on to the bottlers, who had perpetual contracts at fixed prices. Nor could the bottlers or soda fountains boost the price beyond the traditional nickel, or the public would rebel. In short, Candler argued, the soft drink business would shrivel, and the government would receive less rather than more revenue.

  The senators passed the 10 percent tax anyway. To no one’s surprise, the soft drink industry survived. The Coca-Cola Company did charge part of the tax to the parent bottlers, who in turn gave it to their actual bottlers, causing considerable dissatisfaction. Under intense pressure from the Candlers and parent bottlers to maintain the nickel retail price, many bottlers decided it was economic suicide and charged the wholesaler more, resulting in six-and seven-cent retail sales. One bottler wrote, “I must make a profit this year or I will be in bad shape. I have bought an ice machine for $3000, trucks for $6000 and have about $6000 taxes to pay on last year’s profit.”

  Other desperate bottlers resorted to the use of sugar substitutes such as corn syrup, beet sugar, and saccharin in order to stretch their syrup supply. After the war ended in November of 1918, Coca-Cola proudly advertised that “nothing changed, cheapened, nor diluted, Coca-Cola remained ‘all there’ from the beginning of the war to the end,” but the statement clearly bent the truth.*

  With the war behind, 1919 promised to be a banner year for Coca-Cola. “Those returning soldiers will be mighty dry,” one bottler anticipated, “and they will remember what it was that hit the spot.” Demand for Coca-Cola syrup would soon outstrip production capacity, and at a February 12 board meeting, Howard Candler recommended the purchase of land on North Avenue for a huge new manufacturing plant, to include an office building, factory, cooperage, and sugar mill, at a cost of almost $850,000.

  It must have taken a leap of faith to continue with plans for the new factory. Two weeks later, on February 24, the Court of Appeals ruled in favor of J. C. Mayfield, citing the doctrine of “unclean hands.” The decision held that Coca-Cola had no rights whatsoever, since it had once contained “the deadly drug cocaine.” In addition, most of the caffeine in the drink had always come from tea leaves, not from kola nuts. Thus, the court found that Coca-Cola had engaged in “such deceptive, false, fraudulent, and unconscionable conduct as precludes a court of equity from affording it any relief.” As a writer in the National Bottlers’ Gazette pointed out, “under this decision the Coca-Cola Co. is utterly helpless against imitators, no matter how bold they are,” adding that it put the Company in an uncomfortable and possibly “fatal” position. Coca-Cola immediately appealed the Koke Case to the Supreme Court,
where the outcome was far from certain, since the same body had ruled against the Company only three years previously in the Barrels and Kegs Case.

  THE WOODRUFF SYNDICATE

  On July 1, 1919, with the ultimate outcome of the Koke Case looming over the Company’s future, Sam Dobbs met with Ernest Woodruff at the Waldorf Hotel in New York City to continue discussions of the sale of The Coca-Cola Company. Woodruff, the president of the Trust Company of Georgia, had numerous New York contacts, and since August 1918, with inside help from Dobbs, he had been maneuvering behind the scenes to pull off the purchase that had been scuttled twice before. After the Barrels case was settled in November 1918, they proceeded with an informal understanding that the sale would indeed take place.

  It was Ernest Woodruff who had masterminded the creation of the beneficial ownership certificates, a complex arrangement that would prevent any single shareholder from derailing the purchase of the Company yet again. It was due to his influence that the new factory on North Avenue was built adjacent to land owned by Woodruff and his sons, across which the Company would need a railroad easement.

  Woodruff now confirmed that “certain interests” would offer the same price of $25 million. Besides the threat of the Koke Case, Dobbs realized there were powerful tax incentives favoring a sale, which would greatly reduce the accumulated earnings tax and, as important, the excess profits tax that had arrived with the war. The government taxed the company on “excess” earnings above a “reasonable” percentage of its tiny capitalization. Enthusiastically, Dobbs agreed to take the Woodruff proposition back to Atlanta.

  The stocky, jut-jawed son of a wealthy flour miller, Woodruff had, like John Pemberton, come to Atlanta from Columbus, Georgia. Unlike Pemberton, he had prospered in the Gate City, putting together a string of deals that made him a much envied (and feared) power. Woodruff sought out small, struggling companies, merging them to form major corporations such as the Atlantic Ice and Coal Company, Atlantic Steel, Empire Cotton Oil Company, Pratt Laboratory, and the Continental Gin Company. But the coup of his career was the negotiation of the Coca-Cola deal, by far the biggest transaction ever to hit the South.

  Careful to hide his involvement in the process, he knew that rival banker Asa Candler would prefer to sell the Southern business to anonymous New York interests rather than to Ernest Woodruff. Despite his wealth, Woodruff was so tight with money that he made Asa Candler look like a spendthrift. Notorious for his petty frugality, Woodruff saved hotel soap and strapped bulky bonds under his clothes to avoid paying freight charges on them. Once, while a porter awaited a tip, Woodruff fished unproductively through his pockets. “I have a quarter here somewhere,” he muttered. “Mr. Woodruff,” the porter said, “if you ever had one, you still got it.” Even normally respectful newspaper columnists acknowledged Woodruff’s unpleasant nature, while praising his financial wizardry. “Nobody knows just how much he is worth,” a 1919 Atlanta editorial stated. “Nobody knows much about his personal business. He is a silent man, and not companionable, [with] few intimate friends. But when he calls for the dollars, they come.”

  Woodruff’s Syndicate included Albert Wiggin, chairman of the Chase National Bank, and Charles Sabin, president of the Guaranty Trust Company of New York, though neither of the banks was officially involved. Dobbs concealed Woodruff’s involvement, but he did let the Candlers know that New York bankers were interested in making an offer, and on July 8, Howard Candler went north to meet with Eugene Stetson, vice president of the Guaranty Trust Company (and a Georgia native), to negotiate the deal, while Ernest Woodruff remained in the background. After a flurry of meetings, with Dobbs acting as the go-between, Dobbs and the Candlers signed the options on July 26, giving the Syndicate until August 28 to buy all of the $25 million in beneficial ownership certificates.

  At the August 2 meeting of the Trust Company’s board of directors, there was “considerable discussion” about the option on Coca-Cola. Dobbs, now a member of the Trust Company board, took part. Woodruff presented his case: here was a hugely profitable enterprise run on a shoestring, essentially still a small family business. With proper management, it could explode exponentially, particularly in foreign operations. Also, with the Volstead Act just passed, Prohibition would commence on January 16, 1920, substantially boosting Coca-Cola sales.

  The purchase was a gamble, dependent on a favorable ruling in the potentially disastrous Koke Case. Finally, it was resolved to exercise the option only if the bank’s lawyers reported positively on Coca-Cola’s odds before the Supreme Court. By August 13, the legal department must have given the green light: “Be it resolved,” the minutes read, “that this company do enter into a Syndicate for the purchase of the participation certificates representing the shares of The Coca-Cola Company.” Twenty thousand steeply discounted shares were voted to Ernest Woodruff personally “in consideration of the time and services given by him in connection with this transaction.”

  In effect, Woodruff had accomplished what would now be called a friendly leveraged buyout. The Coca-Cola Company of Georgia would be sold to a new corporation, The Coca-Cola Company of Delaware (a state famed for lenient corporate taxes). The stockholders were paid $25 million. As part of one of the agreements between the sellers and buyers, the sellers agreed to buy $10 million in preferred stock. Thus the Candlers were to receive $15 million in cash and $10 million in preferred stock yielding 7 percent interest. In addition, five hundred thousand shares of common stock would be issued. The Trust Company was to raise $4.5 million of the necessary $15 million in cash. Presumably, the rest would come from other members of the underwriting Syndicate.

  The Trust Company did not have that kind of money readily available. With deposits of only $1.8 million, it was by far the smallest of Atlanta’s seven banks. Nonetheless, Woodruff was confident that he could pull it off. On August 22, the day he publicized the deal, the Atlanta Constitution ran a banner headline across the top of the entire front page: “COCA-COLA BOUGHT BY ATLANTANS: Trust Company of Georgia Gets National Drink.” The same day, the bank mailed a letter headed Strictly Confidential to its shareholders, who must have been contacted individually with an explanation of what was really happening, since the letter itself was quite confusing. Trust Company stockholders were given the opportunity to buy one Coca-Cola share for each of their bank shares if they deposited $195 per share within five days. The letter promised that when the Syndicate was dissolved, by October 1, a “distribution” would be made. The vague language veiled the behind-the-scenes reality. Those who came up with the money to help fund the buyout wound up purchasing Coca-Cola for only $5 per share, receiving a $190 refund in October. When the shares were made available to the public at 9 a.m. on August 26, they sold for $40 a share. By 3:45 p.m. that day, the stock was oversubscribed by 140,000 shares, assuring the sale. Almost half of the shares were bought by Atlantans.

  Once the dust had settled, the ramifications of the completed sale became clearer. The Candlers were suddenly very wealthy indeed, and in the next few years their mansions would spring up all over Atlanta. Sam Dobbs was repaid with the presidency of the new company, while Howard Candler was kicked upstairs as chairman of the board. The real power, however, rested with a “voting trust” of three men: Woodruff, Stetson, and Dobbs. The shareholders had no voice in the running of the company, and Dobbs, the only Candler kin, could be outvoted by the bankers.

  It is not at all clear how much money the mysterious Syndicate made out of the deal. Insiders bought 83,000 shares at $5 per share. The Trust Company wound up with an agreement to purchase 24,900 additional shares at $5 and would never struggle for money again. Estimates of the immediate profit ranged from $2 million to $5 million. The bottlers later complained bitterly of the backroom “manipulations” of nefarious speculators, but there is no indication that any laws were broken, other than a lingering IRS suit over taxes.*

  The most important change was reflected in the bottom line of the new Delaware corporation. The beginning
balance sheet showed real estate, buildings, machinery, and equipment worth less than $2 million, but the “intangible assets” were valued at $24.96 million. These intangibles formed the heart of Coca-Cola, including the formula, trademark, and “good will.” Never had an accounting term been so apt. What the Woodruff Syndicate had purchased was, indeed, not primarily a syrup factory, but the good will of the American consumer. In the years to follow, it would grow considerably stronger, with tangible financial results. If the dividends from that one original 1919 share had been reinvested in Coca-Cola stock, which has split eleven times thus far, the $40 (or $5 for insiders) investment would be worth approximately $9.8 million by 2012. Using the same scale, if a forebear had purchased one of Asa’s $100 shares in 1892, it would bring approximately $8.36 billion.

  ASA’S BITTER CUP

  Asa Candler learned nothing of Ernest Woodruff’s involvement until he and his children had signed the option. He was, according to his biographer son, “profoundly shocked,” and didn’t attend the Georgia corporation’s final board meeting at which the sale was approved. For the old man, the timing couldn’t have been worse. Candler’s wife, Lucy, had died of breast cancer in March of 1919, just after her husband’s term as mayor had ended. Now, having given away his Company, the tycoon felt betrayed and powerless—King Lear at the beginning of the storm. Bereft of Coca-Cola, Candler quickly became a pathetic figure who, when most honest with himself, wrote: “I can’t bring myself to a frame of mind that causes this life to be really joyous.”